One of the things venture capitalists are good at — when they are not funding and driving innovation — is blogging. Those VC guys really like a good blog, and VC blogs are a good place to read about insurance, as the combination of fresh thinking on stale technology is hard to resist.
Hacker Daily is one such blog worth checking out. It talks about any and all industries from an innovative and entrepreneurial perspective, including (from time to time) insurance. Last month, Josh Nussbaum wrote a post about the art of predicting how successful a successful investment might be. One of the industries he used for his study was insurance (along with healthcare, and a bunch of other stuff), and it’s worth a look at what he had to say about it.
Here is his paragraph on insurance:
Insurance — Similarly to healthcare, legacy underwriting models were designed for a different time where across all insurance products, risks were statistically modeled based on a variety of factors. Given the whole supercomputer in our pockets point mentioned above, data collected from online and offline interactions provides a massive opportunity for new underwriting, pricing, and products tailored towards our lives today vs. 50–100 years ago. It won’t happen overnight as traditional insurance companies aren’t yet equipped to handle all of this data and it doesn’t make sense for them to completely change their models either. While today many startups are attempting to shift the paradigm and start their own insurance companies (through a Managing General Agent model), eventually legacy insurance companies will see these threats and realize that it behooves them to build out the necessary infrastructure that allows them to buy, integrate and build the right technology tools and services to continue their decades-long dominance. At the same time, access to new data points and new behaviors offers the opportunity for new insurance products vs. past all-encompassing products.
Let’s unpack that a little bit:
- His conclusion “…legacy underwriting models were designed for a different time" is refreshing and accurate. It’s not just that underwriting systems are still sometimes green-screened relics, but the actual art of underwriting has changed in the past decades as more and more information has become available and usable. If you could give underwriters from 1986 and from 2016 the same tools, they would use them differently and come up with different results. This is a very important point.
- Collected data “…provides a massive opportunity for new underwriting, pricing, and products tailored towards our lives today vs. 50–100 years ago.” There are actually two opportunities here: to create new insurance products and to deliver the necessary technology to insurers so they can do it. While comparing our lives to those of 100 years ago is a bit hyperbolic, there is some merit. For example, one of the reasons hurricane is one of the few standard catastrophic perils on homeowner’s insurance is that when it was introduced in the 1930s it mostly impacted the barely-populated Florida coast (!).
- Josh’s message that “…legacy insurance companies will see [the threat of startups] and realize that it behooves them to build out the necessary infrastructure that allows them to buy, integrate and build the right technology” is self-evident. However, it’s worth pointing out that Josh is not calling the insurance systems “legacy”, but rather the whole insurance company! And he is right, because at the most general level an insurance company is not much more than their underwriting. If a company’s underwriting is archaic, the company is archaic.
To paraphrase Josh, the Future of Insurance Underwriting Software is Now!