“The electric light did not come from the continuous improvement of candles.”Oren Harari
Think about that.
Did the car engines come from constantly breeding better horses? Do airplanes fly by brilliantly flapping their wings?
No, these improvements in Light and Transport came about by the application of new technologies to known problems.
So how do we innovate in business? – We should be applying new technologies to our problems and making them more efficient.
Why should the insurance industry care about innovation? Their products are about claims, how can you stop those with innovation? they are part of the product, right? Well, no, typically the insurance industry, as all businesses, cares about all its costs, the complete business model. The insurance industry has a very public metric, the ‘combined ratio’ or, I would say, the generally poor combined ratio. This metric should be the driver for all innovation
So what is The combined ratio? This is typically expressed as a percentage. A ratio below 100 percent indicates that the company is making an underwriting profit, while a ratio above 100 percent means that it is paying out more money in claims that it is receiving from premiums. The combined ratio is the adding up of all the costs of the industry.
This is the driver behind the insurance industry – its like the lap time of a F1 car – shed a 10th off here or there and you are in the lead and seen as the winner. Don’t work on the lap times and you are seen as going backwards.
The industry 2017 combined ratio was around 105% and in 2016 it was around 101%. Meaning that overall the insurance industry lost money from its core business in both years and 2018 will be similar.
So you would think that this would be a huge RED ALERT. No, this is business a normal.
The industry lives in a world of negative underwriter profits. This could be seen as very strange to other businesses. The industry struggles to focus on their main core driver because profits are driven from investing the insurance premiums – not driving the costs out. Imagine if F1 teams did not care about lap times? What would that race look like?
However this is the opportunity. Focus on the combined ratio, use Insurtech to drive costs down – the ability to affect this ratio in some way through speedier sales, smarter claims, better intelligence in underwriting, cost cutting through the business process, straight through processing, etc. They are huge wins to find.
The current business model is stuffed full of issues and problems that are all fully baked into many of the incumbent companies making change hard. Issues and Processes such as: any claim starts with a fraud review; the broker or agent selling the policy does not deal with the claim or carry any of the risk; the agent, broker, MGA, Underwriter, reinsurance business model is too expensive – each taking percentages to cover their costs; within in agents and broker businesses the pay policy fights against innovation; data is not collected in one place, its dispersed across the supply chain; the Policy is mainly a list of exclusions and complicated, it wants a court fight; its hard to get new risks covered or understood; micro policies are too expensive to process; and this is to name only a few of the core issues within the existing model.
You get the picture, insurance is not efficient.
The world of insure-tech is trying to come up with new ideas and models to improve upon existing structures. However, these tend to be around the edges of the problem. What is needed is a drains-up overhaul of the process and a move towards true digital insurance companies – ones that own the customer and all process straight through, from marketing to sales to claims and on to renewal. There are a few new companies emerging, ones that own the whole process, Ping An and ACKO.
The collection of data and the ability to speed up and take the friction out of the process is essential if insurance companies are actually going to make a constant profit from insurance and not rely on investment income. The aim needs to be a constant combined ratio of under 100% whilst keeping the policies priced sensibly. It is possible.
Data and the ability to process and learn from the data is essential. Insurance companies say they have loads of data. This is only partly true – they generally have very little transactional or process data covering the buying cycle of the policy and limited marketing data. They have very few insights into their customers, their motivations, etc. This is because many policies are sold through partner channels – for example if an agent is selling the policy – they don’t pass on or even collect data on customers who looked and did not buy – they certainly don’t find out why they looked and did not buy. This data is lost to the insurance buying cycle.
These simple examples explain why innovation is so hard. The larger companies are changing – they are going more direct, they are doing deals that embed insurance into products, they are starting to build their brands to be direct to the customer.
Where does this leave Insurtech? Tech companies need to build strong relationships with incumbents and in existing businesses need to innovate faster, the lap times are increasing and you don’t start or keep up you will be over taken by your smarter peers or new tech driven companies that get it right.
At MIC Global we are starting to build all the pieces to be a fully digital insurance company. From policy innovation, through distribution, policy lifecycle, claims automation and payment. This entails AI, machine learning, data analytics, bots and many other new tools. Today we are underway with photo recognition AI to scan data from images and other documents together with things like crash detection for cars or damage detection on mobile phones. These technologies are forming the foundations of a micro and multi service tech infrastructure.
We are able to develop and license these modules and we hope that we can partner with companies to do this.