Insurance Is Dead, Long Live InsurTech

Inertia in insurance – Interview: Guy Farley, Bought by Many

Insurance has changed. New customer demands have placed increasing pressure on incumbent insurance companies, forcing them to confront their existing infrastructures. Big insurers aren’t just competing against each other, either – they are faced with an army of innovative startups.

One of these is Bought by Many, a platform that uses data to design better insurance policies for specific needs, using collective bargaining power to drive better premiums. The company exemplifies the importance of customer centric, data driven strategies and received £15m in series B funding earlier this year.

What do shifting preferences and InsurTech expansion mean for the sector and for the legacy businesses within it?

Personalising policies

Guy Farley, CTO and co-founder of Bought by Many, explains that the company was created to bring groups of people together with specific insurance requirements to get better deals and products.

“Examples might be someone travelling with a medical condition, or someone who has a breed of dog that often has certain conditions because of its breeding, or who owns five very expensive road bikes that aren’t covered by their house insurance. There are hundreds of these apparent niche requirements, but actually when you look at it, this constitutes a very large part of the insurance market,” explains Farley.

So why aren’t incumbent insurers doing anything to meet this demand? According to Farley, it’s down to the same old problems that every large corporation faces.

“The thing that mainstream insurers can’t do well is produce new products that fit into niches,” he says. “Making a new product is an 18 month programme of work. The big constraints are internal inertia, and IT legacy problems. They may be running on a mainframe system that might be 30 years old.”

Farley explains that along with big internal structure problems, other obstacles include ingrained mindsets and a failure to use the right language when talking to customers. Generally, the social media presence of large insurers is based on brand building instead of communication. For these very reasons, insurers would not (or could not) produce niche products for Bought by Many. Frustrated by the inertia in insurance, they decided to do it themselves. As well as finding out what customers really need through social media, the disruptor uses search data analysis to engage with customers.

“We buy millions and millions of rows of anonymised search data, and look into that for people searching for insurance of some form or another. That gives us a big insight into both the volume and the direction of change of the market but also the language people are using. We also run specific customer testing, so we’ll get customers in and walk them through product features and designs and ask them some very specific questions.”

Another major part of the company’s drive to focus on customer needs is through the creation of an API for insurance. The API can support multiple insurance product lines very rapidly, allowing Bought by Many to release new products at greater speed. A further benefit is that the websites in which the API is embedded can then start to attract customers.

Competition through consolidation

Interestingly, incumbents don’t see the startup community as posing the biggest disruptive threat. In IBM’s annual C-suite study, Incumbents Strike Back, only 22 per cent of respondents saw startups as leading disruption in their industry. However, 72 per cent credited other incumbents as the most transformative companies. This appears to ring true for insurance, too.

“The really good example of this is reinsurance,” says Farley. “When insurers look into the risks of their company and realise they can’t cover the really big losses, they go to other members of the insurance industry – largely reinsurers – to take some of the risk with them. That model is breaking down because the insurance companies are consolidating, and they get to the stage where they are so diversified and their balance sheets are so large that they don’t really need reinsurers.”

Now that insurance companies have grown so large, the reinsurers who carry the overall risk are no longer needed. As well as diversifying their risk profiles through consolidation, what else have big insurers done to stay relevant? One seemingly counterproductive method has been to work together. Bought by Many, for example, has worked alongside reinsurance company Munich Re for two years. Within these partnerships, fast moving InsurTech companies carry out the front end distribution that incumbents struggle to do, while the legacy firm provides capital and expertise.

“Insurance has always been quite a cooperative environment by nature because people have always shared risks with others. Because of the potential for huge loss, unless you’re a large company, sharing that across multiple players is a sensible move,” Farley says. “You need significant reserves to be the risk carrier, which is not something a startup can do. You need the big guys to provide that capital adequacy.”

The problem with personalisation

Increased demand for personalised services in insurance reflects a wider trend across industries, but from an insurance perspective there is a fine balance to be struck.

“There is this dilemma in insurance as to what level of personalisation is sensible. If you price each individual’s risk incredibly accurately, you’re not pooling the risk, which is how insurance works,” explains Farley. “The whole point is that you take a whole bunch of people and a whole bunch of premiums and some people claim and some people don’t. If you can predict exactly who is going to claim, you either won’t insure them or you’ll charge them so much money that they won’t buy in the first place.”

Bought by Many’s approach to personalisation within insurance is to take a more customer centric look at need. Tapping into underserved consumers allows the company to offer greater personalisation without compromising risk assessment. Farley also points out that personalisation also refers to customer service as well as products. For example, despite the surge of digitisation, significant numbers of people prefer to speak to people on the phone. This is especially the case for those who are buying insurance for the first time.

“This is where we differ somewhat from the norm. Lots of people try and encourage the customer off the phone and online because it’s cheaper and perceived as more modern. But insurance is complicated, and it is reassuring to talk to someone to find out the difference between products and what you might need,” says Farley. “For example, we know that first time buyers in pet insurance are much more likely to talk to us on the phone. We definitely see having people on the phone that you can talk to as a big part of treating people well in insurance.”

There are certainly a few lessons that incumbent insurers can learn from their younger competitors. InsurTech companies like Bought by Many have realised the merit in taking a more personal approach, using data and digital channels to work out what customers really want. And, of course, there’s the helpfulness of a good, old fashioned conversation. Even though more consumers are moving into the digital sphere, not everyone wants to fill out an online form. By becoming more customer centric and less bound in red tape, mainstream organisations can mirror more agile alternatives. At the core of insurance, however, is cooperation.

“It’s in the DNA of insurance to cooperate where it makes sense,” says Farley. “Mainstream insurers know that if they can be the ones underpinning all of these digital startups, their business benefits too.”

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