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This headline is all too common: “InsurTech company launches, threatens to upend the industry.” While consumers may jump at the idea of having access to new and modern product offerings, insurance professionals like myself are more skeptical. We welcome innovation, but it’s important to remember that InsurTech is derived from two words: insurance and technology. There needs to be as much (if not more) emphasis on effective underwriting as there is on state-of-the-art tech. Without an equitable balance, we can’t provide viable, effective products. Check out three insurance mistakes that most InsurTech startups are making—and what they should do instead.
Skimping on underwriting basics
In the insurance industry, the traditional onboarding process has long needed improvement. It has been inefficient and confusing for too long, leaving customers guessing about questions they don’t have the answers to and exaggerating about risk characters (like age of roof) they think could drive their premiums up. In an effort to simplify quoting and binding, InsurTech companies often eliminate underwriting questions needed to properly evaluate potential risks. As a result, new businesses aren’t getting the data they need.
There are technical solutions and big data sources that can reduce friction while providing comprehensive coverage, but many companies aren’t using them. At Hippo, we get all of the traditional questions answered and use a tremendous amount of verifiable, third-party data sources. Our technology is easy for our customers to use and the strategic integration of real-time objective data ensures that the information is accurate so that we can secure long-term profitability. It also means that we can constantly evaluate a home’s exposure to risk.
For example, we have access to aerial images of every house we insure. We’ve worked to develop artificial intelligence that notifies underwriters when something changes. If a customer puts in a pool or their roof condition has gone from fair to poor, our underwriters receive a message. Then we evaluate their policy to determine whether it accurately covers their exposure to risk. If it doesn’t, we amend it. Traditional industry offerings only underwrite exposure when customers first sign up for their insurance policies. Collaborative reinsurance and actuarial partners appreciate the kinds of features that improve operations for customers while maintaining underwriting integrity.
Unsustainable pricing algorithms
Automating interactions and leveraging data and technology is a way to cut costs. But in the long run, new providers can’t get away with charging half (and sometimes less than half) of what traditional insurers charge. InsurTech companies may be relying on low costs to attract enough customers to impress investors, but they fail to recognize that rates must be able to provide long-term underwriting profits—and ensure the viability of their companies.
Insurers must perform extensive analyses of individual risk characteristics in order to create a sustainable product and ensure that prices can adequately cover losses—but first, they’ll need actual price and actual losses from insurers. Otherwise, they will create top-line growth without bottom line underwriting that protects both their customers and themselves.
The pricing model InsurTech companies often use hurts their customers. Consumers will switch providers in order to lower their premiums, but prices will eventually rise to make up for incorrect assumptions made when the company’s top priority was chasing top-line growth. Customers bear the brunt of these unsustainable pricing practices every time they renew their policies until the actual exposure and necessary rates are identified. Low prices may draw in new customers, but they won’t last forever. This bait-and-switch approach creates an eager customer base in the short term, but a potentially disloyal one later down the line.
Perhaps the biggest issue customers (and critics) have with InsurTech companies is the way they handle claims. To streamline this complex part of the insurance experience, companies have created automated processes and robotic claims advocates. There are two reasons why this isn’t a viable solution.
For one thing, it can lead to an increase in fraud. Sixty or 90-second claims settlements don’t leave enough time for adequate research or evaluation. And since a robot, droid or another machine can’t be programmed to identify certain aspects of fraud, this process is bound to be misused. Scammers and fraudsters know that they should avoid claiming large losses that insurers are more likely to verify. So instead, they report small losses. A growing number of instances of fraud not only creates problems for insurers, but it also reduces the loss ratio and drives up premiums for all customers.
Automating the claims process also eliminates human interaction. To me and my colleagues—who work in the homeowners insurance industry and protect the largest investment most Americans make—this is a major oversight. When your house just burned down or your family heirlooms were stolen, you don’t want to talk to a computer prompting you to press different numbers. And you don’t want to face a traditional adjuster who instantly asks whether you had an open flame or left your door unlocked. Following a tragedy or a traumatic experience, customers need a claims process that can determine whether they’re safe and ask whether there’s anything that can be done to help them.
With lower overhead costs and policies that are more accurate than traditional insurance plans, InsurTech companies have the opportunity to become proactive partners. We can provide products and services that traditional insurers weren’t able to offer in the past, like systems that use data to identify which customers are in danger when natural disasters strike. A two-way relationship with insurers will encourage customer loyalty and leave policyholders feeling better protected.
The Bottom line
InsurTech companies are expanding rapidly. According to recent data from Willis Towers Watson, total investments in 2017 ($2.3 billion) were 36 percent higher than they were in 2016 ($1.7 billion). But the field can’t fulfill expectations if it isn’t adhering to half of its mission. As a member of the InsurTech community, I realize that there is a way to marry the terms “insurance” and “technology” more equitably. But as someone who has spent 25 years in the traditional insurance business and has both Chartered Property Casualty Underwriter and Certified Insurance Counselor credentials, I can’t accept the way some companies are dismissing processes that have worked for centuries.
The insurance industry needs to modernize. The world is changing and we have to keep up. But we shouldn’t get rid of the fundamentals that allow us to provide great products and services. Our job extends beyond creating a better application and claims process. Ultimately, we have to deliver a product that keeps policyholders secure.
If 2017 Was the Year of Insurtech, Will 2018 be the Year of the Insurance Platform?
Insuretech must include bedrock of the insurance value chain. It improves and can change the ecosystem but not change inherent risk…only mitigate it.
Well said, Rick! For anyone who believes InsureTech is the magic mantra for a customer’s current woes – this is a very down to earth wake up call. Thanks to the growing noise and rising expectations from the InsureTech – we are becoming increasingly prone to missing out the sustainable core of insurance!
Nailed It. Great Article Rick!
Rick, I completely agree with you. I’m an actuary who has spent time on pricing and claims reporting. In my experience, insurtech companies often assume the improvement in the tech will deliver better profit, but ignore the fact that claims can make up 60-80% of premiums. Any misstep in claims assessing will kill the business. As an insurtech, Optalitix have focused on understanding customer behaviour in all aspects of the process and applying these to improve both customer experience and insurance outcomes. We know doing both isn’t easy for insurers as it requires complex mathematics and system development to get this right.