How can incumbent insurance companies compete with insurtechs and startups? In this article we explore insurance trends and priceless assets which only incumbent insurance companies hold.
Sticks and Stones
If it can break, it can be insured.
That, in a nutshell, is the Great Divide in Insuranceland. The Big Truth and the Bottom Line.
It also exposes one of the Big Problems – the gap between technological ability and the legislature and regulations that govern the use of that ability. We see it in almost every aspect of modern life – privacy and protection of information, behavioral analytics, AI; anywhere we apply modern technology, we face the age-old dilemma – just because I can, should I <put your apocalypse here>?
Anyhow, back to insurance and physical damage.
Until the early 2000s, property could be insured against physical damage, with all the derivatives: personal, product liability, etc. If something can be shown to be able to sustain physical damage, it could be insured. This is P&C (Property and Casualty) Insurance.
As professional malpractice litigation grew in ‘popularity’ (think spilling hot coffee in your lap), professional liability insurance coverage became more available. This is E&O (Errors and Omissions) Insurance and, as a result of litigation and subsequent rulings, is usually accompanied by a long list of exclusions and a limited cap.
Insurance companies had to adapt as digital assets increased in importance and value. The result was that digital assets could be insured, but only the ‘physical’ aspects could be monetized – the cost to research and recreate the data. This was a direct continuation of the traditional ‘Valuable Papers’ policies offered for many years to businesses, pre-digital technology, to insure their financial records and customer lists.
The insurance companies did try to get into the ‘replacement’ option of insuring data, but their market research apparently showed that small businesses and individuals had so many inexpensive backup options already available to them that it simply wasn’t worth the insurance companies’ effort.
Another thing showed up in the market research – insurance companies should stick to insurance. Technology was not seen as their forte.
Cyber insurance began to emerge in the late 1990s – here, too, these policies covered the damages caused and not the data themselves. Online media coverage evolved from earlier professional liability coverage, covering software and media risks.
From the early 2000s, this new kind of insurance was becoming more common in light of the new and very public threat of cyber attacks by viruses, worms, unauthorized access and denial of service attacks – even Hollywood got into it, with movies like Tron and Wargames exposing the general public to hackers and their nefarious plots.
However, like professional liability coverage, early cyber insurance generally had many exclusions and did not cover 1st or 2nd party damages.
Another ‘new’ type of insurance became available in the 1970s – Intellectual Property Insurance. This is a branch of insurance that is, if anything, even more tightly connected to the legislature than traditional P&C insurance because the laws regarding intangible assets and their protection, as well as liability, is constantly evolving. Over the past four decades, the Insurance industry has developed a wide range of mature insurance systems for intellectual property, covering areas such as copyrights, patents, and trademarks.
So, our defining principle – If it can break, it can be insured. Combining this with the gap between technological ability, the legislature, and regulations that govern that ability has created a vast new field of opportunity - the liability and protection of intangible assets that require a special skill set – Compliance.
How much organizational grief and angst can a single word create? Compliance is up there on the list. Right next to Shareholders.
The incumbent insurance companies, for the most part, remained with standard market insurance and traditional property and casualty insurance. I suspect that a massive consideration in this decision was Compliance. No matter what technologies they used to interface with the public or back office, they had a huge compliance infrastructure dealing with the complex state, interstate, national and international law and regulatory agreements.
Some companies decided to specialize either by establishing a new division within the parent company or by spinning off or investing in a new company.
But many new startups decided to investigate specific areas in this field of opportunity and build Compliance into their systems, whether automated or not. This meant that they could offer coverage with advantages not defined by scale or volume but by compliance with new and changing regulations and laws, such as the 2003 California Security Breach and Information Act, the Open Banking initiative, and the EU’s GDPR directive.
Interestingly, the inc insurance companies have a treasure, a priceless advantage, that the startups and insurtechs cannot hope to match - their legacy data and assets.
Properly connected with the digital world, this valuable data and assets can be used to bring the depth and breadth of years of careful compliance and experience and combine it with the speed and power of modern technology.
Learn more about solutions for modernization in the insurance industry leveraging the priceless treasures within the existing legacy systems - without disruption or special skills, and with speed and simplicity.
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