Reimagining Life Insurance: A Thought Experiment
This article appeared at Insurance Thought Leadership, 1 Nov 2017
As 21st-century consumers, we are fully aware of the trends which shape and change the way we interact with the world. Although there are stark differences in the way, say, a Millennial interacts with the world from that of a Baby Boomer, the themes are the same. Digitalization, business model disruption, mobile technology, and process automation are some of the trends we have all become conditioned to. Advances in artificial intelligence, sensor technology, robotics, and genomics are some of the forces which are likely to shape our future environment.
Perhaps due to regulatory hurdles, perhaps due to complexity in the sales and new business processing transaction, or perhaps due to the long-term nature of the policyholder-insurer relationship, the life insurance industry has remained somewhat insulated from these forces of change. Whereas other industries have been disrupted head-on by startups, much of the InsureTech traction has been gained by new entrants modernizing aspects of the value chain, rather than overhauling the product or business model, as a whole.
Recently, venture funding has begun to find its way to the types of companies that can now threaten life insurance as we know it. Lemonade, Policy Genius, Fabric, and Ladder are a few examples of companies attempting to re-shape the entire industry. Common among these startups is the fact that none are anchored down by legacy systems, or held to strict ROI hurdles on new investments. They have the freedom and flexibility to redesign the policyholder-insurer relationship to fit the needs of the policyholder, rather than the needs of a distribution channel or administrative system. Even if large insurers want to be the change catalysts, internal efforts to disrupt, or cannibalize, entrenched business models are not likely to pass through the risk management controls that these insurers have in place.
So, what is the large, entrenched incumbent to do? The controls which traditionally inhibit radical innovation from occurring in an organization are strong, but they can be circumvented. The cheapest and quickest way to reimagine life insurance from within the walls of a behemoth, is to do just that: re-imagine. There is no risk, nor hard cost, to imagination, and the simple exercise of “Design Thinking applied to Life Insurance Risk” can uncover the likely traits that the inevitable disruptor is likely to possess. Here, we’ll take you through a simplified example of how to conduct such an exercise by examining the framework (Design Thinking) and the customer need (Life Insurance Risk), then layering in relevant Consumer Trends to make a prediction of what The Future of life insurance might be.
Innovation has grown to become a highly technical discipline, which has spawned rigorous post-graduate programs. The underlying mechanisms of innovation, however, are simple and unchanging, despite countless volumes published on the “proper” or “best” way to innovate. The emergent discipline of Design Thinking does an excellent job of keeping tried-and-tested innovation mechanisms at its core, without over-emphasis on process or creativity.
Design Thinking maintains the principles that smart solution design is human-centric and ambiguous. Restated, it says that by understanding changes in the consumer’s point of view, we can employ limitless creativity to reimagine any product. Innovation should begin with empathy for the consumer (and in the case of life insurance, the distributor), then seek to match expertly-designed solutions to the problems or needs that the consumers are facing.
A great starting point for our thought experiment is to empathize with the end consumer. Market research companies will charge tens of thousands of dollars to help you do this, but it may be just as effective to simply remove oneself from the paradigm that an insurance professional lives in, and to imagine oneself as the 21st-century consumer that you are. Then, answer a set of hypothetical questions to uncover their paradigm.
How do they see the world? What are their expectations when purchasing products or interacting with companies? How are these expectations changing? How do they view life insurance? How do they manage the risks associated with death?
Life Insurance Risk
In the empathy exercise described above, the line of questioning you would follow to get a rich understanding of the consumer’s point of view is likely to lead you to an exploration of how consumers think about, plan for, and deal with death.
It’s somewhat obvious that the average consumer’s relationship to risks associated with death has changed substantially over the past few generations. It wasn’t long ago that there was a very real risk of a factory worker, as primary wage earner, not coming home at the end of the day, having suffered a fatal accident at the workplace. Additionally, many chronic and critical illnesses that were once almost certainly fatal have become manageable with modern advances in medicine. This has led to a substantial improvement in life expectancy, which, for the consumer, means that the incidence of death risk has become very low in their lives.
Further, with the reduction in the incidence of death in early life, the impact of death on families has changed. Consumers do not live as much with the acute fear of the death of a wage earner as they do with the fear of accumulating insurmountable medical expenses associated with accidents or chronic conditions. Coinciding with that is a notable shift in the complexity associated with dealing with accidents or chronic conditions. Family members caring for loved ones are often left to negotiate through treatment options, financial obligations, and legal matters all on their own. The empathy exercise shows that the risks associated with death, despite how an insurance professional may be conditioned to behave, are not wholly financial. While we all know this to be true, it is easy to for the insurer to lose this perspective, and thus lack empathy for its policyholders.
What’s particularly interesting, especially in the case of term life insurance providers, is that the insurers have a vested interest in helping these families extend the lives of their policyholders, but their products and processes do not reflect this. Traditional controls such as reducing liability risk exposure have probably prevented insurers from becoming the consumer advocate. Shouldn’t the life insurer play the role of the advocate for the consumer in negotiating these complex processes associated with life insurance risk? It is these types of insights that deep consumer empathy can yield.
Having explored the consumers point of view, it’s important next to understand the context that dictates consumer behavior, or the way they interact with the world. In relation to life insurance risk, consumers have experienced many, many years of continuous reinforcement that an insurance contract is a paper one, brokered by an employer or agent. This may have served to maintain the insurance industry status quo, but insurers must be aware that the gravestones are plentiful of companies who believed that their consumers would continue to behave the same way, despite changes in their environment.
Let’s define Consumer Trends as the patterns which impact the way that consumers interact with the world. These can be technologies, lifestyles, popular influences, scientific advances, and marketplace dynamics, among other things, which all define the environment in which consumers live, and those they are moving to. For each we identify, we should ask critical questions about the implications of such a trend to the life insurance business model.
While it would be exhausting to list all the trends impacting life insurance consumer context, it’s worth considering some notable ones:
- Longevity - As explored above, advances in medicine and genomics are improving longevity to levels previously thought impossible. Can improvements in longevity be factored into product design?
- Crowdsourcing - Social media and associated technologies now allow consumers to use “the crowd” to appeal for support such as funding for medical procedures or funerals. To what extent is this emerging trend offsetting the need for a fixed financial benefit from life insurance?
- Sensor Technology - mobile apps, wearables, and the “Internet of Things” (IOT) are allowing consumers to gain immediate feedback on their health and wellbeing. This may lead to situations where consumers know more about their health than their doctors, and subsequently, life insurance underwriters. What is the implication of sensor technology on product design?
It may be worthwhile to bring in experts with varying perspectives into this step, such as experts in new technology, or to simply observe consumers in their natural environment and note how their habits might be affected by trends.
Once the above steps are complete, the final step is to assemble the consumer insights and trend analyses into a hypothesis, or set of hypotheses, for how the solution of life insurance risk management might change. We will leave it up to the reader’s creativity to imagine the ways in which particular traits of the business model are likely to change. Given the pace of change in the world today, conducting this type of design exercise regularly, or with a varying mix of perspectives, will yield new and different insights each time.
What we can learn from this exercise is that there certainly is opportunity for insurers to rethink the value proposition of a life insurance contract. The data assembled above points to a need for insurers to reimagine the fundamental relationship between the policyholder and the company.
What we can’t know is the exact nature of the eventual disruptor, or if the disruptor gains any sort of first-mover advantage. Large insurance companies, however, can make a reasonable prediction as to what the disruptor might look like, and can begin to prepare themselves for the eventualities.
The boldest insurance companies may attempt to become the disruptor, while the slightly less bold may seek to acquire companies that align with their predictions.
More cautious companies can still participate in the change, maybe by investing in startups through venture funds, or partnering with accelerators or universities.
Of course, many will decide to keep their heads in the sand and ignore all the signs. They may cite risk aversion as a reason to not invest in innovation or disruption, but will ignore the question “What is the risk of not innovating?”