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by Matteo Carbone and Steve Anderson
Co-authored by Matteo Carbone, director of the IOT Insurance Observatory and co-founder of Archimede SPAC, and Steve Anderson, a trusted authority on insurance technology, productivity and innovation.
The debate about insurance innovation has been dominated recently by comments generated as a result of the State Farm TV ad, where the US insurance giant celebrates the superiority of its thousands of human insurance agents compared to AI-based chatbots.
Lemonade – a smart US insurtech startup – has credited itself as the target of this ad, because its marketing story is that a chatbot is just as good, if not better, than any human insurance agent. But it does appear that Lemonade’s platform needs to learn a bit more about how insurance works, as AIs have regularly paid out more in claims than they’ve collected in premiums.
Many comments on various social platforms have called State Farm’s advert “the worst commercial I’ve seen,” “creepy”, and “freaky”. Others accuse the insurance giant for releasing an “attack ad”. Even our friend Chunka Mui has written a well-articulated censure of it.
We, however, love the commercial – and we hope the discussion raised by it will encourage two calls to action for insurance companies:
1. Be proud of the way you do business
2. Master the art of communication
Let us start with the first aspect. In years past, technological arrogance and a sort of “politically correct tech-speak” have forced the storytelling of the world’s largest insurers to, on one hand, shyly hide that real people generate the vast majority of their business. On the other hand, these insurers celebrate any insurtech proof of concept as evidence of their innovation, even when it has an immaterial impact on the business profit.
It seems insurance companies have felt embarrassed by their agents, brokers and other distribution partners. Most of their innovation efforts have been in solutions that in some way challenge their greatest asset: the human agent and broker.
“The last agent has already been born,” is a slide title we have seen at industry conferences over the last ten years, but as of today, all around the globe, the sale of P&C insurance continues to be dominated by agents and brokers (excluding a few exceptions such as the retail auto business in the UK). For life insurance, digital distribution accounts for less than 1 per cent of global sales.
So it is great news to finally see a large insurer that is proud of its agents. We love this communication because it is not hypocritical and gives a clear message both to customers and to agents: this is the way – through agents – that we do business, and this is the reason we do it this way.
We are not celebrating or encouraging “old-school” thinking. We are firm believers in insurance innovation – and agree with Chunka that chatbots, machine learning, and AI use cases are among the technologies which will have the greatest impact on the future of the insurance sector.
However, we are also pragmatic. We want to provide a view of insurtech which is different from the mainstream. We think it is a pity to let the innovation cheerleaders – people who raise their pom-poms at any PR-released news, but are not able to distinguish a loss ratio from a combined ratio – guide the debate about the future of the insurance sector.
The mantra of our activities in the insurance sector around the world is “all the players in the insurance arena will be insurtech,” meaning organisations where technology will prevail as the critical enabler for the achievement of their strategic goals. So, we believe insurtech is much more than digital distribution.
Our view is that insurtech is a superpower for insurers, a terrific enabler for performing the job of insurance in a better way: to assess, to manage and to transfer risks.
The world is full of opportunities for reinventing each step of the insurance value chain through technology and data usage. Moreover, an insurance company has a key opportunity to share these superpowers with its agents, brokers and distribution partners.
Many insurers already understand that not involving their distribution system in corporate innovation is a wasted opportunity, so these carriers have introduced technologies which can enhance the capabilities of their human intermediaries. Instead, we have seen only a few players communicating effectively and consistently to support their agents and brokers. Because of this, carrier innovations are frequently perceived as threats by agents and brokers.
Insurance companies don’t need to create this kind of barrier. Maintaining this conflict only pleases the innovation cheerleaders who want to get rid of intermediaries.
Let’s move to the second call to action. The insurance sector has always experienced bad press and has never excelled at effective storytelling. The new generation of insurtech start-ups are demonstrating the power of a consistent and modern communication strategy. Lemonade, who we mentioned at the beginning of this article, is the best example of this communication ability. In our opinion, Lemonade’s two years of case history should be studied in marketing courses at universities. There is a lot for the current industry to learn.
Lemonade positioned itself as the good guy – champions of trust who will provide the remedy for a broken business. It’s well known for the fixed percentage of premium it charges – demonstrated with its famous slice-of-pizza graphic – while the rest is used to ensure they will always pay claims, and whatever is left, goes to charities. That slice of pizza, so celebrated by insurtech cheerleaders, has flown from tweet to tweet, article to article and conference to conference. Moreover, consistent and well-orchestrated communication has fed this mechanism.
So how does Lemonade deliver on its promise to always pay out claims? In its long and wordy FAQs, the start-up mentions the necessity to cover “internal reinsurance,” reinsurance costs, and other expenses. Therefore, at the end, the maximum amount available for the charity giveback is 40 per cent of premiums.
That terrific 40 per cent giveback happens only in the theoretical scenario, where there are zero claims within the peer group. In a scenario with claims at 40 per cent of the premiums (40 per cent loss ratio) or above, the giveback is zero. This means there is a giveback only if the loss ratio is lower than 40 per cent.
Insurance, at the end of the day, is a contract where someone promises to indemnify another against loss or damage from an uncertain event, as long as a premium is paid to obtain the coverage. On average, the US home insurance business line had a loss ratio of 74 per cent in 2017 (actually an exceptionally high year – the lowest loss ratio was 46 per cent over the past five years). This means that 74 cents have been used to indemnify the policyholders for each dollar collected as premium.
As we said earlier, Lemonade positions itself as the good guy by guaranteeing to pay – as claims or giveback – at least 40 cents for each dollar collected as premium within each peer group.
It seems clear to us that the insurance incumbents have more arguments for claiming they are the good guys, but they have only to develop consistent and modern communication storytelling.
Here are some suggestions for next steps insurance companies can take:
What ideas do you have for helping the industry to help agents and broker better protect their clients?
This article has originally been published on Matteo Carbone’s and Steve Anderson’s LinkedIn pages
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