“There are a lot of advantages that legacy carriers have - they just need to remember to leverage them. It's not as if the grass is greener on one side or the other. It's just different grass.”
Technology can be used towards a strategic advantage. In the second of our three-part series, insurance veteran and author of the book series, The Future of Insurance: From Disruption to Evolution, Bryan Falchuk explains why digitization is the way forward.
Do you think changing customer behaviour is the most important reason for an insurer to go digital?
Efficiency reasons have been the primary drivers in the past, certainly on the process side. While operational efficiency in insurance is important, it can't be your priority – and I think we've lost sight of that at times. Quite often, we get into cost reduction mode.
While we should care about the expenses, effort focused on the expense side will yield much less money than the same amount of effort put towards making your loss outcomes better, your underwriting results stronger, or your customer retention higher so that you get improved customer lifetime value.
What would you say to an argument that the legacy insurers have a disincentive to change because of their size and if they are not under financial pressure?
All those things are barriers if you allow them to be, and they are not if you don't.
There is one legacy carrier I know who had many things working against them. They are a state-owned entity so not only do they have the same legacy kind of constraints and weight of other incumbent carriers, but they have actual governmental politics as well, subject to voter preferences and whims, changes in administrations, and they have unionized staff, which very few other carriers, if any, have. That is, they have all the same constraints as their peers, and then some.
Even though they still have a long way to go, when you compare them today to where they were even a few short years ago, and you look at their performance, it really is astounding. And that all boils down to a clear choice they made not to let their constraints constrain them.
I think that is the difference here i.e. do you want to stay actively engaged or do you really want to be asleep and just reap rewards? Because the latter is what retirement is and it’s worth remembering that businesses don't retire.
Competition is coming from different sides. In your opinion, are the insurtech newcomers better at certain things?
Yeah, absolutely – and they are worse at other things.
What is beneficial for the start-ups is because they are starting from this cleaner position, they are going in with a sort of challenger mentality.
There are a lot of things that start-ups lack though. They don't have any of that existing business so if what they are doing does not work out, they have no other leg to stand on. In other words, there are a lot of advantages that legacy carriers have – they just need to remember to leverage them. It's not as if the grass is greener on one side or the other. It's just different grass.
Do the newcomers tend to hire more people who have interdisciplinary skill sets, are they more technologically inclined, more analytics focused?
I haven't seen a clear answer to that yet because everyone I talked to sort of has a different position on that.
A start-up will quite often hire product managers with zero experience in the space who are just smart, curious and often have a consulting mindset i.e. let's structure the problem and then go about tackling it. So they will try to figure out how to price for risks a legacy carrier would never consider because they never considered them in the past. Consultants and engineers tend to look at novel or difficult situations that may seem impossible as just being impossible right now. That’s the mentality I tend to see consistently at start-ups.
Whereas for a traditional carrier, because of all the institutions in place, and the similar training that a lot of people have had, you're less likely to be open to ideas that are a break from what you’ve historically done. It takes the right mindset to be willing to explore that.
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Part One of our interview with Bryan Falchuk