InsurTech will change the way insurance is distributed, underwritten and processed.
Underwriting and processing automation is well under way and the positive impacts are evident. The use of InsurTech initiatives are prevalent in commodity-based products such as automobile or renters' insurance.
The more complex coverages have not as yet been disrupted, largely because they are complex and the consumer needs an independent insurance advisor. Noting this, new InsurTech initiatives in the distribution sector will focus on how to deliver products from the insurer to the agent in a smarter, more direct manner.
Underwriters are ultimately going to reduce acquisition expenses by using InsurTech-enabled distribution, which will allow them to offer the consumer a lower premium. The end result will be a win-win: a net premium reduction for the insured and an increase in profits for the insurance company.
Technology's win-win
The property & casualty insurance industry has the highest distribution expense of almost any financial services industry, or for that matter, any industry. With distribution expenses as high as 32% in the specialty insurance sector, you can be assured technologically capable millennials are going to connect with some savvy grey-haired insurance folks to come up with a better mousetrap. There are already plans under way to reformat distribution.
Significant disruption in insurance distribution is imminent. Here is why:
- Insurer CEOs are determined to reduce distribution costs.
- Insurance technology effectiveness is increasing exponentially.
- InsurTech is real. The Number 1 target: distribution.
Some of the most powerful insurance company CEOs are working on ways to reduce commission expenses. Most of these plans result in cutting out someone in the chain of distribution. Generalist wholesalers and Lloyd's brokers will probably bear the brunt of the first wave of distribution changes in the evolving InsurTech world. Why would an agent go to a generalist wholesale broker to get a specialty quote if there is a platform that leads the agent directly to the managing general agent or insurer? Pre-InsurTech, the wholesaler was the only way a retailer could easily access specialty markets. That is changing.
Efficiency is the name of the game
The power of enhanced automation for underwriting, distribution and processing has greatly increased the efficiency and profitability of insurers. Without it, insurers could never offer today's rates. Efficiency will continue to improve and reduce expense loads, which will reduce rates. If losses prevail, rates will need to change. With all things being equal, an insurer can offer lower rates on a book of business that had a 60% loss ratio in 2005 versus today because InsurTech initiatives have reduced their expense load.
Commission is one of the few constant variables of expenses. InsurTech is now focusing on distribution. We have been on the leading edge of creativity in distribution since our launch in 2000 as a "dot com" enabled distribution exchange. Even then, when many investors felt the internet would disrupt distribution, we didn't believe it. But now, we do. The new concepts offered today are real — and scary.
Richard Kerr is chairman and CEO of MarketScout, based in Dallas, Texas. The opinions expressed here are the writer's own. He can be reached by sending email to rkerr@marketscout.com.
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