There actually is insurance coverage for pandemics
Here's why specialty insurance products — such as pandemic coverage — never moved into the mass market.
The insurance industry is often accused of lagging and having low innovation in product development.
But the reality is that insurance products are diverse across offerings and options. Products exist for pandemics, alien abduction and even ghosts. Coverage exists for identity theft, cyber exposure and digital data recovery.
Many consumers, however, are not aware of these solutions. And so the debate continues: Is insurance bought or sold?
People don’t generally buy an insurance policy and celebrate the way they do with homes, cars or even a comfortable new hoodie. More often, insureds buy policies, then resent the premiums as they clear our bank statements. They resent that automobile policies are legislated, or homeowners’ policies required by mortgagees or landlords. And they rarely look for coverage for something such as a pandemic.
Under this premise, insurance is sold.
As an established global industry, the existing processes and marketing both enables and limits the development of products. Typically, marketing courses teach “the 5 Ps” to consider when launching new products. They are: Product, Promotion, Price, Place and People.
Product
Products are traditionally defined in terms of their appearance, pricing, packaging, the value they create and their target market. Insurance is intangible — a promise to pay if events or conditions are met, eliminating the traditional product considerations.
Mass market products include personal auto, homeowners, credit life insurance and point-of-sale product coverages. Many products have tailoring options such as deductibles, limits and coverage extensions but are generally priced through automated rating systems.
Specialty products are where the ‘law of large numbers’ doesn’t apply. They are often custom designed. Risk transfers are negotiated with highly tailored rates based on estimates of frequency and severity predictions.
The challenge, and the opportunity, is developing specialty products that convert to mainstream mass-market. As with most products, economies of scale are achieved as we increase production. High costs to define rating algorithms and data analysis make this transition complicated. The result is that products such as pandemic insurance never move into the mass market realm.
Price
Product pricing is typically dependent on the type of product, manufacturing process, market segmentation, competitive offerings and substitutes. Insurance pricing is dependent on the frequency and severity of perils for an exposure.
For mass-marketed products, even if the pricing models have many variables and customizations, they have standard baselines and margins and begin to feed into their own analytics; last year’s losses and gains feed into this year’s price.
Specialty products are often a risk for both parties until patterns are established, allowing the products to go to the mass market.
For example, while pandemic insurance exists, there are currently debates as to its coverage or exclusion in business interruption policies. Additionally, risk models are complex given errors in pandemic data reporting, low frequency and inadequate severity estimates.
Hence, the perceived product lags. It takes large samples of data to develop pricing. As technology supporting third-party data aggregators and risk modeling solutions moves forward with data integrations, product-to-market times may reap significant gains that aren’t currently available.
Promotion and place
Insurance distribution channels are well defined and regulated, especially for mass-market products. While it is usually an advantage to have an existing distribution network for products, in insurance, the regulations and established options often contribute to the slow product launch.
- Regulators: The often need to approve product definitions, pricing algorithms and ensure underlying liquidity and reinsurance are properly covered.
- Advisors: Whether captive or independent advisors, they need to be incentivized with easy-to-distribute processes, tools, training, pricing and commissions.
- Digital processes: New technologies help improve target marketing by analyzing and aggregating the research data and target specific consumers. Firms can use AI and ML to research for needs assessment, coverage alignment and pre-qualification. However, existing channels and licensing may limit options or require separate branding.
- Digital channels: Consumers expect online research and data before going into traditional advisor channels to purchase — adding overhead and additional steps to launching new products
- Marketing budgets: Do carriers spend their efforts generating brand recognition? Product promotion? Awareness in the distribution channel? Direct to market? Social media campaigns are often more expensive than efforts in the advisor channels but offer more direct control.
- White Label: Is it easier to leverage an alternate distribution option such as point-of-sale add on protection? Or bundle it as an endorsement?
Currently, insurers are experimenting with a variety of combinations and even setting up subsidiaries to offer new products and experiment with distribution as well.
People
While insurance is an established industry, it isn’t always trusted. Many consumers feel coerced to buy products. Needs-based selling and tailored solutions, even for mass-marketed products, are available but rarely sought out by consumers. And when consumers do search out the products, the distribution channel is often wary of anti-selection (i.e. you need life insurance due to a recent medical condition, or you are buying home insurance as your new home is the path of a hurricane).
The challenges of launching new products are the same as for traditional product marketing:
- Generating awareness of solutions and letting the market know it is available and will meet a need.
- Generating trust and recognition for new products being able to deliver on the promises.
Prognosis
New products are still designed and marketed to be sold. To deliver innovative and responsive products, we need to resolve data and technical gaps quickly, educate our consumers and advisors on opportunities and focus on the trusted, reliable solutions to meet the client’s needs. To offer products intuitively online, that are easily bought, understood and priced. We need analytics to identify and match need to product options.
The COVID-19 pandemic is proving that while we have the products, we didn’t estimate the market risk, or needs, appropriately. Either we provided the product ahead of the client’s need and were unable to establish it, or we didn’t align it with their need and price tolerance correctly.
Looking ahead
The next challenge may be another epidemic or pandemic, climate-related challenges or a new form of cyber risk. No matter the challenge, the insurance industry needs to meet its mandate of providing tools to secure our financial future.
Lisa Smith (Lisa.Smith@capco.com) is the insurance practice lead at the global technology and management consultancy Capco. As an experienced insurance strategist, she focuses on P&C and L&H across underwriting, direct & brokering distribution and product development. She also has expertise in digital transformations, including agency/brokerage management solutions (AMS/BMS), client and advisor interface solutions, core system replacements (Policy Administration Systems — PAS) and system integrations. She is based in Capco’s Toronto office.
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