Changing insurance – pushing a plodding giant

Written by Min Fang

New regulations, shifting demographics, and advances in technology are accelerating change in the insurance industry. Story by Min Fang.

When you think of insurance, you’re probably not thinking about a vast industry that accounts for 7% of US GDP. In fact, you’re probably not thinking about insurance at all until something bad happens: your car breaks down, your bathroom floods, or you need a new prescription.

Consumers interact less with insurers than they do other major service providers, and when they do, dissatisfaction is high, particularly when the interaction occurs online. Because the vast majority of insurers’ business comes through brokers, they rarely interact directly with the end user of their product. In a sense, many insurers have become B2B companies; more comfortable serving their agent sales force than consumers. As a result, they have been slow to innovate and address issues relating to the end user.

People who are happy with their service provider. Source: Morgan Stanley/BCG Global Consumer Survey 2014, BCG e-intensity index, Morgan Stanley Research

For many years, this was business as usual. The multi-trillion-dollar industry remained relatively overlooked by startups and early stage investors due to its highly regulated nature and large capital requirements. Mark Wilson, CEO of $30bn insurer Aviva, put it well when he said:

I think insurance is in the Stone Age while other people are circling Mars.

However, new regulations, shifting demographics, and advances in technology are accelerating change in the once plodding industry.


Regulation, namely the Affordable Care Act (ACA) signed in 2010, has shaken up the health insurance industry and attracted a host of entrepreneurs focused on different parts of the value chain. Startups are delivering new employer brokerage models (Liazon, Zenefits), consumer brokerage models (Stride Health, Gravie), and pure play health insurance (Oscar Health). In fact, since 2010, the majority of insurance tech startups have been healthcare-focused.

Health insurance startups are entering an industry caught in the shifting dynamic between employers and employees. The number of workers covered by employer-sponsored health insurance at small and medium businesses has steadily decreased over the past 15 years. This trend is driven by several factors including:

The typical worker today is more expensive to cover, more temporary, and may not even be a full-time employee. Is it any wonder employers are pulling back sponsored coverage? Taking advantage of the new regulatory landscape, startups have launched innovative offerings. Oscar Health, for instance, offers insurance to individuals through the ACA’s health insurance exchanges. Unconstrained by industry habits or legacy systems, Oscar’s plans leverage big data analytics, IoT connected devices, and seamless UX. The startup is approaching every area of the business model with fresh eyes, including customer acquisition, user experience, and underwriting.


Shifting demographics are driving change in several areas of insurance, including user needs. Most millennials prefer renting homes or cars vs owning them. This has led to the swift adoption of the sharing economy, fueling the incredible growth of businesses such as Uber and Airbnb. The success of these business models portends a need for new types of insurance. Insuring homes used for Airbnb stays, vehicles switching between ride-sharing and personal use, and the health of individual freelance workers are all rapidly growing needs that lack well-suited insurance coverage.

Freelancers as a percentage of the US workforce. Source: General Accountability Office, Freelancers Union, Intuit 2020 Report.

Shifting demographics, in confluence with technology, are also placing the existing insurance customer acquisition model under duress. Most property and casualty insurance is still sold by an agent in person or over the phone. According to McKinsey, the average insurance agent is 59 years old, and a quarter are expected to retire by 2018. Reaching millennials and younger demographics with this antiquated sales model has proven challenging. Only 1 in 20 millennials consider themselves very familiar with the concept of insurance. Purchasing patterns also indicate that millennials are much less covered than older generations.

Seeing the opportunity, a host of innovative startups have emerged focused on customer acquisition for traditional insurers, including PolicyGenius, CoverHound, and The Zebra. Wharton’s own Bungalow, winner of the 2015 Wharton Business Plan Competition, focuses on the underserved renters insurance market. These startups use technology to create innovative customer acquisition models, ones that resonate with millennials, funneling these customers to their insurance carrier partners. However, despite the attention of these new, tech-enabled brokers, insurers are plagued by ageing technology and are slow to change, and therefore have largely failed to provide the experience millennial customers desire.


New technology is also being leveraged to improve insurance underwriting. The growing capabilities and prevalence of the Internet of Things (IoT) will drive major changes in insurers’ risk models. Relatively inexpensive, connected monitoring devices (for home, health, or auto) can provide a much more accurate assessment of risk and will reduce asymmetric information that has forced individuals in the past to pay differently than their risk profile might warrant. Automobile telematics such as Progressive’s Snapshot is the most well developed example of insurers using IoT devices to improve pricing. By combining a GPS with onboard diagnostics, it’s possible to record and analyze driving behavior in real-time, giving discounts to safe drivers.

Oscar Health wearableWearable devices are already in use in health insurance. Oscar Health partnered with wearables maker Misfit to link customer biometric information directly to their health insurance. Oscar customers receive a Misfit fitness tracker for free, and each day that the wearer hits a target number of steps taken, they earn a small amount of money, culminating in a $20 Amazon gift card. The logic here is obvious: an active customer is healthier, and a healthier customer is more profitable for Oscar.

Wearables can also collect a slew of more detailed data, including stress levels, cardiovascular health, and nutrition in real-time. In addition, these devices provide a new and different marketing angle for Oscar, who strives to differentiate itself from more conventional providers in the eyes of millennials. This level of access sparks privacy concerns for some. However, by making programs opt-in and incentive-based, customers can choose the amount of information they wish to share. In fact, being able to price more accurately may entice healthier individuals to sign up for insurance, bringing average premiums down across the entire risk pool.

An inflection point

Unsurprisingly, venture and corporate investors are pouring capital into the insurance space. VCs recognize the enormous addressable market. Insurance carriers recognize how much they stand to lose if they don’t adapt. Recently, carriers have tried to address the changing environment by dramatically increasing strategic investments in early stage companies. Total Seed and Series A funding to insurance tech startups through October 2015 alone increased ~250% over all of 2013.

Corporate insurance tech startup investment trend. Source: CB Insights

What does all this mean for ambitious founders? At almost every link of the value chain there exist opportunities for insurance technology startups. The digitization of distribution, operations, and underwriting is critical for insurers to remain competitive. This will come internally and externally through M&A and partnerships. Like the insurance industry itself, the prizes to the winners who meet these needs will be giant.

 Thanks to Zack Stiefler, Matthew Applegate, and Coby Powers.

– This article is reproduced with kind permission. Some minor changes have been made to reflect BankNXT style considerations. You can read the original article here. Main image: Alberto Loyo, Shutterstock

About the author

Min Fang

Min Fang is co-founder of Harper, a financial services firm built for the digital industry that company provides innovative working capital and liquidity solutions to digital startups, agencies, publishers, and creators. He is a contributor to the Wharton FinTech blog.

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