Technology Adoption: Risk or Reward?

The independent agency channel is doing quite well in today’s economy. According to Labor Department Statistics, total employment within the U.S. insurance sector has recovered very nicely since the Great Recession, reaching over 2.6 million jobs. The unemployment rate has also fallen dramatically from a high in 2010 of 8.4% to just 2% today. So everything is great in the insurance industry – revenues are rising, profits are up, more people are employed, and more organizations want to buy an agency or brokerage at higher prices than ever before. So what’s the problem with that picture?

Well, it’s pure and simple economics – success in an industry breeds new entrants. When you have rising revenues, rising profits and improving valuations, new firms will be created to get a piece of that party. And these new firms may not always take the same form as existing providers. The ability to start from scratch provides the freedom to rethink the operation in its entirety.

Over the last few years, we have seen growing interest in our industry by the technology startup community. This interest has grown so much that there is now a word for it: InsurTech. These new firms profess to be here to disrupt the way insurance is bought, sold and serviced, using technology to change the way customers interact with their providers. So what does all this investment in InsurTech mean for our industry? I believe it depends on how each of us reacts to these new firms and the digital transformation of insurance.

Making the case for digital transformation

As a history buff, one thing that I always do is look to the past for guidance. If we examine how other industries have reacted to digital transformation, you will find that, in general, there have been two primary reactions. Existing industries have either ignored digital transformation, most often to their peril, or they have embraced it, most often to great success despite the fear of change. Let’s look at two different examples to examine the impact digital transformation can have on your business’ long-term success.

Uber verses Taxi
As we all know, Uber has taken the world by storm, materially impacting the taxi industry in the process. Over just a two year period, ride sharing services stole 28% of market share from yellow taxis in NYC. This market share trend is well known, but few have discussed Uber’s impact on valuations for the owners of taxis. In NYC, each taxi is licensed through the city via a medallion. The owner of the taxi owns the medallion and can sell it to others or pass it down in his family through perpetuation. In April of last year, a NYC medallion sold for $241,000, down from $1.3 million in 2013. That is an 81% reduction in value in only four years.

This did not have to happen to the taxi industry. They were highly advantaged compared to Uber in the beginning – they had the fleet of cars, the drivers, the customer database, and frankly, regulation on their side. However, they never adopted technology that was available to them to improve the customer experience. How many taxis still – today – don’t take credit cards? How many taxis still – today – have to be ordered via phone instead of an app? It didn’t have to be this way, but the taxi industry did not digitally transform as these tools became available – they allowed others to do it for them.

Financial Institutions
Now let’s shift to discuss an industry that has embraced digital transformation and it’s an industry that is much closer to the world of insurance – financial institutions. In the 1990s, new venture-backed firms began to emerge, utilizing the internet to improve servicing for both banking and wealth management customers. Many thought that these new, online only firms would usher in the beginning of the end for the existing financial institutions. But what happened next is very different than the taxi example.

The banks didn’t sit still – they invested in the same technology that the online banks were based upon. They launched online customer portals and trading platforms. They offered apps to allow customers the choice of skipping the branch to deposit a check or view account balances. The new entrants initially offered something new, but rather quickly, the existing industry matched those innovations. In reality, the incumbent banks actually leapfrogged the FinTech startups by combining new digital tools with their strong branch networks and long history of service. The key difference in the approach of the banks as compared to that of the taxi industry is that they embraced digital transformation, rather than ignored it

So what does all of this mean for the insurance industry?

Most people view InsurTechs as a threat. In fact, according to PwC more than half of global insurers believe that 20% of their revenue is threatened by InsurTech. However, InsurTech is a large opportunity for each of you. The history of digital transformation informs us that those that move swiftly to innovate, to adopt technology, to advance customer experience are the ones that fare the best, that actually enhance revenue growth and profitability. The question now is, will we embrace the digital transformation of insurance or will we ignore it? In order to embrace digital transformation – to future proof your agency – you must become a digital agency.

Being digital agency provides your organization more time to focus on advice and selling, not transaction processing. Each of you are risk advisors, you are here to help your customers mitigate risk, to protect a lifetime of effort and an organization’s most precious assets. If your agency spends all of its time on transactions, you are not focused on the core value of your organization – advice. A recent survey by the Big I indicated that nearly 40% of respondents admitted that they had never done any research prior to purchasing an insurance policy. Your customers need you now more than ever – make sure that your technology supports the time for advice.

Step into the Digital Age

At times, technology investment has been viewed as a risk – it costs money, involves process change, and sometimes it doesn’t work out. In today’s environment, I think that calculus is changing. With the growth of InsurTechs and rising consumer expectations, I would argue that technology inaction is more of a risk than technology adoption. Mark Zuckerberg of Facebook says it best, “The biggest risk, in fact, is not taking any risk. In a world that is changing really quickly, the only strategy that is guaranteed to fail is not taking risks.” Hedge risk by becoming a digital agency.

Best Practices, 2018, Industry Trends