The cobbler’s children have no shoes
For those unfamiliar with this saying, it’s a rough translation from a Spanish proverb. It’s used to describe someone with a particular skill who is so busy doing it for everyone else that they don’t apply that skill for themselves. Such as the insurance industry and an apparent shortage of innovation, for example.
Here we have an industry built upon the foundations of understanding and assessing the risk and consequences of possible outcomes. And then making provisions for the eventuality of any outcome. If you apply the premise of the cobbler’s shoes, then you’d think that insurance would see what’s coming for it’s own industry and be one of the most innovative, wouldn’t you?
Especially in the 21st century. Where speed of change and the 4tth Industrial Revolution creates an environment for disruption. Where the behavior and expectations of customers and markets is changing. And new risks enabled by new technologies create new demands for protection.
This is fertile ground for the entrepreneur and tech startup. Clayton Christensen talks about this as low profit, under-served markets that innovators target when they’re starting out. In so doing, they’re under the radar of the incumbents who fail to see the threat.
As the innovators learn, refine and improve their proposition, they build strength ready to move into the incumbent’s market space. By then it’s too late for the slow-to-move incumbents to adjust and respond. They don’t see it coming until it is too late to respond. This is what Amazon did with home deliveries when online retailers showed no interest in speeding up delivery times. Arguably, Lemonade are following the same strategy with their focus on the renters niche.
Complacency or Culture?
The great irony for insurance is that it’s an industry not typically associated with innovation. Maybe that’s because it sees itself as too complicated, capital intense or regulated to be under any kind of competitive threat (complacency).
Or maybe it is simply so bound up in its own legacy and focus on operational efficiency that it isn’t able to see the extent that the world is changing (culture). The best the incumbent can do here is to apply innovation to improve existing products to existing markets. The CBInsights State of Innovation survey found that 78% of innovation portfolios are focused on this type of sustainable innovation.
One argument put forward in this 3-part article by Martin Agather is that innovation is stifled in insurance companies by short-term financial performance. Agather writes that money is typically spent on operational efficiency projects on the basis that the cost savings will be used to fund innovation. However, short-term need for financial performance from demanding shareholders takes priority and innovation doesn’t get funded.
For the well-funded tech startup, the entrepreneur does not face the same short-term pressures. The pursuit of innovation has different KPIs and a different timeline for ROI when you’re creating rather than running a business.
But is it really doom and gloom for the incumbents? To find out more, I caught up with my long time friend and CIO of Allianz Insurance, Jacob Abboud.
Are the sleeping giants of insurance awake yet
Jacob is an insurance guy.
He’s also an experienced and enlightened transformational CIO recognised in the Constellation’s Business Transformation list 2018/2019. This is an elite cross industry list of the top 150 leaders “recognised for their business transformation efforts”.
When I asked Jacob about how he saw innovation within his own organisation, he told me, “Over the past couple of years, we’ve started a journey to change the way we do ‘change’ in Allianz. It was necessary if we are to meet the Group’s strategic agenda and build customer-centric digital capabilities quickly and efficiently.
“We also needed to transform our legacy into a digital business from infrastructure to applications & platforms that are underpinned by a digital architecture blueprint that promotes API decoupling and re-use. We’ve become agile, using DevSecOps in the cloud, organised into tribes and squads. Our mission is to make innovative transformation business as usual. It has to be realistically achievable and effective.”
Jacob’s point is that ‘legacy’ is no longer an excuse for incumbents failing to embrace the digital imperative. All across financial services, you’re seeing some of the largest of the incumbents making real progress in transforming their legacy estate. Innovation faces a completely different set of challenges for the big boys to those faced by the tech startups.
“We have to innovate,” Jacob continued, “and we have to approach it in a different way to a startup. We’re not looking at a clean sheet of paper as they are, nor can we stop serving the customers we already have. Innovation is more of an evolutionary process with dedicated teams engaged in pilots and value-proofing activities to bring into the mainstream. Fortunately, we do have the thought leadership and the capital we need for transforming our business to be competitive in the digital economy. We are also prepared to take a longer term view on the return of our investment.”
To learn more about Jacob’s approach to innovation and transformation, read this recent interview with him that featured in Computing.
A top down approach is essential
What is clear to me from my conversation with Jacob is that the transformation of Allianz is being driven from the top down. This is the Allianz Group CEO’s agenda and, frankly, it’s hard to see how a change of this scale and significance could ever be achieved without it.
Allianz, and all the other enlightened incumbents, may have to deal with the challenge of legacy, but they do have a few positives on their side.
They have a brand and they have customers, a lot of them. They also have capital, a lot of it. By contrast, the startups have some customers, if they’re lucky, and some capital, if they’re good enough. But most have no brand, just a clean sheet of paper!
To get a perspective on innovation from the other end of the spectrum, from a startup that has a brand and customers and capital, I caught up with my friend, the CEO of Trov, Scott Walchek.
Being the first of a kind in a market
In 2016, Trov were first to market globally with their on-demand, micro-duration, single-product insurance protection. Having raised over $97m, Trov have successfully launched and developed their offering in Australia and the UK. Earlier this year, Trov continued their journey and entered the US P&C market in partnership with Munich Re Digital Partners.
Regular followers of mine know that I love Trov. The app is a work of art (up there with Cuvva when it comes to beautiful examples of a mobile app). And I love the whole notion of on-demand insurance, especially when the journey for Trov is complete and insurance becomes automated, intuitive and embedded into my lifestyle.
I first spoke with Scott back in 2015 when I wrote this article about Trov. I remember asking Scott why he had chosen to launch in Australia instead of his home jurisdiction of the United States. It wasn’t obvious to me at the time and I felt it was a question that needed asking. Three years on and the decision to launch down-under, followed by the launch a year later in the UK, looks a wise move.
The reason is simple.
Both Australia and the UK are single regulatory environments. Which makes it a lot easier when you are bringing a first of kind product to market with many lessons to learn. With the benefit of two years’ experience under their belt, Trov are better positioned now to enter the US markets and handle the 50-odd state and federal regulatory bodies.
The innovation take-away here is incremental learning and not biting of more than you can chew.
Answering questions that nobody has asked before
When you’re launching a first-to-market product as Trov have done, you have to answer questions nobody has asked before.
Scott explained it to me like this: “Innovation needs time to mature. When you start out, you trust your conviction and belief that you can do things differently. That change is both possible and wanted. But until you go out into the world and put yourself to the test, you don’t know if you got it right or not. Especially when you are doing something that nobody has done before.
“The big questions for us were; will consumers want to work this way, will they adopt the tech, will they understand it? And let me tell you Rick, you learn pretty quick! Customers let you know very quickly what they do and don’t like. We have been very fortunate to have sympathetic and supportive partners on the journey with us. They understand that we won’t always get it right first time and it takes time to mature.”
Wise words indeed! Here the innovation takeaway is that innovation is a two way street.
Scott continued, “When we started out, the focus for Trov was providing on-demand insurance in micro-durations for single items. Never before has a human been able to turn on insurance for whatever they want and turn it off at will, all applied down to a single second. The key is having the data and the technology to enable this proposition and it has taken us time to learn risk performance and how it impacts our underwriting ability.
“It was critical that we didn’t just focus on customer acquisition alone. It would be no use us striving to reach a million customers if our underwriting couldn’t keep up! We’ve now got micro-duration risk data on over a million items and that’s data we didn’t have when we first started. “
Digital lipstick on the analogue pig
In the early days InsurTech, even before the spelling of this social media hash tag was settled, the majority of tech startups were essentially distribution plays only. Their focus was on digital access to insurance via a mobile app. This is still largely the play for many incumbents hopelessly constrained by legacy.
This focus on the frontend defines InsurTech v1.0. However, the shortcoming of v1.0 is that the underlying insurance product doesn’t change. It doesn’t matter how great a mobile and/or digital experience you create, the customer’s digital experience is constrained by the underlying analogue product.
Which is why Trov have redesigned their underlying insurance policy. This wasn’t a matter of choice for Trov, it was a necessity. When you’re launching the first of a kind insurance product, it goes without saying that you also need a first of a kind insurance policy to go with it!
Scott explained the innovation, “What we’ve done in the US is re-engineer the underlying policy and approach to providing insurance coverage. The traditional approach was a constraint and a limitation to our customer proposition. So we created an innovative insurance policy that is flexible and transparent enough to work with the rigours of on-demand protection.
“Let me give you an example. In Trov, we dynamically revalue the customer’s assets throughout the term. If the value of your iPhone or camera has dropped this month, we reduce the premium to reflect this. The customer can see this adjustment in the app (and their payments) as it happens. We call this ‘Smart Premium’ and it’s a breakthrough in insurance.
“Not only does this benefit the customer with lower premiums, it also helps with the claims process. One of the big battles [between the insured and the insurer] over a claim is the value of items featured in that claim. With our approach, we remove the issue of disputed valuations and enable a good claims experience the for the customer.”
What does the era of innovation look like for the 21st century insurance industry?
Having seen the Trov journey first hand over the past three years, what struck me the most from my latest chat with Scott was how the Trov proposition has matured. The incremental (and IMHO, very well managed) approach to innovation has seen the Trov offering evolve from a single item gadget insurance product to a genuine multi-product, multi-line, soup to nuts insurance platform for both consumer experiences and enterprise partnerships.
|“Trov is the world’s leading on demand insurance platform enabling people to protect anything anywhere for any time”|
And when I spoke with Jacob at Allianz, although the context was very different, the innovation language was very similar. Urgency was tempered with calm, rational, one step at a-time logic. There is no fear of failure because innovation is about learning and adapting, not winners and losers. This is what innovation for the incumbents and the InsurTechs looks like in the 21st century.
“The key driver to achieve genuine disruption in insurance is customisation that meets people’s diverse needs.”
This was taken from this post entitled, ‘How we can rebuild insurance together to make it more accessible and fair’. (A good read if you’re interested by blockchain, distributed ledgers and transforming insurance.)
I certainly agree with the personalisation direction of travel. This will see specialty insurance on a mass-market scale. I also see innovation in insurance achieving the outcome of giving agency to the customer, i.e. taking it out the hands of an intermediary. And, ultimately enabling customers to take ownership of their own risks and requirements.
Innovation in 21st century insurance is going to need new approaches from the incumbents, like Allianz, as well as startups like Trov to challenge the norm. For me, I’ve never seen a big disruptive play in insurance. Instead, I remain convinced that insurance is going to experience a rapid evolution as it catches up in the digital world. The 21st century insurance industry has now entered the era of innovation!
The author Rick Huckstep is Chairman of The Digital Insurer and a keynote speaker, strategic advisor and investor in technology startups