I’ve
always been somewhat of a gadget guy. When 4K TV came out in an 85 inch screen,
I had to have it. Got the solar panels on the house and a Tesla in the garage.
And like many of you, I’ve got drawers full of old blackberrys, nokias and
iphones as I’ve continually upgraded to the newest, fastest and shiniest gadget
available. Juxtapose this to the industry I’ve been in for 30+ years, the
insurance based retail financial services business. Of all the business models
out there, it is arguably the least technology driven. While most other
industries have gone Netflix, the insurance industry is still Blockbuster. The
basic premise for this is that the products are sold and not bought. It’s a
people business and technology will never replace the human touch. It’s the
ultimate relationship business. All these premises are historically correct. It
is a relationship business…but the relationship is changing. Ned Ryerson…meet
Silicon Valley.
As
some of you have noticed (Thanks for the congrat notes
on Linkedin!), I recently joined a technology firm specializing in
an industry sub-sect of Fintech known as Insurtech. Yup…traded in the pin
striped suits for more casual attire and I’m developing new lingo like UX, UI
and API. Somewhat ironically, when the HBO series “Silicon Valley” first
came out in 2014, I took a pass. It looked like something that would be of more
interest to my 20 year old kids than a boomer like me. But recently at the
office after hearing the team make multiple references to the show, my wife and
I fired it up and plowed through 3 seasons in a matter of days. Very funny. When
they quote Reid Hoffman as saying “If you are not embarrassed by
the first version of your product, you’ve launched too late”, I
can actually relate to it now.
In
season 3, Silicon Valley introduces a new character into the show named Jack
Barker. Given my perspective having been in the insurance industry and now the
tech business, there seemed to me like a bit of symbolism in this. The
character actor, Stephen Tobolowsky, who plays Jack Barker in Silicon Valley is
the same actor who played the role of Ned Ryerson, the annoying insurance
salesman in Groundhog Day twenty years prior. Check out the short video clips
of these two scenes and you’ll see the similarities in the
characters down to even holding the briefcase in the left hand. Ned Ryerson is
often cited as the symbol of the obnoxious insurance salesman and of course
Jack Barker is the symbol of a rich tech CEO. This got me thinking, is the
insurance industry ready for technological change? Is it time for Ned Ryerson
to become more like Jack Barker?
Obviously,
I do believe it’s time for the insurance industry to digitize. Why? While it
remains a relationship business, increasingly, the preferred customer
relationship is going digital. But unlike most digital disruptors, I don’t
think it’s going to bypass traditional distribution of the products and
services. We see what is happening in the robo-advisor world where the cost of
customer acquisition is financially bleeding the tech start-ups to the point
where they are forced to sell out to traditional distribution platforms. While
this is evidence that digital B2C is a risky financial services business model,
it is increasingly more apparent that the traditional distribution platforms
that integrate digital technology tools to enable their advisors will be far
better positioned to thrive than those who stick with “the good ‘ol days”. Here
are a couple trends and thoughts on why I see it this way (and why I’m bullish
on Insurtech):
- InsurTech investment is
growing faster than FinTech:
FinTech ($5.4 Bill investments in Q-1 2016) is large but mature. Most
Insurtech investment is going towards the Property & Casualty
insurance segment and B2C models. Investment in the Life/Annuity segment
is far behind creating a substantial white space opportunity
- The DoL is driving digital
solutions: The U.S. DoL fiduciary
rule impacts up to 60% of annuity sales and technology solutions are
believed to be the predominant tool to comply. This will eventually bleed
into other lines of business as it will be difficult to operate a
distribution business model that is inconsistent across all product lines
- Insurers are partnering
with digital firms:Technology
is expected to replace up to 25% of insurance jobs (McKinsey). Life
Insurance carriers and distributors do not have the depth of talent nor
budgets to build digital platforms and are choosing instead to partner
with digital technology firms
- Margins tighten/Scale
matters: In a protracted low
interest rate environment, the margins for insurance carriers are
extremely tight. Overhead currently consumes up to 40% of premium
revenues. This is forcing cost cutting efforts, industry consolidation and
a desire to find lower costs methods of distribution using digital
technology
- The “insurance is sold-not
bought” prevailing belief is changing: Historically
the industry has been a top down product push model. Shifting demographics
and technology are moving that to a bottom up customer centric model.
Digital technology is at the root of placing the customer first.
- Demographics are a driver: The vast majority of current sales come from the
traditional agent channels. With an average age of 60, the agent/advisor
channel is in decline and insurers need to find alternative lines and
methods of distribution. Not surprisingly, the Independent Broker-Dealer model
is growing sales of insurance products more quickly than the traditional
independent agent channel.
- Aligning with
trends: Millennials are now the
generation in the majority and are driving the shift in consumer
preferences to digital. The mobile phone is quickly becoming the main
screen
- Augmentation Beats
Automation: As revealed by the
robo-advisor trending towards enabling rather than replacing the financial
advisor, the same can be expected in the insurance industry as “Insurtech”
matures
- We have
"robo-advisors" but where is the "robo-agent"?: There are multiple digital offerings to manage assets
but surprisingly few to protect them in the life/annuity space.
- Digital has taken root
with the customer:Cited by AM
Best, 83% of consumers would use the internet to research life insurance
before purchasing a policy if they had that option. One in four consumers
said that given the option, they would prefer to research and purchase
life insurance online. In addition, global mobile data traffic will
increase nearly eightfold between 2015 and 2020.
- The current distribution
model is not working: LIMRA estimated that life insurance sales would increase $9.5 trillion if the 48 million under-insured households bought the amount of life insurance coverage they said they needed. However, a quarter of under-insured households said they were not approached to buy life insurance.
Insurance
carriers and distribution platforms will need to decide whether to continue
down the traditional path and hope for different outcomes (i.e. definition of
insanity) or transform their approach to customers and products using digital
technology. As the Ned Ryersons' of the business age out and go away, the
industry needs to adopt digital technology not only to attract a new generation
of insurance based advisors, but to meet the standard set by Amazon, Google and
Tesla for a digital buying experience. As actor Stephen Tobolowsky has
done, it's time for the industry to morph from Ned Ryerson into Jack Barker.
There's an app for that!
“The
best way to predict the future is to create it”
–Peter
Drucker
