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Agents: Ignore the Tech Wave at Your Own Risk

By Anthony Tornatore, VP, Insurance Product Management, Kin Insurance

Like any trend or buzzword, the term “insurtech” has become ubiquitous. The term originated to capture the offshoot of fintech where venture capital came in to disrupt the traditional insurance industry by bringing innovation and efficiency to the market. It has now become a phrase adopted by just about anyone wanting to promote their product or service that even loosely involves technology. What is it that insurtech is actually doing? How new are the concepts? Are they achieving the goals of savings based on efficiency gains? And what does it actually mean for the independent agent?

The insurtech story starts before insurtech. Before disruptors came in, the insurance industry, slow as it may be to adopt new data and technology, was already moving in the general direction that insurtech companies are presently headed. Large data providers and aggregators were starting to introduce more robust concepts of data pre-fill, carriers and MGAs started adopting real-time catastrophe modeling, and Progressive and others had long since launched direct-to-consumer channels and telematics to better underwrite and acquire customers. With this in mind, what differentiates insurtech companies that have entered the market from this wave of innovation that predates them? The two key differentiators are speed and expense savings.

With the influx of more data – both quantitative and qualitative – and the development of AI used to better interpret things such as aerial imagery, inspection photos, and the like, companies have an opportunity to automate now more than ever. According to the NAIC, though, industry expense ratios have not made any progress over the past decade. After an uptick in the early 2010s and a subsequent fall, the decline only brought expense ratios down to previous levels.

Why haven’t data and technology moved the needle? Speed of implementation plays a big role. With a large deal of dated platforms in place, the ability to adopt and integrate new sources doesn’t come cheaply, which gives carriers the choice to not adopt the new sources, adopt them slowly on the current platform, or invest in a new platform that can more quickly integrate. This is where insurtech startups come into play. Many are built on proprietary platforms, not legacy platforms built on COBOL. The rate at which new data can be adopted and integrated is materially beginning to shift, which is the catalyst for speed and efficiency.

The end goal for the insurtech movement is to materially reduce expense to facilitate lower prices and use that rate advantage to acquire customers. Again, this is not something we haven’t seen before. GEICO’s “15 percent or more” savings originated largely from the expense they pulled out of the auto insurance acquisition process. There is a wide range across lines of business in expense ratio, and the overall goal of many insurtech companies is to enter the ones that run higher expense ratios and eliminate unnecessary expense.

This is where data availability comes back into play: data is not used just in pricing and underwriting, which is where traditional carriers have largely adopted it, but also in customer acquisition. When incumbents adopt data while leveraging the independent agency channel, they are typically doing it by pre-filling more information in the prospective policyholder’s application. Pre-populating building characteristics, distance to water, flood zones, and more saves an agent time, but without a corresponding reduction in agency commission, the only gain a company gets is the incentive for that agency to place more business with them. It’s a revenue gain, but not a profit gain. New entrants are looking to capitalize here. In an industry with agents, brokers, MGAs, reinsurance brokers, and reinsurers, there are many places in the risk transfer chain to cut out waste. Direct to consumer cuts out several, and reinsurers directly investing in insurtech cuts out MGAs and brokers. Now, as startups, there is the initial upfront investment and customer acquisition costs in building a book of business before gains from subsequent renewal terms work their way into their economics. The longer these companies operate, the greater the gains they’ll realize.

Interestingly enough, it may not even be insurtechs that have had the biggest impact on the independent agent. New data availability and tech adoption has resulted in increased functionality and use of agency management systems with more integrated lead processing, marketing, and cross sale ability. Agents that have stuck with a more traditional approach to marketing have struggled to keep up with an increase in digital channels. Consequently, we’ve seen record numbers of mergers and acquisitions in the insurance agency space the past three years per OPTIS Partners’ M&A database. Many of the buyers in these acquisitions are private equity backed, but many others are publicly or privately held brokers as well. What we’re seeing is the tech savvy and data enabled putting pressure on those failing to adapt, irrespective of the background of the tech adopters.

Even in a digital age where a growing number of consumers would like to execute their transactions on their schedules without having to talk with another person, there is still a large chunk of the market that wants the guidance and expertise of another individual. While there are a wide range of opinions on the ultimate destiny of insurtechs – from acting as the asteroid that wipes out the dinosaurs to being the catalyst that causes incumbents to evolve and keep up, creating an ecosystem where all can thrive – it should be abundantly clear that data and tech adoption are mandatory for all parties moving forward. In light of all the changes in the past decade, the message to agents should be clear: ignore the tech wave at your own risk.

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