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November 22, 2016

Insurance Disruption? Evolution Is Better

Summary:

Most high-tech firms still just sell insurance, rather than changing insurance. A new way of thinking is needed.

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A significant part of the insurance industry and consumers have forgotten, for the most part, about why the industry exists. The policy holder pays into a pool through the insurance company and, if a certain event occurs, expects a claim to be paid. Very simple, right? So how has the insurance industry strayed so far from this simplest of concepts? And how have so many consumers purchased insurance products that have added so many complex layers to basic risk protection?

Yes, it is time for change in the insurance industry. Change is a part of life. And change is coming. The insurance industry needs to adapt to the current technological environment. At the same time, insurance consumers need to take advantage of all of the information available to them and increase their insurance literacy. Almost every single person in the U.S. has some form of insurance, but very few people have more than a general idea of what each of their insurance policies is and what it covers.

See also: Which to Choose: Innovation, Disruption?  

There is a constant buzz in the insurance industry about “disruption.” Why disruption? Is it because the term is trendy and has happened in other industries, or is it because disruption is actually needed in the insurance industry?

Is it more appropriate to say that the insurance industry needs to evolve, similar to how the investment world has already started to evolve?

Let’s look at the words themselves for the necessary direction, which will show why so many high-tech firms have failed in the insurance space and will continue to fail:

Disrupt: to cause disorder or turmoil in; to break apart; to radically change (an industry, business strategy, etc.), as by introducing a new product or service that creates a new market.

Evolve: to develop gradually or to gradually change one’s opinions or beliefs.

(Definitions are from dictionary.com.)

High-tech firms are focused on changing insurance like they have other industries, and it’s not going to work the same because they are focused on disruption rather than evolution. The insurance industry is one of the oldest industries in the world, with the concept tracing back centuries. Insurance is also a highly regulated industry. So just as it’s really difficult for a huge oil tanker to change course, it is equally challenging for an industry with the size and history of the insurance industry to change course or be subject to disruption. A slow evolution is what makes sense for the insurance industry.

The investment industry has evolved in many ways, and the technology firms that are entering the investment world are not focused primarily on disrupting the industry; rather, they are focused on more effective ways to provide advice, manage investments and gain greater efficiency.

The investment world is already further along than the insurance industry because there is already a fiduciary standard, with a greater expectation that the investment industry act in the best interest of their clients. Partially, this is because most investment advisers are compensated through some sort of fee arrangement rather than a commission.

The insurance industry has not changed in many ways and is just starting to adapt to our mobile society, new technologies, “big data” analytics and blockchain technology, among other factors. Currently, changes have been mostly limited to basic tasks like claims processing and some distribution activities. But really, most of the high-tech firms are still just selling insurance, rather than changing insurance. What is really needed is a change in the overall thought-process, including underwriting, policy servicing and home office operations.

Consumers expect and deserve more transparency, more efficient processes and more accurate results. When the insurance industry can deliver these, everyone will benefit. Insurance consumers also deserve advice that will help them best meet their insurance needs. Which is why The Insurance Bill of Rights was created.
What is really needed is to find a way to deliver insurance to the consumer in a way that makes the process more seamless, with optimized pricing for insurance products. Helping consumers become more insurance-literate and manage their insurance portfolio is where technology can help.
Compensation is a part of this and why I’ve written in the past regarding how the Department of Labor fiduciary rule will have a major impact long term on all insurance products, in addition to the ones it addresses inside qualified retirement plans. Major financial service firms such as Merrill Lynch are no longer offering commission-based products inside their retirement plans. While commissions in and of themselves are not necessarily bad, they can lead to market conduct issues and can increase unnecessary replacement of insurance products (and lead to churning of investment products).
See also: FinTech: Epicenter of Disruption (Part 4)  
Optimized insurance products and pricing are what will ultimately be of benefit to all. Consumers will be able to access insurance products that fit their needs and are priced more closely to their risk profile. Insurance companies will benefit from being able to have better data, which will help with their ability to price insurance products more efficiently. Insurance companies have had issues in pricing different types of insurance products, including long-term care insurance and life insurance. Technology and better use of data will help.
And where does that leave insurance agents? Insurance agents will still be necessary, as are investment advisers. Perhaps someday artificial intelligence will be able to replace a human, but that day is still not near. Consumers can benefit from the experience of a professional, dedicated insurance agent just as they can from the experience of other trained professionals. If Turbo Tax has not eliminated every tax preparer, then why would it be expected that insurance agents will be replaced by an automated process?

As Bob Dylan once sang, “The Time’s They Are A’Changin,'” and the next few years will bring a long-needed evolution rather than a disruption to the insurance industry.

If you would like to be a part of this positive change, please support the Insurance Bill of Rights and sign the petition at Change.org (here). If you are a member of the insurance industry, take The Insurance Bill of Rights Pledge. Let me know your thoughts.

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About the Author

Tony Steuer connects consumers and insurance agents by providing “Insurance Literacy Answers You Can Trust.” Steuer is a recognized authority on life, disability and long-term care insurance literacy and is the founder of the Insurance Literacy Institute and the Insurance Quality Mark and has recently created a best practices standard for insurance agents: the Insurance Consumer Bill of Rights.

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