Life Insurance #insurtech Innovation Part I: No Longer an Oxymoron, Expect an Uphill Climb

This is a guest post by Amy Radin. It is a two-parter. The second part is tomorrow. We have also posted it onto the Fintech Genome to stimulate discussion there. You can find Amy’s profile on the Fintech Genome here.

While most insurance technology startup activity in the US is concentrated in health and auto, there are signs of life (pun intended) in the life insurance sector. Given the business model challenges reported in my April post, optimists will see upside and big commercial white space throughout the ecosystem.  People with the skills, smarts and guts to envision how life insurance could work can lead the sector in new directions.

Life insurers ignore the facts at their peril. According to the 2014 Insurance Barometer survey cited in AM Best – Buying Insurance: Evolving Distribution Channels, 83 percent of consumers would use the Internet to research life insurance before purchasing a policy if they had the option. While face-to-face contact with an agent remains the preferred purchase channel, nearly one in four said that given the option they would prefer to research and purchase online.  This year’s Insurance Barometer update reports an improving marketplace for life insurance, citing favorable millennial generation attitudes, and people’s willingness to share data in exchange for better product pricing.

A check-in on what is happening suggests three groups of potential innovation generators emerging:

• New entrants developing client-centric offerings sitting between the carrier and the client, displacing traditional agents with a digital experience business model

• Startups providing B2B solutions to carriers or distributors, addressing pain points in the traditional product and sales model

• Carriers themselves, a number of whom are experimenting either in the market themselves, or via investments in startups and/or accelerators

This post assesses these the three sources of innovation. Tomorrow’s post will highlight players across these categories.

New entrants can change the game … and that will take time

A big beef with the traditional life insurance model is that it is not client-centric.  Nonetheless, even the most change-resistant executives will at least nominally agree that a focus on the client is now essential.

From that consensus, though, all bets are off with regard to incumbents’ ability to transform from a model where many of the industry’s own employees believe that the agent is the client, to one where the client (i.e., the person purchasing the insurance product) and his or her needs drive the business strategy.

It is almost impossible for a time-tested, embedded culture to accomplish a 180-degree pivot, so I am more optimistic that successful models of client-centricity will more likely come from outside.

New entrants who succeed will:

• Establish presence and meaning for their brands among client segments whose unmet needs can be supported by the business model, creating differentiation and marketplace advantage.

• Extract insight from wide sources of data, many not used at all today within the industry, to drive product development, client segmentation, personalized offers and communications, a client journey built upon new models for distribution, servicing, payments and account management, or a pivot from protection to prevention  – all with heavy focus on digital possibilities

• Avoid naivete about the inherent complexity of this industry, starting with:
  • Managing the reality of 50 states’-worth of regulation plus federal oversight from multiple agencies
  • Adhering to tight compliance requirements
  • Assessing the financial and risk implications of claims that won’t occur for decades
  • Recognizing that people are irrational to some degree when making financial decisions
  • Having patience (and patient investors) as even new entrants will be impacted by sector dependencies and client dynamics that may take years to evolve

Start up companies will provide B2B carrier and distributor solutions, aiming at resolving automation, speed, productivity, technology, compliance and client experience pain points.

When I began to take a close-up look at the insurance industry four years ago, it was exciting to see the low-hanging fruit that could have positive impact with limited downside.  Carriers lacked digital and multi-channel capabilities, big data analytics, and technologies that had been introduced in consumer financial services at least a decade prior.

There are signs of progress. Entrepreneurs are honing in on specific problems, and executives are more open to outsiders. Consider as a starting point three buckets that are filled with pain: Agent, Client, and broader Capabilities.

• The traditional agent model is riddled with issues, e.g.: 
  • A continuous decline in the agent workforce,
  • A mismatch between agent demographics and overall population trends,
  • A prospecting model out-of-touch with the times, and
  • A compensation model that encourages churn and does not align interests between the agent and either the carrier or the client

Emerging agent solutions can successfully focus on reducing sales funnel inefficiencies especially in the areas of:

• automation solutions to ramp up agent engagement in digital channels (website and mobile app development, social media, compliance, content development, marketing campaign management),

• hand-held device-based data capture and submission for policy applications; and

• improved underwriting and application processing for faster approval, reducing error rates, and minimizing or eliminating the need for applicants to provide blood and urine specimens.

Startups offering B2B solutions will succeed by:

• Demonstrating real knowledge and expertise in the vertical

• Connecting the dots between their solution and drivers of financial success, especially the core metrics against which the industry and the analysts have historically measured performance.

• Having a constructive attitude – no one wants to hear that the sky is falling, especially executives and advisors within striking distance of their own retirement.

Carriers are innovating to connect directly to the people who own their products, and also to motivate agents to sell 

The goal of client-centricity is on top of the list for US life insurers. The challenge is translating what starts off as an intellectual abstraction into resource allocation, structure, governance, talent, prioritization, investment and daily tactical delivery… not to mention demonstrable financial impact that will satisfy boards and investors.

The pressure is on. Carriers are choosing a variety of areas for focus, and stepping beyond expense reduction to shore up results.  Commonly on the short list:

• Advisors – whether captives or third party – have the direct relationship with the client, and tend to maintain connectivity only with their top clients who represent additional sales or referral potential.

• Client relationship management – Carriers transact infrequently with clients or their beneficiaries – contacts focus on premium notifications, claims, and questions about policies.
  • Even when clients or beneficiaries reach out, most carriers are in the early days of figuring out responses beyond answering the immediate question.
  • Across the industry there are millions of clients referred to as “orphans” – people whose agent has died, retired, or is no longer affiliated with the carrier.  Even if “assigned” to another agent, these clients do not have strong relationships with whoever issued their policy.
  • Carriers have not done a good job understanding their clients and how to improve the effectiveness of these relationships based on behavioral segmentation or other proven tactics. In the language of the carriers, “in-force management” is a relatively new area of focus, driven initially by risk and expense reduction strategies, with some signs of effort to impact client loyalty and satisfaction.

• Capabilities – Ranging from basic automation to big data to digital and multi-channel experience platforms, e.g.:
  • data management platforms that unify disparate data sources making them useful in one, dynamic dataset, speeding up execution as well
  • data analytics, e.g., to enable proactive and relevant product migration as well as additional sales. product development, and exploration of new business models
  • integrated experience for agents and clients across channels
  • data security enhancements
  • e-document management

The business model and culture that enable results to happen, along with the distractions of running a business of such high complexity, will compete with carrier-led efforts.  Without restating the obvious challenges, two worth noting are:

• The dependency on agents and advisors to drive sales, which makes any direct-to-client conversation controversial, as it may be perceived as competitive with the sales force

• The diversion of attention in life insurance c-suites right now to address the recent US Department of Labor decision on fiduciary standards.  The impacts of this ruling are significant.

A 2015 World Economic Forum research study entitled The Future of Financial Services concluded that while, “the most imminent effects of disruption will be felt in the banking sector … the greatest impact of disruption is likely to be felt in the insurance sector.” For entrepreneurs and investors who see the upside and can tackle the complexity, life insurance is territory that appears, at least for now, to have considerable reinvention white space.

Daily Fintech Advisers provides market development services to Fintech ScaleUps, Financial Institutions and Investors and operates the Fintech Genome P2P Knowledge Network.