The Uncommonly
Pragmatic Blog

Any leader in any company who sees a future for their business and career is feeling the pressure to innovate, find new ideas and business models, and create enduring client value that adds to the bottom line and strengthens the balance sheet. There is no one formula or set process to find and execute the ideas that achieve these goals. Clients set moving targets. Shareholders are unforgiving and demanding. Regulators are wary of new risks. Society expects companies to care about much more than the bottom line and to behave with authenticity.

Innovation has moved from an abstraction that will matter at some distant date to a front-and-center deliverable that must show evidence of impact in the space of the calendar quarter.

The fast and furious forces of change stimulated by technology, demographics, lifestyles, and economic, environmental, political and regulatory impacts — or any number of these in combination – are easy to see. The question, “WWAD” – “What would Amazon do?” seeds an uncomfortable conversation happening inside corporate conference rooms. The answers are easy to intellectualize. The problem? They are hard to translate into results that matter. Execution takes new, nuanced combinations of leadership, skills, strategy, and tactics. Innovation has moved from an abstraction that will matter at some distant date to a front-and-center deliverable that must show evidence of impact in the space of the calendar quarter.

While this post speaks to the example of the insurance sector — a self-confessed laggard when it comes to internalizing and getting out in front of the speed of change — the lessons apply to any business seeking to sustain growth and relevance.

The underlying business model for insurance has not been challenged since demutualization-induced disruption at the beginning of this century.  The possibilities of business model disruption have gotten increasing attention and investment beyond the incumbent players. Not surprising, as entrepreneurs and investors in search of mega-opportunities see insurance as a $5-trillion sector (premium dollars) [1] that has stubbornly resisted change while sectors as wide-ranging as media, entertainment, retail, telecommunications, and travel have been shaken to their roots by new entrants serving markets in new ways. Insurance today is a unique profit pool – massive, global, diverse and adhering to legacy business approaches – where the opportunity to create new sources of value and growth is difficult to achieve, but where there is room for impact.

Self-reinforced moats have shielded carriers: the sheer complexity of underwriting, policyholder management and communications, capital requirements, hydra-like distribution systems, and low consumer enthusiasm for the category. No surprise that products historically have either been mandated, or pushed by commission-driven sales processes.

According to Venture Scanner[2] there are close to 1500 insure-tech startups seeking to change the sector. Since 2015 there are signs that the rate of growth in investments has continued to increase but at a slower rate. CB Insights reports that strategic investments by (re)insurers have shifted beyond the US towards a more global footprint, particularly Germany, France, the UK, and China. [3]

Innovators are experimenting in retail and commercial, in property & casualty, health, life and retirement lines. Solutions aim to do everything from replace the traditional, intermediated model for distribution with digitally-centered direct to client alternatives, to new capabilities that automate elements of the value chain, and apply new data sources to underwriting, empowering either carrier or client with more knowledge.

Opportunity or threat, depending upon one’s position, is everyplace.

Safe bet that the technology is here or will be here soon enough to transform every element of the insurance value chain. But acquiring the technology is the easy part.

A more fundamental question faces the insurance sector’s c-suites, which must be answered to frame the daily, short-term decisions that are creating the future, intentionally or not. It is the question of purpose.

Evidence of risk pools can be found even 5000 years ago when shippers devised pools to protect against loss of cargo and crew at sea.[4] The sector’s genesis and the ongoing reason for being was the notion of the community contributing to a common fund from which many would not benefit, while the few would be protected in their time of need.

Even as insurance companies have introduced new products, brands have come and gone, and other aspects of the business have evolved, the basics have not changed – the creation and management of a risk pool that is sufficiently durable to pay claims over time, and engagement of a broad community of individuals to feel that their interests are served by participating.

But as data analytics and technology capabilities move us into a world where risks can be underwritten not just down to the level of individuals, but at the level of moments in their lives, carriers may choose to skim within certain risk pools, pricing higher risk people towards unaffordability.

Signals of this exist today. Usage-based insurance (UBI) products, such as those offered by Metromile, Progressive and Allstate surface knowledge about an individual that allows policy tailoring to individual driving behavior. UBI disrupts traditional risk pool principles. And, it is hard to imagine that UBI won’t hurt those with less favorable profiles. The full consequences to society may not be examined or understood until out into the future, but they are brewing.

In May 2017, the New York Times carried a headline: New Gene Test Poses Threat to Insurers. The article described how data transparency and availability are disrupting underwriting for long-term-care insurance in the US. Challenged for years by inaccurate claims forecasting and sky-high pricing, long-term care coverage faces the further threat of adverse selection at a time when the population is rapidly aging and people voice greater concern about living too long — not dying too soon

Carriers should take note that as innovators such as 23andme, with no stake in the legacy business model, create data asymmetry between a policy buyer and the carrier, the advantage flips to the buyer. With a $199 investment, all of us can now make more informed decisions about which risk pools we may fall into. Over two million people have already purchased a test kit, with broadcast media rolling out to scale adoption. Analogous use cases are certainly possible in other insurance lines.

The question is: Will insurers find a path to sustain their purpose under rewritten assumptions, and deliver shared value that supports economic returns as well as the well being of society? Insurance plays a role in our collective and individual well-being and must find the balance between generating bottom line and social returns contributing to a sustainable future.

Pragmatic c-suite actions to integrate into 2018 and 2019 priorities starting now:

Do the work to reaffirm purpose. Efforts must be authentic, heartfelt and seen as the basis for action – not a slogan, not a project delegated to Human Resources, Marketing or Corporate Communications. Signals that this is happening well? In every meeting where decisions are being debated and driven, people are aligning those decisions to the purpose, not trading it off, and working hard to find the answers to living the purpose based upon a strong operating and financial foundation.

Engage in serious experimentation to find the feasible paths to implementation. Take lessons from the startup world: First, have passion and make the leap of faith that these paths exist. Then, embrace hands-on iteration. Prototype and test concepts — including product, client interaction, distribution, servicing, underwriting and claims management – in other words, seek to challenge and redefine the major operating levers of the business.

Be ready to invest in workforce, culture, and capabilities in ways that respect the great legacy upon which the sector has thrived for centuries. Acknowledge in word and action that it is time to achieve far greater talent diversity, and move from silos to a culture defined by collaborative behavior, open communications, and a willingness to innovate.

Reinvention, in insurance or across all sectors facing disruption, is not a technology or data problem. It is a challenge that requires leaders to rethink their brand’s purpose and then drive purpose into strategy, culture, and execution, setting aside established notions of what works, and focusing more on what matters. Technology is an incredibly powerful enabler.

The floodgates are open and conditions demand reinvention. Any insurance player — or any executive in any sector — who thinks “this too will pass” or regulations or legacy business model defenses will provide full protection may be able to buy time for a while. But chances are their business is already being disrupted one day at a time and is ready for reinvention.

© EBR Media Ltd, 2017.  The definitive and originally edited version of this article upon which this post is based is published in The World Financial Review May/June 2018 issue and can be found at http://www.worldfinancialreview.com/?p=30886.

[1] https://www.plunkettresearch.com/statistics/Industry-Statistics-Insurance-Industry-Statistics-and-Market-Size-Overview/

[2] https://www.venturescanner.com/blog/tags/insurtech%20company%20list

[3] https://www.cbinsights.com/research/report/insurance-trends-lendit-2017/

[4] https://finance.zacks.com/risk-pooling-insurance-1890.html