Insurtech startups are disruptive and a threat to traditional companies.
This is the message behind the rise of a new sector that, by leveraging technologies, is able to propose new insurance offers and ride on new business models. Simplified purchasing experience, fast and clear process management and low costs represent the “value proposition” of young companies that break into the insurance sector, an old and poorly digitalized industry that has been managed for a long time in the same non-innovative way. Aside from the fact that a change and digital transformation were needed, will these startups, of which we are talking so much now, survive in the long run?
Are their business models sustainable over time? It’s a kind of misgivings that spread among insurance veterans and to which Richard L. McCathron, Head of Insurance at Hippo, one of the U.S. startups that are making the difference in the insurtech industry (we talked about it here), attempted to give an answer. The professional has a working background in traditional companies and therefore holds a high knowledge of the sector which leads him to say, in a nutshell, “insurtech is a good thing, but let’s be careful to say it is replacing the traditional companies”. In particular, according to McCathron, who published his point of view on the IIReporter website, insurtech startups are making at least three mistakes.
According to McCathron, “it’s important to remember that InsurTech is derived from two words: insurance and technology. There needs to be as much (if not more) emphasis on effective underwriting (insurance carriers) as there is on state-of-the-art tech. Without an equitable balance, we can’t provide viable, effective products”.
The expert has identified at least three insurance mistakes that insurtech startups shouldn’t make if they want to survive in an environment ruled out by huge global players, deep-rooted, and well-known brands.
Skimping on underwriting basics
In the insurance industry, the traditional onboarding process needs improvement. It has been inefficient and confusing for too long, often with lack of clearness and senseless risk items designed solely to drive their premiums up. In an effort to simplify quoting and binding, Insurtech companies often eliminate underwriting questions needed to properly evaluate potential risks. As a result, new businesses aren’t getting the data they need. There are technical solutions and large data sources that can reduce friction by providing comprehensive coverage, but many companies are not using them.
Low prices
Automating interactions and leveraging data and technology can cut costs. But in the long run, new providers can’t get away with charging half (and sometimes less than half) of what traditional insurers do. Insurtech companies may rely on low costs to attract enough customers to impress investors, but they fail to understand that premiums must provide long-term profits and ensure the profitability of their company.
Sustainability over time requires in-depth analysis of individual risk characteristics in order to create a product with a fixed price and that can cover losses, otherwise the danger is a disproportionate growth compared to the fund protecting both customers and the same company.
The pricing model Insurtech companies often use could damage their customers. Consumers can decide to switch carriers in order to lower their premiums, but prices will eventually rise to balance incorrect assumptions made when the company’s top priority was chasing top-line growth. Low prices may draw in new customers, but they won’t last forever. This approach creates an “easy-to-reach” customer base in the short term, but a potentially disloyal one later down the line.
Automated claims
Perhaps the biggest issue customers (and critics) have with Insurtech companies is the way they handle claims. To simplify this complex part of the insurance experience, companies have created automated processes and artificial intelligence. There are two reasons why this isn’t a viable solution.
First and foremost, it can lead to an increase in fraud. 60- or 90-second claims settlements don’t leave enough time for proper research or evaluation. A robot, droid or another machine can’t be programmed to identify some aspects of fraud, this process can be misused. Scammers and fraudsters know they should avoid claiming large losses more likely to be verified by insurers. Therefore, they report small losses. A growing number of fraud, creates problems for insurers, reducing also the loss ratio and driving up premiums for all customers.
Automating the claims process also eliminates human interaction. Again according to McCathron, “to me and my colleagues working in the homeowners insurance industry, protecting the largest investment most Americans make, this is a key supervision. When the house just burned down or family heirlooms were stolen, a person doesn’t want to talk to a computer prompting to press different numbers. Following a tragedy or a traumatic experience, customers need a claims process supporting them in understanding whether they’re safe and whether there’s anything that can be done to help them.”
McCathron eventually states that: “With lower overhead costs and policies that are more accurate compared to traditional insurance plans, Insurtech companies can become proactive partners. These can provide products and services that traditional insurers weren’t able to offer in the past, like systems that use data to identify which customers are in danger when natural disasters occur. A two-way relationship with insurers will encourage customer loyalty and leave policyholders feeling better protected”.
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