Insurance innovation limited to the icing, can’t touch the cake

I often meet start-up founders determined to improve insurance distribution and customer experience, with most of the solutions targeting millennials. They are often millennials themselves, or at least emphasise with the needs and wants of this segment. These brave souls don’t often expect what cruel faith has in store for them — the inflexible “suits” in traditionalist insurance companies who want little to do with start-ups and product innovation.

The single biggest obstacle faced by pretty much all those entrepreneurs is the lack of control over their product. Since they are limited to selling the products offered by insurers, they can quite ironically innovate everything else except the very core — the product itself.

A start-up aspiring to come to market with a telematics-enabled usage-based motor insurance app can expect to discover that insurers “don’t’ have appetite for that type of risk” and would much rather work withold-school motor cover that requires your hairdresser’s age for calculating the premium, besides 200 other variables.

“Start-ups are limited to wrapping these old, often cumbersome products in a nice user interface.”

As the product sits in the centre of customer experience, there’s only so much that these start-ups can do — more often that not, they are limited to wrapping these old, often cumbersome products in a nice user interface.

Considering the poor customer experience level that online insurance customers have traditionally been facing, a posh design with a clever quote form logic can maybe win a few hearts — but unfortunately it falls short of a serious sustainable competitive advantage.

Moreover, the entire start-up management methodology is built around experimenting with every aspect of the organisation and its operations, with product characteristics being obviously amongst the most prominent variables. If the product is “locked in”, it’s like boxing with your better arm tied behind your back.

“To redesign the value proposition, you need to control the entire value chain.”

Amazon would not be Amazon without controlling the whole customer experience from sales to delivery (and everything between), Uber would not be Uber if its product would be limited to an app for ordering regular taxies. Tesla couldn’t have built the best electric car by just putting an electric motor under a Volkswagen’s bonnet. To redesign the value proposition, you need to control the entire value chain, and in insurance it includes the product, support, process, pricing, claims and payment collection.

The main reason behind that problem is the inherent risk averse nature of the insurance industry. Insurers want to underwrite portfolios with historical profitability data, which certainly makes sense; however, one can’t experiment with new business models and underwriting concepts without being capable for a small leap of faith. The leap of faith of putting the customer journey first, and the leap of faith of trusting the new underwriting ideas created by new technology and customers’ digital footprint.

Vikings decided to sail to England and beyond without knowing if any land exists there, and in order for insurance industry to find new territories they too need to unlock the courage of sailing to uncharted waters. Of course, it can be wise to send ahead a scouting ship before committing your whole fleet to the unknown

“It’s about time insurers stop merely paying lip service to innovation.”

This is probably why US based start-up Lemonade became an insurer instead of an intermediary although it required a substantially larger investment. Bad news is that most start-ups fail to raise $12 million to capitalize an insurance company without demonstrating any real traction — but there can’t be traction without a product. Catch 22.

Thanks to considerable entry barriers, including regulatory ones, insurers have felt relatively safe against disruptive innovation from newcomers. The immune-system-weakening effects of this “quarantine” have become glaringly observable by now, with insurance lagging behind in efficiency and customer experience. There’s no Uber for insurance — yet customers are getting used to the experience level enabled by new technology in other industries.

It’s about time insurers stop merely paying lip service to innovation, and start going with the flow of experiments proposed by dozens of start-ups, desperate to find underwriters for their novel product ideas. Of course, not all these ideas end up being great. Of course, not all these ideas end up being great. But such is the nature of experimenting.

This article was originally published on insly.com. Written by Risto Rossar, co-founder of Black Insurance.