There is a great deal of investment activity in the insurance industry. Hundreds of startup firms, insurance and technology firms, have come – and continue to come – to the insurance market. I distinguish the two types of startups by using a very straightforward – and I believe a black-and-white legal – perspective: if a firm must comply with insurance regulations then it is an insurance firm, and not a technology firm, regardless of what technology it uses to get-and-keep customers.
Why all the activity? Why is the insurance industry a ‘target for transformation’ or a ‘destination for disruption’ for investors?
VCs, other investors, and the startup entrepreneurs view the trillion dollar global insurance industry as a group of (very) old companies using (very) old processes to conduct commerce. From their perspective, the industry is an extremely large addressable market of companies that are seriously out-of-touch with the realities of how commerce is, and should be, conducted in the mobile, digital, interconnected marketplace in the Internet-era.
For investors, it is an industry ready to be plundered!
Brokers: the sweet spot of many startups
Quite a few of the insurance startups are targeting insurance brokers as a ‘sweet spot’ to be disrupted. And a ‘sweet spot’ it is. Estimates from various sources put the number of agents and brokers in the US insurance industry as being between 300,000 to 400,000.
[Note: The number of insurance broker firms (and independent insurance agencies) is a separate issue as is the trend of rationalizing / reducing of the number of insurance broker firms. And, no, I don’t think the reduction of insurance broker firms will impact the range of the number of insurance brokers and agents in a manner that will be noticeable.]
However, before going any further, we need to apply the brakes for a moment. For the purposes of this post, I will use the term ‘broker’ to mean either insurance broker or insurance agent. I agree that I’m taking liberties doing that because they are not equivalent. Here are the definitions from the Insurance Information Institute (iii.org):
- Agent: “Insurance is sold by two types of agents: independent agents, who are self-employed, represent several insurance companies and are paid on commission; and exclusive or captive agents, who represent only one insurance company and are either salaried or work on commission. Insurance companies that use exclusive or captive agents are called direct writers.”
- Broker: “An intermediary between a customer and an insurance company. Brokers typically search the market for coverage appropriate to their clients. They work on commission and usually sell commercial, not personal, insurance. In life insurance, agents must be licensed as securities brokers/dealers to sell variable annuities, which are similar to stock market-based investments.”
BTW The role of the broker is consultative and advisory. Insurance, regardless of line of business, is not a commodity. Customers, whether retail (personal P&C or individual L&A) or enterprise (commercial P&C or Employee Benefits) need assistance determining what insurance to purchase, how much insurance to purchase, and which insurance carriers can best meet their requirements. A deeper discussion of the broker’s role is beyond the scope of this post.
I do agree that investors targeting the broker space use a degree of logical reasoning that goes far beyond their probable sweet, sweet dreams of disrupting the large number of these intermediaries. Beyond the sheer size of the broker space, brokers play a critically important role as part of the insurance industry value chain. And it is this role that seems to also be a ‘destination of disruption.’
Brokers: target for transformation
Disrupting and/or transforming the insurance broker space
I have mentioned that there are many insurance brokers and they fill a crucial role in the insurance industry. However, there is another important fact about insurance brokers: customers can’t legally purchase insurance without using an insurance broker.
That is why I stated above that “investors targeting the broker space use a degree of logical reasoning …” rather than stating that the investors were thinking exceptionally logically or with clear reasoning. I believe that they forget the fact that brokers are legally required in the purchase of insurance, think that fact (i.e. the law) will change to the benefit of the startup they are invested in, ignorant of the fact, or willingly ignore the fact.
(If you’re wondering … Yes, I believe there are VCs or other investors who would willingly and illegally ignore insurance regulatory requirements and related laws.)
Before answering the questions of whether the insurance broker space can be disrupted or transformed, let’s first consider the definitions of ‘disrupt’ and ‘transform’ from the Merriam-Webster (online) dictionary:
- Disrupt: to break apart, to throw into disorder, to interrupt the normal course or unity of
- Transform: to change in composition or structure, to change the outward form or appearance of, to change in character or condition.
Back to the (implicit) questions: can the insurance broker space be ‘disrupted’ or ‘transformed?’
My answer is no.
I believe they can’t be disrupted using any of the definitions of ‘disrupt’ above (i.e. broken apart [a process can be broken apart or parts of a role but the legal essence of the insurance broker role must remain], thrown into disorder, or interrupted in their normal course or unity).
Disrupted, no. However, I believe the broker space can be transformed.
Specifically, the customer-broker paths can be transformed. In reality, through the applications of technology through the decades of the insurance industry’s existence, these paths have been transformed, are being transformed, and I suggest will continue to be transformed.
Consider the visual below. The visual captures past, existing, and potential future customer-broker paths. But, keep in mind two points, being that:
- even through the process of ‘transformation’ that the broker (whether person or algorithm) remains because the broker is legally required in the insurance purchase.
- the ‘transformation’ is about transforming the path between insurance customer and the insurance broker but is not about transforming the role (or the essence of the role) of the broker.
The history of customer-broker paths is founded on face-to-face (F2F) meetings whether in the customer’s home, the broker’s office, at car dealerships, or in banks.
Beyond F2F paths, technology has acted as an interface that has eliminated time and distance between the customer and the broker. But whether at the other side of a computer screen, a mobile app, an email, a chatbot, on an insurer web portal, there must be a broker present to sell the insurance line of business. Even algorithms used as brokers have to comply with the requisite insurance regulations: no leprechauns, no pixie dust, no magic.
Technology redefines the existing paths, introduces new paths, and makes the activities enabling any of the customer-broker paths both more effective and more efficient.
The technologies, whatever they are, do not, of course, replace the broker even if they make the broker appear in a virtual reality, in the metaverse, in Second Life, or ‘embed’ the broker in a hologram.