THE WHY: INSURTECH AND LIFE INSURANCE
Updated: Oct 14, 2020
“Change is the only constant in life [insurance].” – If Heraclitus had discussed life insurance and insurtech
Change is central to life, and to life insurance over more than 300 year history. Since the first modern policy in 1706, and the creation of statistical models to offset long-term life assurance risks by James Dobson (in the 1750s), life insurers have consistently and methodically pursued and invested in development, including technology. And, despite challenging circumstances today, life insurers continue to develop at what appears to be a slower, more cautious pace than other industries. A survey by Novarica (June 2020) showed that, amidst COVID-19, 42% of life insurers plan to maintain information technology (IT) budgets, while others suggested increases in IT spending would be maintained.
So, what’s troubling life insurance, and why?
Despite a desire to defend life insurance, its efforts, steady progress and lofty aims, the industry struggles. This is sometimes unjust, but mostly for founded reasons – many self-inflicted. Its products are inflexible (for customers) and static (for the purpose intended) and do not ebb and flow with changes in society (in general) and customers (in particular), especially over time. Simply put, life insurance struggles to be a solution for customers, but is a windfall for insurers. Moreover, it has been grown in strange ways, resulting in a poorly mixed, overly complex industry that is misaligned with its original intent.
Life insurance poorly mixes savings and protection in products, with benefits tilted in their favour (revenue) over their customers (coverage and security). The financial crisis revealed as much when certain products like unit-linked insurance (products that combine savings and protection), saw sharp declines as investment markets tanked. Despite a mini-rebound in 2019, markets are yo-yo-ing again with the coronavirus-come-economic crisis, leaving insurers less eager to sell them and other savings products with built-in guarantees given the volatility – now and anticipated – of investment markets.
Obfuscatious (purposely obscured messaging)
Life insurance is also overly complex: its many labels, definitions and descriptions confound even the most studious agent, broker or analyst. Having spent years drafting and editing information materials), this is a particularly personal bone of contention. I have heard it called ‘obfuscatious’ in its descriptions, components, guarantees, riders and benefits and drawbacks even by the most seasoned industry actor. Most infuriating, it doesn’t have to be this way – but is allowed to be. It would be cruel to ask the average customer to differentiate between the myriad of crossover products. For a moment, simply consider term, whole and universal life insurance; hybrid, variable and fixed annuities; and indexed versus non-indexed universal life insurance. It has been shared that, without the slick documents, online databases and prepared speeches, agents and others would struggle to match the product to the customer and their issue.
Ironically too, the complexity and obfuscation that has created roles in life insurance for agents and brokers to (try to) navigate the hundreds of products, descriptions and permutations to ‘discover’ a product(s) apparently ideal for the average customer. And this does little for the clients themselves. It is a boom for agents and brokers, however, who make a handsome sum from sealing a deal: commissions can be as high as 260% of APE (annual premium equivalent) in some markets. For these benefits, it is no wonder agents and brokers are eager to engage customers, often several times a year to remain sticky (stuck?) with, but of little benefit to, clients themselves. All this, in short, shows how life insurance is fundamentally misaligned today: selecting the product to suit the challenge rather than understanding the customer’s issue to find the right cover.
Life insurance is also overly complex and time consuming in processes. While this is often based on what an insurer has to lose (by not knowing key details of the insured), it also goes beyond what would be rationally necessary at times to incur considerable costs – that are likely passed on to the new or renewing client. Requirements for medical exams for most products, but particularly whole life and universal life policies, challenge the ‘straight through process’ (or STP), while available modern underwriting methods and optimisation from artificial intelligence (AI) and behavioural proxies can reduce costs. Sadly, too few insurers have these tools in their toolkits.
It should be about prevention, but…
Another shortcoming of modern life insurance is one of its pillars: prevention. It is rarely part of life insurance policies, at least from the perspective of the insurer themselves. While contracts and compliance are key, and improvements are underway, methods and means to minimize or even prevent that which clients are seeking protection against are not yet at the forefront of many life insurers’ focus. If insurers shared methods to prevent (e.g support on health screening) and means to improve quality of life (e.g. exercise tips, nutrition programs), the benefits would double. Not only would clients – the main priority – benefit from more engaged insurers and their expertise to live better and longer while being covered for the known unknowns of life, but insurers would also benefit commercially, financially and reputationally from greater engagement through richer databases and robust actuarial tables that would being about reductions in sudden death benefit claims and claims management (e.g. greater data builds stronger cases). This is a significant opportunity for life insurers that others like Vitality (Discovery) are invested in to drive long-term behavioural change to reduce morbidity and mortality related risks.
Change is possible – through insurtech
Insurtech emerged in 2010 as the latest catalyst for change in insurance, albeit twenty years behind fintech. According to a survey by the Milken Institute, nearly 300 insurtech-related deals valued at $12.3BN took place in 2016, with insurers buying firms to automate processes, reinvent product suites, build niche product offerings and increase personalization. Momentum is building (Willis Towers Watson reported 314 insurtech deals worth $6.3BN in 2019), but insurtech trails the sharp trajectory of fintech (fintech deals in 2016 were $24.7BN (KPMG), suffering from limits to launching, sustaining and growing platforms.
Some facts are even surprising given the tech industry in general. For example, only three insurtech platforms were founded in 2017 and in 2018, down from 15 in 2016. Such decline is counter to the overall movement of technology development. The ecosystem is also overly concentrated by geography: 64 of 104 insurtech platforms identified had headquarters in the United States (Milken Institute). Odd in itself, this is odder still given how much Asia and Europe trailed despite mature markets, advanced triggers, overall opportunity and pioneering leadership in tech-focused developments. This disconnect overall and specific contradiction to fintech requires correction to bring about the change drastically needed for life insurance.
Key roles of insurtech
It is clear that challenges exist and limitations must be overcome. Blanket statements aside, insurtech has a role to play in catalyzing insurers’ development, and such roles must be responsibly fulfilled and also championed to pushed through known and unknown hurdles and creative leapfrog over others.
The key roles insurance, its focus and value can bring to change life insurance include:
Insurtech is different. Insurance lags banking for many reasons, but mainly their slower legacy systems. Banking is maligned for its cumbersome and, in instances, ‘Frankenstein-ed’ infrastructure, but the problem is magnified in insurance. From enormous and isolated databases of unstructured data to outdated contract mechanisms, ultra-long-term products and risks and an aversion to agility, insurers make banks look agile by default. Therefore, insurtech has an opportunity to utilize its dexterity to make change both enticing and palpable.
Better to buy insurtech firms than invest externally. Often stocked with technology experts and loaded with data, insurers are “data rich, but information poor”. Their archaic mainframes, unstructured data lakes and a weak ability to extract value through analysis are also apparent. Here, insurtech firms have useful services and tools to support change and deliver value. More powerfully, insurers actively acquiring insurtech firms could rejuvenate internal tech expertise, while adding perspective to unlock hidden value in internal databases via external data tools.
Struggle stimulates change. It may seem extreme, but the challenges life insurers contend with may be an indirect trigger for a boom in artificial intelligence (AI). Unstructured data is ideal for AI as its excels in learning and recognizing patterns, but in creative thought. And this resembles how actuarial science models risk. Life insurance databases are crammed with old, varying and variously formatted types of data that, if analyzed appropriately, could unlock valuable insights.
Pandemics and sales. Succinctly, life insurance is a guarantee against a significant life event: death. While the coronavirus outbreak has raised the value of life insurance, and boosted searches online, higher sales have yet to follow. However, triggers like pandemics do affect select customer segments and products; for coronavirus, the middle class and critical illness insurance are disproportionately affected. COVID-19 is challenging insurers to better and more profitably assess and assign value to policyholders and their products, while seeking to understand and engage new behaviours like online purchasing. This has ramped up the visibility of and desire for digitization internally, but more so through insurtech partnerships.
Better efficiency – now. The COVID-19 outbreak highlights how insurtech can improve an insurers’ adaptability and product management response(s) to future pandemics. While life insurers have reacted slowly to COVID-19, they have benefitted from advanced risk management systems and practices. Working with insurtech partners could build faster, better and tailored product and systems or even bolt-ons to boost efficiency (i.e. to manage existing contracts / changes and to field rising inquiries) for the benefit of customers, partners and insurers alike.
Outsourcing to gain. Insurers have historically been less inclined to outsource, using reasons like complexity, customer privacy, security and platform stability. This long-held view has now been challenged by COVID-19 as employees struggled with archaic systems, often ill-suited to working while at home (WWAT). Insurtech also challenges these outdated thoughts through their streamlined capability and tools that bring and even ramp up value, remotely and smoothly, during the crisis and beyond. As such, the coronavirus has taught life insurers that outsourcing and partnerships can bolster risk transfer – ‘resilience’ in insurance speak – that is beneficial and antecedent to ongoing, long-term and positive industry change.
Change is constant and in flux
Change is a mainstay – it happens in times of stability and disruption. While market, industry and provider idiosyncrasies remain, a positive outcome of the coronavirus outbreak for life insurance is the reminder that technology, brought by insurtech, can advance, differentiate and support current and future customer, operational, product and systemic methods, processes and strategies. This empowers life insurers to meet today’s expectations and tomorrow’s aspirations. That said, insurers will only benefit if they are open to insurtech and its unlimited range of benefits and options, remaining eager to create, collaborate, consider and adopt and implement practices that pave the way to future success.
 While the origins of life insurance, as funeral insurance, are traced back to Ancient Greece and Rome – where ‘burial clubs’ helped families handle bereavement and funeral expenses – modern life insurance starts in the late 17th century
Geoffrey Clark’s “Betting on Lives: The Culture of Life Insurance in England, 1695-1775” (Manchester University Press, 1999)