Under Pressure: Preparing the Insurance Industry for 2019

This article originally ran in the October 2018 print issue of Connections, “The Innovation Issue.”

The insurance industry today is rapidly changing, in large part due to technology. In many ways, this is nothing new.

Technology is constantly transforming business, entire industries and our day-to-day lives. The real challenge with disruptors is how — and often more importantly when — we decide to tackle them.

At PwC’s 2018 Financial Services Audit and Risk Committee Forum (FSARCF), 44 percent of insurance attendees said the industry business model and players will change dramatically in the next 5–10 years. They agreed that most existing insurers will not survive in their current form, showing that many believe there is a necessity to change or fall behind.

When asked what has been the most disruptive change, 34 percent of insurance attendees at FSARCF said technological change was the biggest driver, 31 percent said customer expectations (e.g., anytime, anywhere service) and 19 percent said changes to regulations and standards.

What does this all mean for independent insurance agencies? The Applied Client Network Advisory Council represents both independent insurance agencies and brokerages as well as larger industry partners with the goal of helping them navigate these changing waters. During a recent meeting, the discussion centered on disruptive industry forces, how change can affect insurance players of all shapes and sizes, and what agents are doing today to help manage market transformation.

Disruptor #1: A New Generation of Insurance Providers

The trend of millennial-centric companies “disrupting” industries has become mainstream ever since Warby Parker came on the scene in 2010 offering a new way to buy prescription glasses. Following the obvious success of that business, many other industries are seeing similar disruptors taking a digital-first, consumer-centric approach with a comparable product or service offering. A few other examples that come to mind: Casper for the mattress industry, Dollar Shave Club taking on the CPG giants in men’s grooming, and Blue Apron shifting the way individuals and families plan and cook meals.

The insurance industry saw disruptive companies pop up in 2016 and 2017 with the rise of online, self-service insurance platforms like Lemonade and Huddle, and now Amazon is entering the market as well. A Google survey from April 2017 showed Lemonade taking over 4.2 percent of the overall New York City renters market.

Although these start-ups are still only a small portion of the overall insurance market, they do showcase a different way to think about marketing, buying and selling insurance products to a new generation of consumers.

“Lemonade was one of the first big disruptors in InsureTech that came in with the express purpose of replacing sections of the independent agent (IA) distribution channel market,” said Ron Berg, executive director of the Agents Council for Technology and a member of the Applied Client Network Advisory Council.

“They’re one of the first where many said, ‘There’s no way they can succeed; their funding can’t sustain them,’ etc. I don’t agree with their aim to replace IAs, as there are many new InsureTechs that want to partner with IAs. But Lemonade is a great example of how we need to do business — maybe not every aspect of it, but definitely the tech ease-of-doing-business parts.”

It’s true that the way Lemonade and other insurance start-ups are structuring their services are very easy for younger audiences to understand and start using. Simple, online, self-service platforms allow anyone to easily obtain information or a quote at their own pace — as opposed to needing to set an appointment and speak with a representative before being able to move forward.

“This is how people want to do business and how they want to deal with insurance,” said Nadine Vasquez, commercial lines manager at Rue Insurance and a member of the Applied Client Network Advisory Council. “Everything is instant, and many insurance agencies are way behind on that.”

This, in many ways, is at the heart of these new providers: the ability to enter the market in a new way and do things differently. If today’s insurance agencies and brokerages want to connect with a new, younger customer base, they need to look at what these new market entrants are doing differently and see how these approaches could fit into their traditional business models — or consider upending their traditional offerings completely.

Disruptor #2: New (and More Prevalent) Technological Hardware

Technological advances and efficiencies today can help the insured and the insurer obtain information faster and more accurately.

Consumer behavior is constantly changing; 2016 research from Google showed that 50 percent of people use three or more connected devices on a regular basis. More people expect constant, round-the-clock service and easy access to get their problems resolved. In many ways, businesses today are at the mercy of the consumer. Although there has always been a focus on customer service in businesses, customer relations is now a make-or-break business unit for many organizations.

Much of the new customer-oriented updates come from mobile technology advancements and the prevalence of internet connectivity. Traditionally, agents and brokers have always gone through a specific process for client interaction to provide a quote: a meeting or call with the client, underwriting, pricing, etc. Although it’s been effective for many years, it isn’t necessarily the fastest or most efficient form of client interaction when considering the available technology. These processes can now be streamlined, combined or skipped as needed to improve the customer experience from their initial interaction with an insurance agency or brokerage through to getting a quote for their insurance needs.

April 2017 research from Google showed that 70 percent of smartphone users who bought something in a store first turned to their phone for information about that purchase. This stat is in relation to retail sales, which is very different than insurance, but are today’s consumers looking for more retail-centric experiences when it comes to their insurance purchase? Instant quotes and responses are now commonplace, and customer service can be available 24/7 through the use of call centers and chatbots. We’re potentially seeing the commoditization of insurance, necessitated by how consumers want to interact with the insurance industry.

The other side of this is how technology hardware is helping insurance agencies and brokerages fulfill their responsibilities faster, better and, in many cases, cheaper with the use of drones. Drones have been instrumental in allowing insurers to not only have a more accurate view of damage in disaster-stricken areas, but also to get that information in a cheaper and more reliable fashion. Additionally, Berg said that he has noticed in insurance-related news feeds that when drones are used for insurance purposes, fewer litigation and disputes arise in the process. “We began issuing strategic background on drones in 2015 as one topic under our ‘Risk Advisories,’” he said. “What we’ve found since then is that the use of drones has exploded in insurance. They have greatly increased efficiencies in claims and appraisals, as well as reduced the risk of human injury.”

Drones have also been used to underwrite large structures, which has traditionally been a difficult process. “We can use drones in a claim situation to assess damage and get a more accurate picture of what has happened,” said Dan Goodwin, business architect with P&C staff sales at Nationwide and a member of the Applied Client Network Advisory Council. “We can then use third-party data to fill in the gaps.”

Disruptor #3: New Insurance Products

Technology is both creating new insurance products and prompting necessary changes to existing ones, as evidenced by trends like the rise of cyber insurance and the emergence of self-driving vehicles.

The 2017 Equifax data breach, which affected 147.9 million people in some way (nearly half of the United States), highlighted the importance of cybersecurity for organizations that hold data, and it showed that consumers can — and should — take cybersecurity into their own hands.

According to CSO’s 2017 U.S. State of Cybercrime report, cyber-crime damage costs are projected to hit $6 trillion annually by 2021, and cybersecurity spending is expected to exceed $1 trillion by 2021. This area is becoming a higher priority for consumers and should be for

insurance agencies, too. “Coverage issues will emerge and take time to evolve, just like cybersecurity is still evolving and stabilizing,” Vasquez said. “The insurance industry should understand these issues and be ready to adjust and innovate with them. It’s easy to understand but terribly complex at the same time.”

The same goes for self-driving cars, which aren’t even on the market for consumers quite yet, but present a number of obstacles for the insurance industry to consider as they become more mainstream. Not only will they disrupt the typical auto insurance market if the owner of the car is not actually responsible for driving it, but they also bring into question who is actually responsible for the actions of the car. Is it the owner? The manufacturer? The operating system developer?

In a recent interview with Connections, Travis Owens, innovation manager at Central Insurance Companies and Applied Client Network member, shared his thoughts on where insurance for self-driving cars could eventually go. “I could see auto premiums shrinking and being allocated differently,” he said. “The frequency of claims will decrease, but the claims reported will be more severe. Vehicles with automated driving systems are more expensive than those without, and repairing these systems requires costly, specialized labor.”

Additionally, as cars become completely autonomous (not just special features and add-ons for parallel parking and other driving tasks), Owens sees the manufacturer taking responsibility for any insurance issues. “The liability will eventually shift to the manufacturer as the automated driving system reaches full automation,” he said. “Ridesharing has the potential to dramatically shrink the market with numerous individuals using one vehicle in lieu of each owning their own.”

As research in these areas continues to evolve, so will the potential insurance coverage. Both advancements pose a number of challenges for insurers as neither cybersecurity nor self-driving cars have established historic data to model potential coverage.

Closing Thoughts

In many ways, the disruptors of today are a factor of the technology that is available now, but even that will change in the next five, 10 or 15 years. Insurance agencies and brokerages need to look for the right technological partners in their industry to help them navigate that change, as no single business can navigate it alone — nor should they have to.

Jamie Thomas, benefits manager at Weber Insurance Agency and a member of the Applied Client Network Advisory Council, said, “There’s an overwhelming feeling that all of these topics are moving so quickly that it’s difficult to know what everyone needs to be educated on and when.”

Berg echoed a similar sentiment: “It’s difficult for each of us to individually understand the trends. It has to be a collaborative effort between the carriers and the associations.”

Disruptors are here for a reason. They force change into a market and demand attention — but once they’ve become so large that you have to address them, it’s already too late. Thought leaders, subject-matter experts, advocates and everyday professionals need to be a part of helping the industry shift to a future-focused mindset. What will you do to address these disruptors in the next year and beyond?