We are approaching the dawn of a technological revolution in insurance, one that has had a great impact on other industries in the recent past. This wave of technology washed through the banking system over the last decade, and while some of the changes were as expected, others were not. In a sea of change, it’s important to recognize the difference between meaningful innovation and short lived trends. Drawing conclusions from the fintech revolution helps us predict changes within the insurance industry in the years to come.
The similarities between finance and insurance are obvious. Both industries are built on managing risk, capital, compliance, and distribution. Like the banking industry, the insuretech “revolution” is likely to be more of an “evolution.” While the impact will be great, it will be gradual but relentless.
Based on my experience in observing this evolution of fintech, here are my five predictions on how technology will reshape the insurance industry.
1. Technology Will Be An Arms Race and Not a Cure
Technology can be transformative, like the invention of the computer, the internet, the iPhone, and many other examples. But, often times, technology is iterative in the sense that one widget is replaced by a more efficient and lower cost widget. In these situations, technology enables the masses by lowering the overall cost. The main impact is typically on productivity.
Efficiencies, however, are often short lived. Given enough time, the advantage typically shrinks and you’re on to the next shiny object. For example, take a look at small dollar lending in both personal and commercial banking. Putting the entire application process into a digital format with instant funding was a huge advancement in 2006, but has since become table stakes. Billions of dollars have been invested in this space since, making the digital lending experience a commodity.
Short of a truly defensible business model with unique IP or network effects, most companies will find themselves in this arms race. No single technology will be the holy grail. Instead, a company’s ability to continually innovate at a fast pace will become the goal. At Verikai, we believe that next frontier in insurance is big data and artificial intelligence. While the insurance industry is familiar with traditional forms of data, it’s just starting to embrace alternative data and AI.
2. New Data Sources Will Be Critical
The insurance industry is highly proficient in leveraging known data about a person. In life insurance, the carrier may ask for a blood draw to determine if you are a smoker. In auto insurance, the carrier may search public records to see if the driver has been cited for drunk driving. The list goes on and on. Based on this individual information, an insurance carrier makes decisions based on these underwriting variables.
Securing new sources for generating volume, speed and better customer experience will pave the way for innovation. Not only is every carrier using the same sources of traditional data, which makes it difficult to create a competitive edge, but buyers are also putting pressure on carriers, underwriters and brokers to provide a better user experience and to accelerate the process. No one wants to go to the doctor to get blood drawn, just like no one wants to fill out a 30-page insurance application.
As a result, the industry will be forced to keep up with the times by finding alternative data to complement existing underwriting models. In the old world, you asked someone to give blood or pee in a cup. The results were reliable and the workflow was obvious based on the singular data point you received from the test. In the new world, carriers and underwriters are required to crunch through thousands of different data points and to figure out which ones, in combination, offer a valid prediction of risk. The comfortable analytical process of one-to-one attribution and causation is shifting to correlation, machine learning, and big data. Capital One is a shining example of how data can be used as a weapon and not just a cost center in the world of banking. Insurance companies who are able to integrate new technology, data and artificial intelligence will be in a better position to detect patterns of risk, serve modern customers, and create a competitive advantage.
3. Regulation Will Change
It’s only reasonable to expect that as an industry evolves, regulation and policy will evolve alongside of it. More data was created in the past year than in all previous years combined. With this accessibility of a massive amount of data comes a shift in insurance business practices, which in turn will lead to the evolution of industry regulation—particularly as it pertains to disparate impact, privacy and discrimination.
We’ve seen this in the last five years in fintech, where fintech companies have pushed regulators and Congress to accommodate new business models (i.e. fintech charters.) Similarly, we can expect to see more interaction between insuretech companies and governing bodies as the industry matures.
Regulations will evolve given enough time, and it’s important that carriers, MGA’s and brokers all understand the shifting sands. Start-ups are more likely to lead the charge and push the envelope, but it’s important that they are not the only voice at the table. Understanding how regulators will react to new technology is very important to growing a sustainable business.
4. Market Reach Will Require Partnerships
There are only so many people looking for insurance products at any given time in the market, and multiple organizations trying to reach them to fulfill their role in the selling process. Add to that the fact that these organizations have varying levels of capability and differing relationships with their channel partners, and the swimlanes become cloudy at best.
The same was true in the banking industry. To reach potential customers, lenders quickly became experts in digital marketing, as it offered the simplest and most direct path to reaching a prospect. However, for that reason the space was also oversaturated and a new strategy to reach customers became prevalent—through partnerships with the banks themselves.
At first, fintech was the sworn enemy of banks, and yet, today’s banks and fintech companies are now aligned to reach a common goal. We are likely to see this play out as well in insuretech, with technology companies, carriers, brokers and MGA’s all working together to serve a potential customer. Certainly, there are already a number of MGA’s who already write on behalf of their carrier partners, but I suspect even deeper, broader partnerships are possible. Don’t be surprised if competition evolves to cooperation over time.
5. Product Expansion & Cross-Selling Are Inevitable
As investment dollars come into the insurance industry, old and new business models will collide, compete, and mutate as companies search for new opportunities for profitable growth. Eventually, many companies will come to the same conclusion — acquiring new customers is expensive and necessitates the need to develop and cross-sell multiple products.
Fintechs like SOFI, Marcus, Chime, Varo, or Robinhood are relevant examples of companies in the fintech space who broadened their offering by bundling products to create modern platforms. This cross-selling approach allows them to increase the lifetime value of their customers and justify the high cost of acquisition.
Whether the insurance industry follows this trend, or a large fintech player decides to enter the insurance space, it’s only a matter of time before we see both horizontal and vertical consolidation across these industries.