Why insurance will be a hard industry to disrupt
06/19/2017

Tech-savvy startups represent both opportunity and threat to traditional insurers.

By Sheri Scott, Principal, Milliman.

The insurance industry might be seen as an inefficient market and an easy target for disruption. But new entrants will face many of the same challenges that constrain the established players and that have stymied innovation for years.

Many new startups are tech entrepreneurs well positioned to challenge the norm and make getting insurance as easy as booking a car ride or buying a gift online. They are creating tech-savvy ways of delivering insurance that appeal to Millennials, who traditional insurers are struggling to reach. They are even designing peer-to-peer insurance options and responding to changing social norms.

But making these innovative adjustments to the insurance product and delivery process will require these startups to navigate the complex state insurance regulatory system in the United States.

Insurance regulation barriers
Insurance is very different from other inefficient markets ripe for being turned on their heads by Internet startups.

The industry is heavily regulated, for a start. In other sectors, a new idea that catches on can be quickly scaled up to become a nationwide phenomenon.

But not in insurance. Startups in this industry must be licensed in each state in which they intend to sell. They must comply with each state’s unique insurance regulations before they can start selling there.

A nationwide launch can become a long and expensive process. It takes a lot of up-front preparation work to facilitate a countrywide rollout that is compliant in all states, and adjustments will need to be made to the product and rates from state to state to achieve compliance. I have been in charge of some countrywide rollouts that have gone very smoothly, with all 50 state filings prepared and ready to submit within six months. When the unique requirements of each state are not part of the initial planning process, it can take more than two years to get filed in all 50 states. This increases the variation in the business model, products, and rates from state to state.

Investors will want proof that a startup’s concept works, and regulatory constraints should be considered before bankrolling such a big rollout.

For example, one of the biggest selling points of peer-to-peer insurance is that, if claims within social networks are lower than expected, then the surplus will be given back to the members. New York state and California do not permit insurance companies to do this and they are two of the biggest Millennial markets.

Setting up an insurer requires guts, patience, and a lot of capital. None of these are in short supply in the tech sector, where the likes of Amazon, Facebook, and Uber have proven themselves. Tech investors are prepared to wait for their bets to pay off, providing the potential is shown to be there.

But it’s virtually impossible to achieve success—overnight or otherwise—in the insurance business without understanding the regulatory environment and actuarial nuances of preparing regulatory compliant rate filings in the United States.

Consumers may grumble about the established players, but the startups offering to deliver the product in a more modern way are not always well positioned to be able to follow through with their innovations in a compliant fashion. At the same time, the established players who do have the regulatory experience do not appear to be responding quickly enough to market demand for modern insurance products and delivery.

Automating the insurance industry
Automation is where startups could really make a difference.

Pre-populating all the data needed to market, rate, and underwrite an insurance policy, and creating intelligent algorithms that automate the rating, underwriting, policy issuance, and claims processes, could bring enormous cost savings in an industry where expenses eat up to a third of companies’ income.

Simplifying the process of applying for cover, updating policy details, or claiming on a policy would also make customers happier. Why ask the customer for data that you can get on your own?

But startups face the same risk as their bigger rivals, in that a rating or underwriting mistake can lead to a string of claims that blow the loss cost forecasts out of the water. They need to make sure their actuarial data is sound, but that’s hard, because their bigger rivals have a much larger volume of data on which to base their decisions.

Also, those that decide to focus on solving some of the thorny issues in the insurance value chain rather than setting up an insurer are still left with one big problem: who will underwrite their business?

Once they have an admitted insurer to front the business to satisfy state regulators and then a reinsurer to actually take the risk, a startup could easily find that its products aren’t much different from or cheaper than those of its established rivals.

Using big data
But these startups are learning fast about this business, while all the time collecting data—lots of it—which they can use to find new, creative ways to sell people insurance.

Today, most U.S. life insurance rating models use only a handful of data such as gender, age, the limit of coverage, and a time-consuming medical examination to rate and underwrite a policy.

But data on smartphones, for example, can provide a detailed picture of people’s lifestyles, from the number of steps they walk each day and their average heart rate, to the number of times they visit a gym or a doctor. This data can be supplemented with medical records, prescription records, credit scores, and a lot of other data that is already available and doesn’t require a medical examination.

Big data offers the chance to target people in ways they regard as being useful, rather than time-consuming and intrusive.

Our Internet search histories reveal a lot about what’s going in our lives. If we’re browsing real estate websites, why wouldn’t we want a pop-up appearing on-screen telling us how much it would cost to insure a home we’ve clicked on?

The U.S. insurance industry is ripe for disruption, but the startups will need to navigate the insurance regulatory environment or find a state-licensed insurance company that is willing to front them. Adding a fronting insurance company does speed up the initial regulatory process, but it adds cost to the product and introduces an additional player that is not always committed to offering a revolutionary insurance product.

Some home insurance startups are focused on trying to build a friendly sales model with data pre-population and modernized coverage. Others are building rating and underwriting algorithms to better match premium with exposure. And still others are automating the claims process and passing along expense savings to consumers. But we have yet to see a disrupter combine all of these innovations and successfully roll out a product across the United States.

One will come along, sooner or later. And despite the naysayers in the traditional insurance market, insurance rating and delivery will become fully automated. This market is too big—worth $1.2 trillion in 2015, according to the Insurance Information Institute—to ignore. If a traditional insurer doesn’t successfully respond to market demands for modernization and full automation, then a disrupter will achieve it….soon.

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