How incumbent insurers are becoming disrupters

Insurance isn’t easy. But, with its myriad of regulatory bodies, lines of business, outdated processes, and overly (or overtly) complex policy language, nobody said it was going to be. However, money talks, so interest in insurance from new players is high. Watching insurtech startups bend, flex, and pivot to handle the business pitfalls inherent to insurance could leave one wondering if the approach is worth it, however. Interestingly, as startups struggle with product-market fit, incumbent insurance organizations are those most worth watching. With changes necessary in order to compete and continue to control the industry, incumbent insurers are the new market upstarts who are plowing green fields, building robust APIs to integrate emerging technologies, and considering customer experience from a whole different point of view.

Plowing green fields
Recently, the drive to stay relevant and compete has insurance companies launching new greenfield divisions to drive organic growth through new lines of business and emerging coverage types or classes. The first examples of this largely went for the low-hanging fruit of pet insurance and coverage for high-net worth individuals. This led to incumbent insurers creating new brands or standalone divisions not reliant on the mothership’s internal processes and IT infrastructure, such as Nationwide Pet Insurance and Berkley One.

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Employees work on laptops at the Pandora Media Inc. offices in Oakland, California, U.S., on Tuesday, Nov. 18, 2014. Oakland, long synonymous with crime and blight, is attracting businesses and residents priced out of its more famous neighbor, San Francisco and drawn to an increasingly vibrant scene. Photographer: David Paul Morris/Bloomberg

The next challenges for incumbents include developing underwriting criteria and software solutions to handle coverage for types or classes the industry has no track record of writing, such as drones (think AIG) and cyber (think Chubb). Emerging areas of new business provide risk and potential return if the price is right. Emerging coverages, however, have potentially very different processing and billing requirements. That said, it stands to reason the software enabling insurers to handle these new and emerging coverages may not look like the industry’s more traditional solutions. Incumbent insurers who have relied on suite solutions for core administration must now err on the side of flexibility and begin to move back toward a best-of-breed approach to technology.

“These old systems were not built for the current (or future) market environment with its very specific and demanding requirements around data and engagement that enables us to support today’s very different customer expectation,” wrote Nigel Walsh of Deloitte in a recent article, “Is the insurance core systems the lowest common denominator in the insurtech (r)evolution?”

Building APIs
Fifteen years ago, best-of-breed was a strategy used almost exclusively by the largest insurers with the budgets, manpower, and expertise to withstand the burden of very high cost and painfully lengthy enterprise projects. These projects often resulted in disruption to many, if not all, of the company’s critical business processes and workflows. In those days, little more than rudimentary integration of best-of-breed components was typically achieved through the engagement of third-party firms who developed one-off solutions, such as middleware like an enterprise service bus (ESB), to make solutions from different vendors “talk” to one another.

Today, however, the rise of the application programming interface (API) enables new levels of software solution flexibility which incumbent insurers can realistically choose and implement. Further, one could argue, APIs are behind much of the move away from the painful “rip and replace” projects of the last decade which sought to modernize core systems. With open APIs built around libraries of reusable pieces, custom integration projects are becoming obsolete. Almost any InsurTech innovation can be easily and quickly made to work with an existing (legacy) core system to extend usefulness and functionality.

Incumbent insurers just beginning to explore how APIs can improve connectivity across a constantly developing IT infrastructure are in for a pleasant surprise. New functionality is available today without expensive onsite implementations. Supplemental data can be easily acquired and incorporated into a rate/quote/bind process through new third-party data providers. And, ease of use and access features can be seamlessly extended to customers, making the choice of which company to buy insurance from a literal no-brainer.

Considering the Customer
In this new environment, the insurance industry has to take a new view of the customer. The argument for customer-centricity is truly a moot point. Customer acquisition is expensive, and insurers are starting to realize the easiest customer to get is the one you already have.

“If we were to start the industry today, with a blank sheet of paper, of course we wouldn’t design it the way we did 30 years ago,” wrote Walsh. “Nor did we have the same ability back then to adopt a capability-driven and services-enabled approach to plug the necessary components together easily, or swap out capabilities quickly and easily.”

Recent technology advances and InsurTech innovations are largely aimed at taking cost out of critical insurance processes and introducing simplicity in transactions that customers have found almost incomprehensible for decades. If a customer still wants to write a paper check, shouldn’t that still be as much of a choice for paying an insurance premium as PayPal, Venmo, or other digital wallet options? The challenge here is for incumbent insurers to retain existing customers by making the overall experience of shopping for, understanding, and buying insurance better, while improving the claims service experience on the back end.

While the insurtech rush slows down slightly with fewer new entrants, investment dollars are still coming in and chasing those startups already creating a successful track record. On the sometimes stubborn incumbent side, there is a growing realization that sometimes drastic measures are necessary. In fact, there is a resurgence of new initiatives driven internally or in collaboration with insurtech startups. The pitfall that both startups and incumbents need to avoid is slipping back into a legacy trap. Continuous innovation is imperative.

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