Insurance Disruption, Insurance Innovation or maybe it's only Insurance Evolution!

By Joe Petrelli, President, Demotech Inc.

Joe Petrelli, President, Demotech Inc.

Vertafore suggests InsurTech is a term to be applied to the numerous facets of technology that are disrupting the insurance space. They cite specific examples of smartphone apps, consumer activity wearables, claim acceleration tools, individual consumer risk development systems, online policy handling, automated compliance processing, and others. Their definition and focus is on the disruption that InsurTech brings to insurance. In contrast, my belief is that it is the changes in insured and claimant expectations that are the driving forces behind InsurTech. Those individuals and companies focused on developing or implementing “disruption” are missing the underlying phenomenon. There is little new to the insurance or the corporate structure of the insurer.

In virtually all states, the department of insurance approves the coverage documents available to consumers. Coverage documents are promulgated by advisory organizations or internally by larger carriers, and, regardless of the type of insurance, e.g., fire, automobile insurance, products liability, etc., not revised often. In fact, revisions to policies are generally made when need for clarification is discovered in litigation over a specific claim. As such, a fire insurance policy in New York has the basic wording as a fire insurance policy in Oregon. If an insurance coverage ain’t broke, we don’t fix it.

Concurrently, the financial reporting underlying the statutory financial statements of InsurTech insurers is prescribed and needs to be consistent with the financial reporting of non-InsurTech carriers. Once again, consistency is more than requested—it is mandated.

"The capability and willingness of an insurer to dissect and discern its customer interaction processes are an integral part of its ability to sustain its business"

In my view, when InsurTech entities are characterized as “disruptive” or “innovative”, the adjectives of choice are inarticulate. The insurer that elects to harness InsurTech to deliver a particular coverage, form or rate structure in a non-traditional manner is focused on nuances and enhancements to distribution and delivery systems that are increasingly utilized by all other sectors of the economy. Because the coverage, forms, and rate structure are reviewed and approved by the departments of insurance, they are not likely to be radically different from othersoffered in that jurisdiction. 

What I find unique and disruptive is how technology has been harnessed to create a data collection and product/service delivery system that is consistent with the systems that supports, say, Amazon, Google, paying your utility bills, etc. If the warranty for your refrigerator can be purchased online and the agreement forwarded to you as a pdf, consumers must chuckle when their insurance company mails a paper invoice, encloses an unstamped return envelope, and make them write a check and mail it to a post office box! It seems to me that when an InsurTech insurer moves in the direction that the balance of the economy has evolved or is evolving, it is inarticulate to characterize the migration as either “innovative” or “disruptive”.

Similarly, with the enhanced delivery and distribution processes associated with InsurTech, there are practical advantages that inure to the benefit of the InsurTech insurer as well as the consumer. In the insurance industry, it is axiomatic that an insurer’s permissible loss and loss adjustment expense ratio, i.e., the level of loss and loss adjustment expense as a percentage of premium that it can support and still report a pre-tax profit, is 1.00 minus its expense ratio. 

If your insurance company has an expense ratio of 35 percent, then your loss and loss adjustment expense ratio cannot exceed 65 percent if you desire to make a profit. InsurTech carriershave demonstrated the ability to harness technology and develop a delivery and distribution system that meets consumer expectations and demands. They do so using but 20 percent of premium, permitting them to experience a loss and loss adjustment expense ratio as high as 80 percent and yet flirt with profitability. Some in the insurance industry find it easier on their egos to characterize such a competitor as “innovative or disruptive” rather than admit that the carrier is eating our lunch on multiple fronts.

It is my opinion that established, brick and mortar insurers will not be displaced due to innovations in coverage, forms or endorsements. The battles, and the war, won’t be won or lost on slogans, creative corporate names or marketing techniques. Rather, the wins and losses will add up based upon the willingness, capability, and speed with which brick and mortar insurers adapt their delivery systems, data collection processes, and customer experience to reflect the evolving expectations of consumers who have broadly accepted the digital age. 

The capability and willingness of an insurer to dissect and discern its customer interaction processes are an integral part of its ability to sustain its business. Today, even if the dollar amount of a claim settlement is exactly what the claimant expected, if you issue a paper check rather than wire transfer that amount, you may not meet the expectations of your client.

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