December 29, 2015
Why Insurance WILL Be Disrupted
by Nigel Walsh
Following an article on why insurance won't be disrupted, here is a point-by-point response. Big change is, in fact, coming soon.
As it’s Pantomime season, can I start this with “Oh, Yes It Will”? (For those not familiar with Pantomime, check out some of the history here.)
I write in response to a great post from Nick Lamparelli on why insurance will not be disrupted (here). He takes a really interesting position. But I sit on the other side of the fence and believe insurance will, is and can be disrupted.
In answer to Nick’s six points as to why insurance will NOT be disrupted, here’s my perspective:
1. He writes: “At the core, insurance customers are leasing the potential to access capital…. How do you make a big pile of money irrelevant?” But this will vary from line of business to line of business. Where there are person-to-person (P2P) and other self-insurance approaches, why do I need capital? I will self-insure.
2. He writes: “Peer-to-peer providers just won’t be able to get sufficient scale to efficiently use capital to cover risk.” But isn’t this more about how they enable distribution and connections and pools of risk?
3. He writes: “IoT [Internet of Things] devices [and other new technologies] will slowly be adopted by most insurers as they look to get competitive edges, but the follow-the-leader paradigm of the industry will mean that any edge will disappear quickly, and we will all be running hard just to stay in place. These technologies are impressive. I would classify them as a solid innovations to the industry, but not disruptive.” I agree on this – it’s more evolution, not revolution. The revolution comes if the carriers actually do something with the technologies and create better products that are truly personalized. Note that we are still thinking in a product mindset, and I suspect this will change.
4. He writes: “I think State Farm and large auto insurers like them will be just fine, and technologies such as autonomous vehicles will be more of an annoyance than an existential threat.” Like Nick, I think there will be evolution. But I think the change with autonomous vehicles is not only to move from personal insurance to product liability (or a mix with a flex of product and personal liability, e.g. the manufacturer will provide the base layer of cover, but after that you have the flex options to add extras). To me, the issue is more about distribution of the product. I envisage that next you will buy insurance to cover a journey, instead of buying insurance once a year through a price comparison/aggregator site. Equally, the big auto insurance carriers Nick mentions will need to look for new sources of income and value-added services, be it breakdown or otherwise to drive revenue and profit. I suspect these will be more often from outside our standard world. The car will be the most connected thing we engage with, and that alone brings a whole host of exciting opportunity. If we do go for autonomous cars in scale and get them right, then the disruption could be that product liability (PL) dramatically reduces to being a capacity provider only to a new distribution channel (auto providers?). Or the CL carriers and reinsurance providers actually take prominence (higher likelihood in my view).
5. He writes that regulators could stomp on innovation. This is a tough one, but I think the consumer will always win. Regulators’ views will be driven by what’s best for the customer. Equally, smaller, nimbler insurers that can turn on a dime will be better-equipped to manage through regulation changes, as opposed to large, legacy-laden carriers that will be too slow to react and catch any positive outcome.
6. He writes that there is very little that technology can do to disrupt insurance for natural catastrophes, which is his area of expertise. I reply: OK, you win. Not many seem to be tackling this, if any at all. However, how we manage in advance, or the ensuing events, how we handle the supply chain and how we treat return to pre-loss will improve, again as natural evolution rather than as disruption. You could argue that crop insurance has changed dramatically over the years with better weather data. Some pay out proactively based on weather data, without ever the need for a claim. This to me is revolutionary and goes back to the point that customers come first.
I’m 100% with you and Paul VanderMarck, chief strategy officer at Risk Management Solutions – customers and better outcomes will ultimately win. However, on the race to this end, there will be many who change and challenge our thinking. To me, this is why there are so many new entrants and existing carriers investing heavily to understand what, why and how we can disrupt. Have a look at some of the work from CB Insights, which gives a fascinating view on the state of the market. See here for some of the great work Matthew Wong and team are doing.
Separately, I think we have jumped on the “disruptor,” label, as, like any industry, we need to be able to offer up the opportunity for the next unicorn (Zenefits, Oscar etc.) and to attract the right attention, from both inside and outside the industry, along with the appropriate talent and thinking!.
Either way, for me it’s an exciting time out there in insurance, and we must continue to evolve, revolve, pivot, disrupt – whatever we call it. Sitting still is not an option!