Can Insurers Afford Outside Disruption?

For many years, as the information revolution and Silicon Valley energy rolled through industry after industry, the insurance sector watched from the sidelines. Business models remained unchanged, and existing organizations didn’t face severe existential threats. Of course, the price of such stability was an absence of the adventure and daring that accompanied startup culture. Plus, insurers may have not been the first choice among tech-savvy or innovation-savvy talent seeking to help build new forms of businesses.

All of a sudden, insurance is joining the digital revolution, in a big way. Established insurance companies are even among the biggest supporters. As recently disclosed by Accenture, insuretech investments have tripled within the most recent one-year period, from $800 million in 2014 to more than $2.6 billion in 2015. Along with venture capital and private equity funding, large carriers are also investing heavily in emerging insuretech startups. The Financial Times also reports healthy interest in insuretech, which includes wearable devices and aggregators.

This represents a sea change for the industry, with players from outside the traditional bounds of the industry making inroads to promote new insurance services -- based on connected, real-time and interactive offerings and coverage.

The time is ripe to begin what is amounting to a great disruption of the industry. In a recent post, Paul Tyler suggests that there are opportunities not only in the P&C sector, but life insurance as well – an even more conservative segment of a conservative industry. He observes there are a number of innovative insuretech providers emerging in this space – mainly fitness and wellness device producers. However, Tyler adds, the life insurance industry’s well-entrenched legacy systems may be incapable of supporting innovative new services. To put it simply, the costs of insurance back-office operations need to come down – way down -- to open up the gates of innovation.

As Tyler explains: “the average cost of processing a new policy will make breakeven impossible for micro insurance-like product offerings. I have seen industry estimates of the cost to process a single underwritten life policy ranging from $120 to $250. For these new businesses to succeed, the cost per policy will probably need to be reduced to the $10-to-$15 range.”

Cut back office costs down to 10 percent of their current levels? Is this even possible? Many life insurance companies still run large data centers with legacy systems, such as mainframes. These older systems support the information and logic for what may amount to generations of life insurance customers, dating back decades.

Cutting these data center costs requires some up-front investment in mapping out new approaches – such as virtualization, cloud and service oriented architecture, which are highly distributed and not wed to more expensive platforms. However, there will be up-front costs for the migration work, training and potential business disruptions as a transition takes place. It will likely be gradual, wholesale lift-and-shifts are often too painful.

If the industry is going to adapt and grow with the new opportunities opening up, it needs to be open to working with the new entrepreneurial class of disruptors entering the market. Without this innovation now, the next wave of disruption may not be adjunct insuretech products, but entire new forms of digital providers that make the current model of insurance service delivery archaic by comparison.