Buying insurance? There's an app for that

As Bob Dylan so eloquently crooned, "The times they are achangin'."

When it comes to the insurance marketplace, the lyric certainlyrings true. And that is because tech innovators, who have targetedthe insurance industry for disruption, are changing the way peopleaccess and purchase coverage.

A mash-up of "insurance" and "technology," InsurTech ispenetrating the insurance space with smartphone apps, wearables,claim acceleration tools, tailor-made policies, social insurance,online claims handling and more. In so doing,InsurTech companies are seeking to price products morecompetitively by approaching data and analysis in ways traditionalinsurers — and their actuarial tables — do not.For instance, by accessing information made available with GPStrackers (automobiles) and activity trackers (you and I),disrupters are able to evaluate risk in a manner previouslyunthinkable.

Lemonade

In an industry seemingly resistant to such innovation, theadvances are rather exciting. Take, for example, Lemonade, a property and casualty insurerleveraging technology — and philanthropy — tobreak the "business-as-usual" mold.

Lemonade is a startup offering renters, condo and homeownersinsurance in New York, New Jersey and California, and rentersinsurance in Illinois (homeowners and condo coming soon). Thecompany, which plans to roll out in additional states in the comingyear, has an approach to the insurance business that is certainlyunique: it sells policies and processes claims through iOS andAndroid apps and its website. No phone calls and no producers; thisis not your father's insurance company. Broadly, Lemonade takes afixed fee out of insureds' monthly payments, pays reinsurance andother expenses, and uses remaining proceeds to pay out claims.

With a business model based, in part, on charitable giving,Lemonade donates monies leftover each year to causes policyholderscare about. The rationale behind this paradigm is the eliminationof any conflict with customers all the while promoting societalgood — a formula that will surely resonate withmillennials most likely to purchase coverage with a mobile device.Lemonade also seeks to minimize fraud by encouraging policyholdersto view excessive claims as taking from charity rather than from afaceless insurance company.

Metromile

Another InsurTech firm worth a nod is Metromile, a Silicon Valley startup transformingthe way auto insurance is provided by charging per mile. Asmall, free wireless device called Metromile Pulse enables thisbilling model, which benefits low-mileage drivers. The MetromilePulse easily plugs into a car's OBD-II port and counts miles todetermine a driver's monthly bill.

The innovation goes beyond premium pricing. The Metromile Pulsealso captures data about trips taken and the health of the carsbeing monitored, all of which is displayed via the Metromile app,which informs Metromile's insureds about the money they spend ongas, driving distances and vehicle location (no more lost cars).Metromile also recently released AVA, an artificial intelligentclaims assistant that accurately verifies claims in seconds andpromptly resolves them. No doubt, in the age of Uber and connectedcars, when people — particularly millennials— are driving less and less, Metromile's novel approach tocoverage is sure to gain traction.

There's a lot more to it than building an app

The advances and early successes of companies like Lemonade andMetromile are certainly noteworthy, but for those seeking to followsuit, entry into the insurance marketplace is not as simple ascreating a web presence or building an app. Insurance is a highlyregulated industry, requiring licensing to do business and a rangeof state-specific statutory compliance. That being said,traditional insurers or entrepreneurs hoping to transact insuranceonline or by way of apps must understand the regulatory issues tobe confronted — obstacles that may not be insurmountable,but are nonetheless significant.

Continue on for an overview aimed at would-be players in theInsurTech revolution…

Tech innovators who have targeted the insurance industry fordisruption are changing the way people access and purchasecoverage. (Photo: iStock)

Licensing and regulation

To lawfully sell insurance products or services, an insurer orinsurance-related business must be licensed pursuant to laws (as codified in Insurance Codes)that vary state-by-state. This not only applies to traditionalinsurance companies, but also to InsurTech firms. There is more.Entities in the insurance business are bound by the (sometimescomplex) web of regulations of their respective states of domicileand in all other states where they operate. Companies that fail tocomply with these licensing and regulatory requirements do so attheir peril, with cease and desist orders, fines and/or licensesuspension or revocation the likely result.

Those seeking to place policies by way of apps and the like mustrealize that insurance agents and brokers are subject to alicensing mandate too, and they must adhere to state laws and aregulatory framework that govern their pursuits. Indeed, stateinsurance departments do not look favorably upon unlicensedactivity (read, the sale, solicitation, or negotiation ofinsurance), which is amongst their major focus in terms ofcompliance. And like insurance companies, producers that do notobserve applicable regulations may be fined or worse— licenses can be lost.

Entrants into the InsurTech arena should understandthat insurance policies, and the provisions they include, need becompliant with state regulations as well. On a state-by-statebasis, they are subject to rate reviews, rulings and approvaldesigned to protect consumers and ensure that coverage is adequate,fair and reasonable. Likewise, the insurers issuing such coverage(InsurTech companies included) are regulated in terms of theirfinancial standing, and must undergo periodic financial examinationby state examiners. These insurance department officialsinvestigate accounting methods, procedures and financial statementpresentation. Should it be determined that an insurance company isin financial trouble, operations could be taken over by thestate.

Compensation

To the extent InsurTech firms seeks to circumvent thetried-and-true broker/agent model of insurance sales,compensation issues arise. For instance, in a few states,commissions cannot be shared with unlicensed individuals andreferral fees cannot be paid, while in many other jurisdictions,commission sharing with unlicensed persons and the payment ofreferral fees are permitted under certain circumstances (thoughthere is no consistency to the dollar amounts allowed).Consequently, InsurTech executives and incumbent insurersdipping their toes into the InsurTech waters must takeinto account the varied state-specific compensation rules.Prohibitions against rebates paid to consumers or prospectiveinsurance purchasers (anti-rebating laws) should also befront-of-mind.

The InsurTech business is largely driven by big(consumer) data. As such, the regulation of compensation (andrelated disclosure requirements) in the insurance industry is ofparticular concern for burgeoning InsurTech firms,especially where the activity of unlicensed third-partyparticipants in the data chain (those expecting to be compensated)can possibly be characterized as the sale, solicitation, ornegotiation of insurance.

Regulations aside…

Along with industry disruption comes a shift in consumerexpectations and demands. And with an array of coverage andpurchasing options fast becoming available with a few taps on asmartphone, insurance customers — tech savvy,price conscious and conditioned for instant gratification— are ready for InsurTech to transform insuranceas we know it. Nonetheless, while the traditional insurancebusiness model may be in flux, the state-specific laws andregulations governing the space are here to stay. Which promptsthis message to the developing InsurTech sector:innovators, the comprehensive rules of insurance apply to youtoo.

Mark B. Robinson is founding partner of Michelman &Robinson, LLP, and an insurance industry specialist who primarilyrepresents retail brokers and agents in all aspects of theirbusinesses. He can be contacted at 310-564-2670 or [email protected].

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