THE INSURANCE INDUSTRY IS  EVOLVING

The insurance dinosaur—a common image indeed. But what about the buttoned-down insurer brainstorming with the hip and happening tech entrepreneur? Now that’s a sight you don’t see every day—until recently. Today, innovation titles and teams are popping up everywhere, even in insurance companies—including health benefits providers. But what does insurance industry innovation really look like, and what does it mean for the future of health benefits? As 2018 comes to a close, let’s pull out the good old crystal ball (still waiting for the high-tech version) and take a look…

There’s fintech… and then there’s insurtech

The insurance industry certainly has more than its fair share of headache-provoking acronyms and jargon. However, now there’s a buzzword that you will actually want to hear more often because it is all about taking the dinosaur out of the insurer. Insurtech is here and growing… but we’re getting ahead of ourselves; to understand insurtech, first you need to understand yet another buzzword: fintech.

As a mashup word, the combination of “fin” and “tech” pretty much speaks for itself. Fintech is when technology is applied to financial services to operate outside of traditional financial sector business models. Why? To improve how and what is offered, as well as to enhance how financial aspects of businesses are managed. And in its most ambitious incarnation, fintech is designed to challenge and potentially usurp established financial service providers.

In its simplest form, using your credit card could be considered fintech. However, given today’s rapidly evolving technology, fintech is being applied well beyond just commerce and payments; it’s reshaping everything from
financial advice and education to lending, borrowing, and investment management to retail banking, fundraising, and cybersecurity to even what we consider money with digital currencies like bitcoin. Then there’s fintech that applies technology to improve insurance—hello insurtech!

With insurtech, the customer is king

The EY FinTech Adoption Index 2017 study conducted over 22,000 online interviews of people who use the internet, including 1,020 Canadians, and found insurtech adoption doubling since 2015.¹ But why is insurtech gaining momentum? What makes it attractive?

It’s because today’s customer—who is living in a fastpaced world with a vast amount of information literally just a click away—expects a lot. A lot as in customers expect financial services like insurance to deliver the better, faster, cheaper value proposition that they now receive in other industry sectors. As this researcher explains, "Consumers are drawn to [the new] services because propositions are simpler, more convenient, more transparent and more readily personalized. This has a ripple effect across the industry as consumers come to expect these characteristics in all financial products, regardless of whether in retail banking, wealth management or insurance, and of who is providing the service.”²

Accordingly, technologies applied to insurance that enhance the customer experience will, to use more lingo, act as disruptors. Disruption happens when new technologies alter the way traditional business models operate. As described by this researcher, fintech entrepreneurs have a dynamic duo: “Fintech firms share two core characteristics: a laser-like focus on the customer proposition and a willingness to apply technology in novel ways. These are powerful differentiators in a marketplace where many productfocused incumbent financial services companies struggle to deliver the seamless and personalized user experiences that consumers increasingly expect.”³

Which raises the question, will some cool new techie start-up swoop in and disrupt the health benefits industry?

The answer is: Not likely. Yet. In the immediate future, it’s unlikely that an insurtech entrepreneur will enter the market and cause full-on, complete disruption. This is because they will be held back by many of the same barriers that are deterring traditional incumbents from introducing their own revolutionary insurtech. Not the least of which is that insurance products, as well as the regulations surrounding them, are complex (more on that to come).

In addition, research indicates that consumers are not totally sold on using new financial service technologies when they are offered by unknown providers. Study participants indicated that a main reason they are not using emerging fintech is that they prefer traditional service providers.⁹ The traditional financial services sector is holding strong as the desired provider of fintech (so far). The study researchers think this attachment to established service providers reflects that many consumers see traditional financial organizations as the safest option, which may be especially important where money and confidential information—like health data—is concerned.¹⁰ Accordingly, in theory, for a techie newcomer to cause major disruption, it would need to build its brand to the point where it can successfully compete in a competitive market of (for the most part) well-respected incumbents.

But that’s in theory… because, not surprisingly, the most likely demographic to use fintech are 25-34 year-olds, followed by 35-44 year-olds.¹¹ Not only are they highly internet and mobile savvy, they are at the stage of their lives where they are hitting milestones that involve insurance, like starting full-time employment, becoming homeowners, and having children. And here comes the kicker, they are the least likely of all age groups to cite a preference for established providers as a barrier to using fintech.¹²

Will an established insurer fly solo and disrupt the industry on their own?

The answer is similar as regarding an insurtech entrepreneur’s potential to cause a major industry disruption. It hasn’t happened. Yet. But it’s coming; it’s just that first there are a number of high hurdles that incumbents need to jump over before they are able to effectively harness newer technologies:

• Modernize legacy IT systems: Although health benefit providers have come a long way in terms of embracing technology (those of a certain age will shudder when they think back to manual claims processing), recent technological advancements are moving faster than ever. As a result, legacy IT systems face compatibility issues; simply put, they don’t have the flexibility built in that would allow adoption of new technologies.
• Figure out how to work within or possibly change regulations: Who owns the data? What is—and isn’t—OK
  to do with the data? Whether individual or aggregate data, questions like these abound. Accordingly, ensuring compliance with any number of industry and government regulations—and in turn, internal policies—slows down adoption of insurtech. And in some cases, it makes adopting certain innovations impossible (for now).
• Recognize the complexity of products: Needless to say, even the so-called simplest forms of insurance have a myriad of complex features and processes that in turn, make adopting insurtech complex. Health benefits is definitely no exception; if anything, health benefits represent complexity on steroids because almost all aspects of the business involve the human factor. You’ve got your plan sponsors, plan advisors, plan members, health care providers—all with a variety of needs and wants. Not to mention evolving scientific evidence and approaches to diagnosis—and, of course, big-picture legislation and regulation and smaller picture internal processes and procedures.

The customer consideration

Ah yes, the human factor. Probably the main reason established incumbents are not adopting insurtech innovations more quickly is their responsibility to their customers. The reality is incumbents can’t just throw caution to the wind and disrupt away! Essentially, it’s a juggling act. Current customer obligations are the priority, while simultaneously, the incumbent gauges evolving customer expectations. And these expectations continue to evolve with the times based on how customers see technology enhancing the offerings and customer experience in other sectors.

And then there’s corporate culture. Although incumbents are sometimes innovative, their approach to innovation is often one of the perfectionist. This attention to detail is in direct contrast to most insurtech entrepreneurs who apply an iterative approach to innovation where they basically launch the “best guess” (essentially a pilot) then learn along the way and make continual improvements—in some cases, a total switch in direction. The iterations are all driven by, you guessed it, the customer experience.

Everything the entrepreneur does is driven by the customer: customer needs, wants, expectations, feedback everything. By contrast, the incumbent’s perfectionistic tendencies, established business models, and legacy IT systems means they still have policies in place that are more administrative-centric than customer-centric. It’s the entrepreneurial mindset that incumbents are struggling to instil throughout their organizations.

Interestingly, some of the hurdles faced by incumbents have inspired savvy entrepreneurs to develop new products and services specifically to help incumbents jump the hurdles into a future filled with insurtech. For example, insurtech entrepreneurs are now involved in developing the plug-ins, patches, and layers necessary to modernize legacy IT systems. There are even enterprises whose reason for being is to facilitate and streamline compliance with industry regulations via technology-driven services.

But you can  teach an old dinosaur new tricks

It’s unlikely that either an insurtech entrepreneur or an incumbent will be able to disrupt the industry by going it alone. However, collaboration may be the name of the innovation game. What’s most likely is that incumbents will partner with insurtech entrepreneurs to leverage what each brings to the table—and ultimately drive change.

Incumbents recognize that the strength of insurtech entrepreneurs goes well beyond just technology expertise. They are creative, nimble, and most important, customer obsessed with a focus on delivering the elusive trifecta: customization, convenience, and flexibility.

In turn, tech ventures see value in collaborating with incumbents because of their distribution channels and\ existing customer base, security and fraud protection, regulatory know-how, risk management expertise, and whenever possible, their useable data. This is where incumbents typically get a huge gold star—they are sitting on masses of current data, as well as historical data, definitely a techie’s dream come true.

As one researcher put it, “When it comes to banks and fintechs, we’re seeing what used to be a competitive mindset turn into a desire to collaborate. It’s becoming clear that working for mutual benefit, rather than competing with each other, will result in more meaningful innovations, faster.”¹³

Crystal balling it: This dynamic duo of incumbent and insurtech venture could be a match made in heaven as it appears that both camps have a lot to gain and not much (if anything) to lose by working together. And of course, for plan sponsors and plan members, these kinds of partnerships could mean enhancements on many fronts.  But what constitutes an enhancement is up for debate.

All systems go… but to where?

Insurance companies are expected to take innovation up a notch. And the business case for collaboration with insurtech entrepreneurs is solid. But what direction do plan sponsors want innovation to take? Just how involved do plan sponsors want to be in plan members’ health care? What do they see their role as? And what about plan members; how involved do plan members want their plan sponsors to be in their health care? Although all systems may be a go for increased adoption of insurtech, just where the health benefits industry is headed may circle back to that age-old question: what is the purpose of your health benefits plan?