Buying insurance? There's an app for that

As Bob Dylan so eloquently crooned, "The times they are a changin'."

When it comes to the insurance marketplace, the lyric certainly rings true. And that is because tech innovators, who have targeted the insurance industry for disruption, are changing the way people access and purchase coverage.

A mash-up of "insurance" and "technology," InsurTech is penetrating the insurance space with smartphone apps, wearables, claim acceleration tools, tailor-made policies, social insurance, online claims handling and more. In so doing, InsurTech companies are seeking to price products more competitively by approaching data and analysis in ways traditional insurers — and their actuarial tables — do not. For instance, by accessing information made available with GPS trackers (automobiles) and activity trackers (you and I), disrupters are able to evaluate risk in a manner previously unthinkable.

Lemonade

In an industry seemingly resistant to such innovation, the advances are rather exciting. Take, for example, Lemonade, a property and casualty insurer leveraging technology — and philanthropy — to break the "business-as-usual" mold.

Lemonade is a startup offering renters, condo and homeowners insurance in New York, New Jersey and California, and renters insurance in Illinois (homeowners and condo coming soon). The company, which plans to roll out in additional states in the coming year, has an approach to the insurance business that is certainly unique: it sells policies and processes claims through iOS and Android apps and its website. No phone calls and no producers; this is not your father's insurance company. Broadly, Lemonade takes a fixed fee out of insureds' monthly payments, pays reinsurance and other expenses, and uses remaining proceeds to pay out claims.

With a business model based, in part, on charitable giving, Lemonade donates monies leftover each year to causes policyholders care about. The rationale behind this paradigm is the elimination of any conflict with customers all the while promoting societal good — a formula that will surely resonate with millennials most likely to purchase coverage with a mobile device. Lemonade also seeks to minimize fraud by encouraging policyholders to view excessive claims as taking from charity rather than from a faceless insurance company.

Metromile

Another InsurTech firm worth a nod is Metromile, a Silicon Valley startup transforming the way auto insurance is provided by charging per mile. A small, free wireless device called Metromile Pulse enables this billing model, which benefits low-mileage drivers. The Metromile Pulse easily plugs into a car's OBD-II port and counts miles to determine a driver's monthly bill.

The innovation goes beyond premium pricing. The Metromile Pulse also captures data about trips taken and the health of the cars being monitored, all of which is displayed via the Metromile app, which informs Metromile's insureds about the money they spend on gas, driving distances and vehicle location (no more lost cars). Metromile also recently released AVA, an artificial intelligent claims assistant that accurately verifies claims in seconds and promptly resolves them. No doubt, in the age of Uber and connected cars, when people — particularly millennials — are driving less and less, Metromile's novel approach to coverage is sure to gain traction.

There's a lot more to it than building an app

The advances and early successes of companies like Lemonade and Metromile are certainly noteworthy, but for those seeking to follow suit, entry into the insurance marketplace is not as simple as creating a web presence or building an app. Insurance is a highly regulated industry, requiring licensing to do business and a range of state-specific statutory compliance. That being said, traditional insurers or entrepreneurs hoping to transact insurance online or by way of apps must understand the regulatory issues to be confronted — obstacles that may not be insurmountable, but are nonetheless significant.

Continue on for an overview aimed at would-be players in the InsurTech revolution…

Tech innovators who have targeted the insurance industry for disruption are changing the way people access and purchase coverage. (Photo: iStock)

Licensing and regulation

To lawfully sell insurance products or services, an insurer or insurance-related business must be licensed pursuant to laws (as codified in Insurance Codes) that vary state-by-state. This not only applies to traditional insurance companies, but also to InsurTech firms. There is more. Entities in the insurance business are bound by the (sometimes complex) web of regulations of their respective states of domicile and in all other states where they operate. Companies that fail to comply with these licensing and regulatory requirements do so at their peril, with cease and desist orders, fines and/or license suspension or revocation the likely result.

Those seeking to place policies by way of apps and the like must realize that insurance agents and brokers are subject to a licensing mandate too, and they must adhere to state laws and a regulatory framework that govern their pursuits. Indeed, state insurance departments do not look favorably upon unlicensed activity (read, the sale, solicitation, or negotiation of insurance), which is amongst their major focus in terms of compliance. And like insurance companies, producers that do not observe applicable regulations may be fined or worse — licenses can be lost.

Entrants into the InsurTech arena should understand that insurance policies, and the provisions they include, need be compliant with state regulations as well. On a state-by-state basis, they are subject to rate reviews, rulings and approval designed to protect consumers and ensure that coverage is adequate, fair and reasonable. Likewise, the insurers issuing such coverage (InsurTech companies included) are regulated in terms of their financial standing, and must undergo periodic financial examination by state examiners. These insurance department officials investigate accounting methods, procedures and financial statement presentation. Should it be determined that an insurance company is in financial trouble, operations could be taken over by the state.

Compensation

To the extent InsurTech firms seeks to circumvent the tried-and-true broker/agent model of insurance sales, compensation issues arise. For instance, in a few states, commissions cannot be shared with unlicensed individuals and referral fees cannot be paid, while in many other jurisdictions, commission sharing with unlicensed persons and the payment of referral fees are permitted under certain circumstances (though there is no consistency to the dollar amounts allowed). Consequently, InsurTech executives and incumbent insurers dipping their toes into the InsurTech waters must take into account the varied state-specific compensation rules. Prohibitions against rebates paid to consumers or prospective insurance purchasers (anti-rebating laws) should also be front-of-mind.

The InsurTech business is largely driven by big (consumer) data. As such, the regulation of compensation (and related disclosure requirements) in the insurance industry is of particular concern for burgeoning InsurTech firms, especially where the activity of unlicensed third-party participants in the data chain (those expecting to be compensated) can possibly be characterized as the sale, solicitation, or negotiation of insurance.

Regulations aside…

Along with industry disruption comes a shift in consumer expectations and demands. And with an array of coverage and purchasing options fast becoming available with a few taps on a smartphone, insurance customers — tech savvy, price conscious and conditioned for instant gratification — are ready for InsurTech to transform insurance as we know it. Nonetheless, while the traditional insurance business model may be in flux, the state-specific laws and regulations governing the space are here to stay. Which prompts this message to the developing InsurTech sector: innovators, the comprehensive rules of insurance apply to you too.

Mark B. Robinson is founding partner of Michelman & Robinson, LLP, and an insurance industry specialist who primarily represents retail brokers and agents in all aspects of their businesses. He can be contacted at 310-564-2670 or [email protected].

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