If insurers can’t beat fintechs, they should join them

There's been a lot of speculation about how fintech companies might end up shoving aside many traditional insurers with new business models and more innovative customer engagements.

But while the industry may be ripe for disruption, I think we're far more likely to see increasing carrier collaboration with — rather than displacement by — game-changing startups.

Indeed, many existing insurers are already financing, buying or at least working side-by-side with the new breed of InsurTech players, leveraging the inherent advantages incumbents enjoy and the benefits they can offer to disruptors. However, that doesn't mean insurers can merely assimilate these newcomers into the status quo, as major changes in operations and corporate culture may be necessary to effectively develop and integrate InsurTech applications before the competition — legacy and emerging — beats them to the punch.

Those were among the key takeaways I gathered from a recent InsurTech symposium hosted by the Peter J. Tobin College of Business at St. John's University, which brought together insurers, technology pioneers, and financiers seeking to raise capital and facilitate deals between the legacy industry and entrepreneurial upstarts.

Disruptors

The InsurTech movement encompasses those looking to ride the wave of cutting-edge applications for blockchain, cognitive technologies, robotic process automation and virtual assistants to disrupt the business. Yet speakers from both incumbent carriers and InsurTechs emphasized the considerable barriers facing those trying to establish a presence in the insurance industry.

Insurers are highly regulated and capital-intensive. They have brand recognition, a huge customer base, and a longstanding distribution system. The complexity of many of their products (especially in high-end commercial insurance and annuities) can make selling difficult even for legacy carriers, let alone newbies looking to market directly to consumers in three minutes over a mobile app.

These inhibitors should preclude widespread displacement, but not significant disruption. It certainly isn't an argument that insurers can afford to assume a "don't just do something, stand there" mentality as the InsurTech revolution plays out. Carriers need to keep reinventing themselves, and not just to prevent a tech-driven upstart from eating into their market share or undermining profitability. They also must keep up with legacy competitors — many of which are launching innovation labs, venture capital arms and other proactive initiatives to become players in the emerging fintech space.

(Photo: Shutterstock)

Show me the money

Consider the insurance industry's projected investment curve when it comes to just one rapidly developing field — cognitive technology, which actually learns from experience and adapts accordingly, just like a live underwriter, claims investigator or insurance agent.

On a compound annual growth basis, between 2015 and 2020 insurers are expected to increase spending on cognitive computing by 40% in automated claims processing, 36% in threat intelligence and prevention systems, 47% for program advisors and recommendation systems, and 49% in fraud analysis and investigation, according to the April 2017 "Worldwide Semiannual Cognitive Artificial Intelligence Systems Spending Guide" put out by International Data Corp.

But it will take more than just money to make it in the fintech world. Incumbent insurers will need to accommodate innovators who think beyond the insurance industry's traditional parameters and are accustomed to operating on a much faster track to get inventions to market. At the same time, disruptors looking to live long and prosper in the esoteric world of insurance may find an easier path working with established, well-capitalized brands providing platforms that spare them the time and trouble of laying the required groundwork. Partnering with an InsurTech outfit rather than trying to reinvent the wheel on their own can check a lot of boxes for legacy and startup companies alike.

We should therefore expect much greater collaboration between the new and old world orders, with incumbents and innovators developing increasingly symbiotic relationships. A good example for insurers is taking place in the banking sector, where fintech-driven marketplace lenders and major banks are already becoming tightly integrated, as described in a recent Deloitte Center for Financial Services report on the topic by Stephen Fromhart, "Marketplace Lending 2.0: Bringing on the Next Stage in Lending."

Culture clash threatens to undermine collaboration

Unfortunately, one potential obstacle casting a shadow over InsurTech collaboration is culture clash. This is not uncommon across the fintech space as old ways of doing things are suddenly upended by newer, hungrier disruptors. So, how might a traditionally slow-moving, conservative insurer incorporate an entrepreneurial startup mentality? For those looking to import innovation by financing or acquiring an InsurTech company, how can they avoid draining the startup's energy and hamstringing progress with internal speed bumps designed for an earlier, less volatile age?

Most insurers have traditionally been more comfortable seeing someone else step onto the bleeding edge. Yet when it comes to InsurTech, he who hesitates may indeed be lost if more aggressive competitors get a leg up, upgrading their systems and business models by purchasing or partnering with InsurTech innovators.

To encourage experimentation, symposium attendees were urged to put a little method into their madness by creating an innovation architecture that fast-tracks InsurTech development outside of an insurer's standard operating procedures. For example, speakers at the event observed that while insurers usually delay releasing new systems until they are perfected, in the tech culture dealing with imperfection is often a critical part of the innovation process, with user input incorporated to fix flaws on the fly as hiccups emerge. Think of it as InsurTech 2.0, 3.0, and beyond as new and improved versions are rolled out over time.

One approach might be to think like a disruptor, brainstorming what you would do if you were looking to start an insurance company, product, or distribution system from scratch. That could be easier and more effective than trying to shoehorn an existing product or system into the emerging high-tech, mobile, sharing economy. In other words, don't just settle for cutting costs by automating how an existing homeowner's policy is sold, underwritten, and serviced. Consider innovating an entirely new type of coverage leveraging a disruptive innovation — telematic data from sensor-equipped smart-homes — to create a transformative customer experience.

This won't be easy, if only because while insurers are in the business of assuming risk, paradoxically they are often very risk-averse. But sooner rather than later, insurers will need to take a leap of faith into a more risk-friendly environment, since bold, even audacious confidence in an exciting but uncertain future is one of the defining features of the InsurTech culture.

Sam J. Friedman ([email protected]) is insurance research leader with Deloitte's Center for Financial Services in New York. Follow Sam on Twitter at @SamOnInsurance, as well as on LinkedIn. These opinions are his own.

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