Like many legacy markets poised for change, the insurance industry has already undergone its first wave of innovation. Equivalent 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 providing customers with 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 like some might have flown a little too close to the sun instead: focusing on customer experience in the front end leads to rapid growth indeed, but failing to focus on underwriting in the back end can lead to rapid claims. 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. The ability to embed insurance in other digital journeys, creating a value-added experience for consumers, partners, and insurtechs alike.
By focusing first on growth and second on underwriting, the Insurtech 1.0 wave essentially flowed in the wrong direction. But there is plenty of time to reverse the tide, as consumers’ enormous appetite for convenient, modern insurance products has only been whet.
The Insurtech 2.0 Playbook: Getting Back to Fundamentals
So what does focusing on next-generation underwriting really look like, and how should you build upon it? Here’s our 5-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 out 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 hold-outs and post-issue audits are great tools for continuous recalibration. Eventually, you’ll have enough data to harness machine learning and uncover new ways to understand and segment the risk. Proceed with careful and methodical steps, all along tracking your actual to expected claims ratio closely.
This process can take years, depending on the insurance vertical. Set expectations right 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.
Done right, real-time underwriting powers a fast, digital, 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 further helps you compete in the market. Last, but not least, years of proving out good underwriting outcomes is key to building out trust with reinsurance partners, who will thus 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 with a better price means a stronger 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 confidently scale, thus activating 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 $5.4B this year, and is expected to expand north of $152B over the next 8 years. An increasing number of companies in insurance-adjacent industries (including banking, benefits, financial planning, etc.) are taking advantage of this trend and partnering with insurtechs to embed insurance right in their platforms.
At the end of the day, partners care about your ability to give their customers both a great experience and great prices. They also want to know you’re built for the long-term. That means winning the embedded space also starts with (you guessed it) digital, proven, next-generation underwriting that partners can easily plug into.
The Collective Step Forward
Insurtech 1.0 opened the door. It demonstrated that consumers want their insurance to keep pace with every other aspect of their lives. But insurtech companies need to keep pace with the demand they created, too, 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. We call it Insurtech 2.0.
This article was originally published on June 9, 2022 on Forbes.
