Working together, startups and established life insurance companies are the way forward.
Although much has changed in the insurance industry over the past 325 years since the Amiable Society for Perpetual Assurance Office produced the first life insurance policy, the industry’s long-standing, reliable procedures have remained primarily unchanged. Insurers have logically concluded that since their industry is risk-averse, nothing needs to be fixed.
That formula makes a lot more sense when consumers aren’t primarily responsible for driving significant changes in the life insurance industry. Most people have little interest in it; only 15% of 1,000 customers polled in late 2020 rated life or health insurance as one of their top three financial priorities.
But therein lay the difficulty faced by life insurers: attracting new clients while keeping existing ones interested and involved. This is especially true for clients who don’t believe life insurance offers much value to their lives. It is simpler to recruit, keep, and engage those most likely to require insurance, but this exacerbates the issue of adverse selection.
The picture for life insurers is obvious once these considerations are taken into account, along with the rise of creative insurance businesses that have proven competent at acquiring clients through customized solutions and elegant user experiences. Insurance companies cannot rely on the industry to remain as it has over the past four centuries while functioning without severe upheaval.
The bright side is that they can count on having support as they go through this change. Working with industry newcomers to build a whole that is bigger than the sum of its parts is the best way to accomplish change on the necessary scale.
The Importance of Established Companies for New Ventures
What necessitates this alliance of forces? Legacy life insurers offer the extensive experience, sector knowledge, and resources necessary to function efficiently and create new projects that will produce the intended results; despite whatever inefficiencies have hampered them.
Unlike other types of insurance, life insurance is unique. The cost of a life insurance policy depends on a far more complicated set of factors connected to policyholders’ health and life expectancies than the cost of a home insurance policy, which can easily be insured a house based on its neighborhood, age, security features, etc. This increases the complexity of the actuarial tables used by life insurance and highlights the need for a steady hand when forming new business opportunities.
Reinsurers are the most prominent participants in the insurance industry’s historical legacy. These reputable organizations have a history of overcoming the particular difficulties facing the sector. They have the capital reserves necessary to handle the significant, individualized risk distribution that life insurance requires. In sharp contrast to the $2.7 billion insurance industry size, the whole reinsurance market was predicted to increase from $402 billion in 2020 to $435 billion this year — a growth rate of 8%. Although managing general agents (MGAs), which gives them the same rights as an insurance carrier, is advantageous for some insurance businesses, it’s obvious where the funding required to power customized insurance experiences rests.
The Importance of David in the Face of Goliath
How can established life insurance companies benefit from working with up-and-coming firms when they require the same established firms’ market power, financial resources, and industry expertise?
Although risk aversion is prized in the insurance industry, many life insurers may benefit from the innovation and risk-taking of startups to finally implement the necessary but long-overdue improvements that will boost customer acquisition and retention. A similar dynamic emerged in the auto sector, where the need for greater sustainability is opening the door to accessible, effective electric vehicles. Partnerships between established automakers and EV startups have greatly hastened this transformation.
In the world of life insurance, such partnerships typically aren’t complicated. Working directly with insurance firms that function as MGAs and use their technical capabilities to reach larger audiences allows reinsurers to circumvent insurance carriers.
In addition, new businesses play a critical part in helping established ones transition to the digital era. This is an urgent need in the life insurance industry. A 2018 Deloitte study found that only 11% of respondents who buy insurance do so digitally. However, research shows that digital purchasing options speed up and make it much more convenient for customers than drawn-out, analog processes.
Finally, startups provide the data-savvy attitude, tools, agility, and imagination that legacy firms need to develop excellent services and solutions as the insurance industry shifts away from static evaluation methods toward more dynamic approaches, such as rewarding and incentivizing policyholders to make healthier choices. An AI-driven assessment process, for instance, might be used to match applicants to various tiers of insurance depending on legacy-startup partnerships. The AI may foresee consumers’ requirements and lifestyle changes and present them with new policy options as circumstances change. Without startups by their sides, legacy insurers risk being disrupted and becoming another Kodak or Blockbuster — long-dominant industry titans that succumbed to competitors who were more creative and innovative.
Indeed, life insurance has changed little in principle over the previous 325 years. However, if the new century has taught us anything, change is coming faster than before. The speed with which insurers act to establish new forms of innovation and collaboration will determine whether those winds are at their backs or in their faces.
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Paolo Moyet
August 19, 2022
