(Image credit: Jerry Kimbrell.)
I’ve seen this story before. Having worked in FinTech since 2005, I witnessed the Fintech wave forming, cresting, and eventually crashing into the financial ecosystem. If there is a fraternal twin to banking, it’s the insurance industry. Both industries are built on managing risk, capital, compliance, and distribution. Not everything in FinTech will apply to InsurTech, but there’s a lot we can learn by assessing the impact of FinTech on the banking system.
It’s important to recognize these patterns, because we’re vulnerable as humans to conjecture, especially when something is unfamiliar. We don’t like to live in ambiguity for long periods of time, so we put things into boxes, even if we don’t have all the data. This, of course, can lead to myopic thinking and short-term planning. The truth, however, is that the InsurTech revolution will likely be more of an evolution—a slower more gradual shift and less of a big bang. The proof is the banking system. While it has clearly been impacted by FinTech, the tsunami of change has been less violent than what some predicted at the height of the craze.
Technology Is an Arms Race
Technology can be transformative or disruptive, like the invention of the computer, the internet, the iPhone, and many other examples. But, often times, technology is iterative in the sense that one widget is replaced by a more efficient and lower cost widget. The impact is less disruptive and more evolutionary. Technology enables the masses by lowering the overall cost, which is extremely democratic and a much more subtle shift.
Efficiencies, however, are often short lived. Given enough time, the advantage typically shrinks and you’re on to the next shiny object. If you need an example, just take a look at small dollar lending in both the personal and commercial space within FinTech. Putting the entire application process into a digital format and with instant funding was incredible, but this has become the industry standard now. Literally billions of dollars have been pumped into that space. In just a few short years, the software was commoditized.
Short of a truly defensible business model with unique IP or network effects, most companies will find themselves in an arms race. No single technology will be the holy grail. Instead, a company’s ability to continually innovate at a fast pace will become the goal. A lot of variables dictate the success of how well an institution innovates, but I can only speak to my own experience in FinTech, and now InsurTech. Here are some common mistakes that I have seen in FinTech and now within InsurTech as a potential technology partner:
- Carriers cannot always articulate what problems they are trying to solve and what success looks like.
- Decision makers aren’t involved enough or don’t provide enough support in the innovation process.
- Failing fast or testing concepts is cumbersome.
Over the course of a year, innovation teams probably meet hundreds of start-ups and the same is true of start-ups. The challenge with start-ups is that we don’t know what we don’t know about your business. It’s difficult enough to sell a young technology but almost impossible to sell something to a client that can’t articulate its own problems well. To borrow a metaphor, it feels like some innovation teams are browsing instead of shopping, which are very different things from a sales perspective.
Furthermore, even if you create alignment, it’s extremely difficult to push an insurance carrier into simple tests. There are a ton of valid reasons for why on-boarding is slow, but you have to find a way to cut through these barriers. Even the banks eventually found ways to re-engineer their internal processes to accommodate start-ups. Whether its contracts, audits, compliance, certifications…etc., I would encourage carriers to find a way to “yes,” rather than “no.”
I’m oversimplifying, but half the battle is just accelerating your own discovery process. Obsession over the latest technology craze is understandable, but what teams should really be focused on is creating a structure, culture, and process that allows a company to adopt all of the relevant technologies in the coming years.
Sandboxes: Not Just for Kids
More data has been created this past year than all the previous years combined. That’s a lot of data and there’s no way that any regulator can keep up with the proliferation of data and technology. While fair lending may not exist within insurance, the concept of disparate impact is shared. And, the concern for safety and soundness is as well. In banking, regulators began creating sandboxes and townhalls to encourage dialogue and learning. In addition, the FinTechs began pushing regulators and Congress to change regulations to accommodate new business models. As the InsurTech movement matures, I’d expect to see a lot more interaction between regulators and InsureTech companies. Even the regulatory side of the business will shift given enough time and it’s important that each carrier understands the shifting sands. Start-ups are more likely to lead the charge and push the envelope, but I think it’s important that they are not the only voice at the table. This is an extremely important aspect of long-term planning that needs to be considered. It will become a weapon or a weakness if not cultivated appropriately.
Directto Consumer Is Difficult
There are only so many people looking for financial products at any given time in the market and they’re not always in the digital channel. FinTech lenders, over time, became adept at customer acquisition through digital marketing. But, even this market had an upper limit. When they ran out of market share in the digital channel, the obvious place to hunt for customers was through the banks themselves.
At first, FinTech was the sworn enemy of banks and now they are often partners. InsurTech, like FinTech, will find a pain point that big insurance companies cannot address efficiently. They will exploit it for what it’s worth, but will need to broaden their distribution over time through partnership. Certainly, there are a number of MGA’s who already write on behalf of their carrier partners, but I suspect an even deeper partnership is possible in many cases. While digital channels are incredibly appealing, brokers/agents are still relevant to many people. The point is that the digital market is a growing pool, but that there’s still a much larger body of water to fish from. Don’t be surprised if competition moves to cooperation over time.
Unbundle to Bundle
As referenced earlier, FinTechs were extremely strong at finding niche markets that could be easily exploited under the noses of the banks. The same will hold true within insurance, but the demands of investors and capital will drive these InsurTechs to go after an even greater share of the consumer wallet. All companies are fearful of the Amazon’s and Apples entering the financial services market and they could be fearsome competitors. However, it’s the FinTechs like SOFI, Marcus, Chime, Varo, Robinhood, and countless others who are beginning to bundle multiple products to create modern, digital banks. The most expensive thing in FinTech has been acquiring customers in high volumes. Naturally, these companies can justify higher costs if they can increase customer lifetime values through cross-selling. And, it creates a potential network effect for the winners. Whether it’s InsurTech’s doing the same thing or possibly some giant FinTech player coming into the insurance space, I suspect it’s a matter of time that someone will try to create the Amazon of the insurance space.
The Early Days
It’s certainly going to take a while for all of these predictions to play out, but it’s important to have a long view on these matters. So far, I’m not sensing any panic in the industry, but at the height of the mortgage crisis, no one paid too much attention to the peer-to-peer lenders lurking in the background in 2008. Somewhere around 2015, the banks went into high alert. It’s undeniable that a lot of things have happened in the years since the crisis. Depending on who you are and how you are positioned in the industry, the hindsight of FinTech may be prescient for your company.