3 Forces Disrupting Personal Lines

Five years ago, insurance-focused technology conferences were attended mostly by insurance carriers and large consulting firms. Now, I’m amazed and encouraged at both the size of the audiences and the diversity of the audiences – a melting pot of venture firms and eager entrepreneurs, as well as all the traditional industry folk. “Insurtech” is starting to get some serious attention, and for good reason. There are new funding announcements every couple weeks, new conferences popping up left and right and corporate venture funds now at almost all major carriers. The funding in this space alone has risen from $740 million in 2014 to $2.65 billion in 2015, and as a category insurance tech has seen 50% more deal activity in 2016 year to date than in all of 2015 combined. As Peter Thiel has said, “Humans are distinguished from other species by our ability to work miracles. We call these miracles technology.” We’ve seen technology revolutionize other industries, and now it’s our time. Our industry has been here before, and, every time, new companies have emerged while incumbents have suffered. Technology has cycled through the industry many times, each time weeding out the latent and rewarding the agile. What’s different this time is the pace of change – winners will become losers faster than we’ve ever seen. This time, three forces will significantly affect the personal lines insurance industry: shifts in consumer purchasing behavior, the proliferation of data and the interplay between data and consumers. The mobile-first era Technology makes life easier for consumers, and we’ve seen a shift in behaviors because of it (or is it the other way around?). Regardless, as a result of this shift, mobile is the fastest-growing retail channel, and “one click” ordering has become the standard. See also: Blockchain Technology and Insurance   Unfortunately, as an industry, we are far behind. The industry standard still touts a 15-minute purchasing experience as a win – on a computer. Despite the inherent value of convenience, the mobile experience is far more tenuous for consumers than other distribution channels across all major competitors. Consumers are asked to enter in form field after form field designed for a desktop, but on a mobile device and with only two thumbs. The result is a digital experience that ranks worse than government services. We’ve seen this trend before. The internet had a very similar effect on our industry in the late '90s and early 2000s and continues today. With the exception of Progressive, Geico and USAA, most large carriers still struggle to understand how to compete in an internet-first world. These three companies successfully cornered the market by embracing the internet while the rest of the industry doubled down on the spiraling agent-model. It’s clear that we’re trending toward the same pattern with mobile. Today, it’s a relatively level playing field. Those who support a mobile-first experience will win big. Those who are late to the game won’t ever catch up. Open the data floodgate The rise of mobile means access to new data, and new data is paramount for our industry. A fundamental value that insurance companies provide to the economy is the ability to price and understand risk. Data is essential to this understanding. As Seth Lloyd of MIT says, humans used to be hunters and gatherers of data. With technology, data is now flying by us every second, and the real challenge is successfully understanding how to capture, sort and use this data. Smart mathematicians and engineers have already figured this out to a large extent, creating supercomputers able to do machine learning mathematics on large quantities of data, producing insights never before seen. However, despite the accessibility of these improved techniques, most actuarial modeling is still based in classical statistics and generalized linear modeling. The interactions: data + consumer These two trends -- the customer move to mobile first, and the proliferation of data -- are difficult to manage alone. When combined, the interaction becomes disproportionately challenging. This has created an environment where the industry has largely pegged new data collection against consumer experience, rather than executing on both simultaneously. For example, telematics through OBD II programs have been major efforts of the industry. The reality is these devices are confusing for consumers, the value proposition to them is meager and the process of receiving the device, plugging in the device and returning the device is starkly arduous in contrast to modern consumer purchasing experience expectations. Smartphones can now do everything an OBD II device can, and, with connected cars, these OBD II devices are completely obsolete. The question is whether carriers will continue to throw good money after bad, or realize the sunk cost of OBD II programs and begin investing in new technologies. See also: Insurtech: One More Sign of Renaissance   And it’s not that the industry isn’t spending money on IT – it is. Armies of engineers working on old technologies are provided with hundreds of millions of dollars to attempt to overhaul policy management systems. Billion dollar companies specializing in just fixing policy management systems exist, capitalizing on the inability and incompetence of the industry. The dawning of insurance tech The industry has for too long mistreated technology, looking at it as a cost of doing business, rather than an investment in consumer experience and better data management. It is rare, if ever, that you see a seasoned engineer in the C-suite at an insurance company or even on the board. Talented engineers run from the industry. Can you blame them? The agile engineer, eager, stumbles into a lagging and latent system. It’s almost the start of a bad joke. The result is that all of these implications and their interactions with one another have cost consumers dearly. The purchasing experience is confusing and onerous. The price is unfair, based off the same data as 20 years ago and off out-of-date statistical modeling. Consumers are paying for an inefficient system. This is clear to the venture community, and clear to many entrepreneurs. The industry has been protected by regulation, capital and complexity. These barriers may have slowed the pace, but, increasingly, we are seeing startups that are not partnering with existing carriers, but becoming carriers. This is the beginning of a new end for car insurance. Technology will continue to create miracles, and these miracles will belong to the consumer.