The insurance industry provides amazing support to individuals, families, and businesses, often in their darkest times. Society truly benefits enormously from the proper running of the insurance sector. However, the benefits of insurance provide no immediate gratification to the purchaser. I will explain how the insurance community has historically addressed this issue. I will go on to consider why this has led to systemic weaknesses across the whole sector, which may now jeopardize an industry that I love – unless these challenges are addressed.

The Challenge

There is no tangible product delivered within most insurance transactions. The most risk averse individuals will buy it. The least risk averse will self-insure. However, no-one really wants insurance until they really need it. The customer only buys trust – or a promise of trust when times are hard. This tempts intermediaries to sell insurance using the tactics of fear and commoditization. Front-loaded commissions can lead to a tendency to secure sales irrespective of need. This propensity may lead to misrepresentation; it leads to dissatisfaction; temptation leads to fraud; suspicion and a breakdown of trust lead to dysfunctional claims systems; and so it goes. The cycle of fraud in the industry has undermined the true benefits of insurance for a long time.^1,2 The industry has no product other than trust. There is nothing else to take away from the transaction other than a promise. If the customer considers the promise to be compromised, there is nothing left.

The prolonged, cyclical soft market in insurance, coupled with an inflow of fresh capital during an unprecedented period of interest rates close to zero, has placed increasing pressure on bottom lines.³ The unintended outcome has been that many in the sector have systematically underinvested in technology and innovation. The majority of these companies are left with systems, processes, and practices that would still be mostly recognizable by those that were working in the industry in the 1980s. While the insurance sector stagnated, changes across the business world and other industries were radical. It is only in the last decade or so that the world has enjoyed smartphones, social media, e-readers, YouTube, Google Maps, The Cloud, and virtual reality. Within the same time frame, the companies that dominated specific global markets have radically changed. We all know the GAFA (Google, Apple, Facebook, and Amazon) effect. Changes brought by Uber and Airbnb are arguably even more radical in the transport sector with autonomous driving as well as new approaches to accommodation and the renting market. Customer expectations have arguably changed forever. Already the protectionism in Financial Services is being disrupted by FinTech, and it is clear that insurers desperately need “InsurTechs” to remain relevant to the customer. The bigger question is perhaps whether InsurTech needs the incumbents in insurance. Before we address this issue let’s step back and look at how we arrived here.

The History

Insurance and risk management techniques have been around for a long time. Methods for risk transfer were practised by Chinese traders as long ago as the third millennium bce.⁴ Modern insurance is around 300 years old. Insurance companies help us all manage some of our risks. Whether personal or commercial, in exchange for a constant stream of premiums, insurance companies offer to pay a sum of money when a predetermined event occurs such as a natural catastrophe, a fire, or loss of life. An insurance company creates value by pooling and redistributing various types of risks. It does this by collecting liabilities (i.e. premiums) from all the companies that it insures and then paying them out to the few that actually need them. The insurance company can then effectively redistribute those liabilities to individuals or entities faced with some sort of event-driven crisis, where they will need more cash than they currently have on hand. As not everyone within the pool will actually suffer an event requiring the total use of all of their premiums, this pooling and redistribution function lowers the total cost of risk management for everyone in the pool.

Connecting Risk, Insurance, and Systemic Failure

The purchase of insurance products should be an important decision-making process for both individuals and companies. However, it is often an afterthought of last recourse, particularly after something goes really bad. Unfortunately, people tend not to like spending time thinking about the bad things in life. We all hope to live in a relatively benign environment. Arguably, human nature tends to allow personal and business risk protection methods to fall down the priority list. Unless we are jolted into action.

There is an old adage that insurance gets sold, it doesn’t get bought. Over the years this has been the task of intermediaries – agents and brokers – who communicate directly with customers and explain why insurance is a good thing. When it works well, it’s a tremendous partnership. When it doesn’t work well, the customer feels they are getting poor or biased advice. As with many intermediary processes, there is little transparency as to who is really working for whom. If experience with claims is also problematic – either directly or indirectly – then the whole trust process is undermined. Both individuals and organizations can question the merit of the solution and may seek alternative risk mitigation measures, which they feel are more trustworthy.

In personal lines this results in a lack of clarity of when and why insurance should be bought – other than because the law says so. There is an ingrained sense that insurers and their cronies will sell anything to anyone and then do anything to avoid paying claims. At times, it seems the primary drivers in the sector are anything except the customer. CNN^5,6 summarized the objective of insurers as “Delaying, Denial and Disputing” of legitimate claims. Surveys reveal that 25% of Americans now buy insurance with the deliberate intention of defrauding insurers. As Daniel Schreiber, CEO at Lemonade, puts it: “There is a reservoir of ill will against insurance companies. In the US most Americans perceive insurance as a necessary evil rather than a social good.”⁷

In the corporate setting, the perceived lack of transparency and governance often translates into distrust in the buying process. The result is that insurance buying is frequently delegated to relatively junior and inexperienced employees who often have other things to do anyway. The purchase process can become a compliance-driven, commodity buy with little focus on the underlying reason for the policies, their coverage, and, most importantly, their security. The relatively low-level employee has a transactional relationship with a broker or agent. The relationship is muddied and sometimes dominated by internal purchasing teams who often have no idea how the transaction should be structured or why it might be important.

Everyone loses in this scenario. The individual is poorly prepared and/or served during traumatic life-changing events. The CEO whose company is in this mindset has missed a huge partnership opportunity. The broker or agent loses or ignores the chance to educate. There are huge benefits that can arise from a more robust debate and attitude to risk and insurance management. The underwriter and the markets behind the policies often have little or no idea of the quality of the risk protected. So, the market will provide something cheap and cheerful – particularly in the soft markets prevalent at the moment – and do everything in their power to delay or avoid paying claims if something goes wrong.

Insurance penetration rates in North America are arguably at their lowest ebb for decades and continuing to decline.⁸ In the boardroom, insurance used to be relevant for perhaps 25% of corporate risk faced by the CEO in the view of the author. Nowadays that figure is below 10% according to research by Lloyd’s of London. In emerging economies, where the phenomenon of insurance is only just getting going, scandals, performance failures, and consequent distrust mean that penetration levels under current models will likely never reach the levels in OECD countries.⁹

Transparency and Due Diligence: Where Can the Industry go from Here?

1. Deal with low penetration of technology. Insurance remains comparatively old fashioned when compared to the financial services sector generally. The failures of companies throughout the insurance stack to address technology issues are legion. Many insurance transactions remain mostly face-to-face and woefully inefficient. This is difficult to address. There is such a strong general distrust in the industry that many customers still retain a desperate need to look into the eyes of someone they hope will still be there in the event of a claim.
2. Deal with low transparency. Who gets paid what for the procurement transaction? There is almost no transparency in the insurance sector and a constant stream of high profile criticisms, both from within the industry¹⁰ and investigations by global regulators,¹¹ show that there remains something intrinsically dirty and incestuous in the complete process that customers never get to see.
3. Deal with low speed. Placement takes a long time in insurance and usually involves extensive form filling. As discussed above, that’s nothing compared to the demoralizing claims experience in many cases.
4. Deal with low IT security. The sector is well recognized as having comparatively weak data management processes compared to other areas of the financial services industry. There have been repeated small-scale cases of data loss.¹² Fingers crossed there isn’t a “Sony” moment imminent as this will do nothing to help the sector’s already tarnished reputation with customers.

Does InsurTech have all the answers? That’s debatable. But clearly change is imminent in some form or another and this book is a superb way to continue our self-critique as an industry.