Like many legacy markets poised for change, the insurance industry has already seen its first wave of innovation.
Similar in many ways to the initial novelty of opening a bank account online, insurtech 1.0 brought a centuries-old product into the digital era by giving customers a way to apply for insurance online. Customer excitement translated into investor excitement, and everybody rode off into the sunset.
Well, not quite. It seems some might have flown a little too close to the sun instead: Focusing on customer experience on the front end leads to rapid growth indeed, but failing to focus on underwriting on the back end can lead to a very large number of claims, very quickly.
That’s because insurance, fundamentally, is about risk. It follows that digital insurance innovation should primarily focus on digital underwriting innovation — in essence, using technology to correctly assess and price risk in real time.
The truly magical (and most misunderstood) fact is that everything else can simply flow from that innovative underwriting foundation: an instant, digital customer experience, sustainable growth unburdened by excessive claims and the ability to embed insurance in other digital journeys, creating better experiences for consumer, partners and insurtechs alike.
By focusing first on growth and then on underwriting, the insurtech 1.0 wave essentially flowed in the wrong direction. But there is plenty of time to reverse the tide — consumers’ enormous appetite for convenient, modern insurance products has only been whet.
So what does focusing on next-generation underwriting really look like, and how should you build upon it? Here’s our five-step playbook for winning in the insurtech 2.0 era.
Realign your business around underwriting excellence
Refocusing on underwriting innovation starts with refocusing your business.
Ask yourself the following questions:
- Do your primary KPIs include ways to measure underwriting outcomes alongside traditional growth metrics?
- Do a majority of your employees work on underwriting directly or indirectly?
- Do your company goals include explicit underwriting goals?
- Can all your employees articulate how/why underwriting is a differentiator at your company?
If you’ve answered no to one or more questions, it might be worth rethinking your goals, metrics and organizational structure.
Prove your models
Nobody likes to qualify growth, but in insurtech, smart growth is the name of the game. Resist the urge to rapidly scale acquisition before you’ve built confidence in your underwriting engine. But how do you do that?
Incumbents, for all their digital shortcomings, have accumulated years of risk data that provide technology companies with an excellent benchmark. Initially, the goal should be for your underwriting to consistently predict those tried and true underwriting incomes.
That’s easier said than done. Practicing systematic holdouts and post-issue audits are great ways to continuously recalibrate. Eventually, you’ll have enough data to harness machine learning and uncover new ways to understand and segment the risk. Proceed carefully and methodically while tracking your actual to expected claims ratio closely.
This process can take years depending on the insurance vertical. Set your expectations, and arm yourself with patience and discipline: You are building the foundation of a giant.
Build upon your foundation
With your proven, next-generation underwriting engine in hand, you can start pushing the customer experience and product innovation sides of the agenda.
When executed well, real-time underwriting powers a fast and delightful experience. It’s time to unleash your designers to iterate on a beautiful UI around it.
Well-assessed risk can also enable you to offer customers a better price, which helps you better compete in the market. Last, but not least, years of proving good underwriting outcomes is key to building trust with reinsurance partners, who will be more inclined to support new product features and initiatives.
Unleash direct growth
At this stage, your underwriting should have helped you achieve two fundamental things:
- Good unit economics: A better experience at a lower price will give you the ability to compete and win over customers, bringing CAC down. But digital underwriting also has the advantage of connecting directly to your digital marketing, enabling you to pass back signals in real time and optimize acquisition based on underwriting conversion paths.
- Good risk: By systematically demonstrating you’re matching (and even outperforming) benchmarks for underwriting decisions, as well as tracking good actual to expected claims.
This combination means you can scale confidently and activate the virtuous insurtech flywheel: More customers, more data, better product, more customers, and so on.
Expand by offering insurance as a service
The insurtech industry is on track to reach $5.45 billion this year, and is expected to grow to over $152 billion over the next eight years. An increasing number of companies in insurance-adjacent industries, including banking, benefits and financial planning, are taking advantage of this trend and partnering with insurtechs to embed insurance into their platforms.
At the end of the day, partners care about your ability to give their customers a great experience and a great price. They also want to know you’re built for the long term. That means winning the embedded space also starts with digital, proven, next-generation underwriting that partners can easily plug in to.
The collective step forward
Insurtech 1.0 opened the door. It showed us that consumers want their insurance to keep pace with every other aspect of their lives. But insurtech companies first need to keep pace with the demand they have created through sustainable unit economics and wise risk management.
A new collective step is required, one that puts the “insurance” back in “insurtech” through digital underwriting innovation.
The original version of this article was published on May 13, 2022 in TechCrunch.
