Disruption remains a looming concept in the world of entrepreneurship and business development, and there are few industries in need of disruption more than the insurance industry.
In case you aren’t familiar, disruptive innovation (coined by academic Clayton Christensen and sometimes referred to as simply “disruption”) occurs when a new product or service takes root in the bottom of a given market, eventually gaining popularity and growing to displace the existing heavy-hitters in the market. These disruptive businesses often start with lower gross margins, specific niche target markets, and quite possibly, an initial stigma or bias against them.
Though the term “disruptive” is often applied too broadly (as explained by Christensen himself), there are several modern industries currently being displaced by new technologies and services; a perfect example is how Netflix’s low-cost streaming subscription model is displacing larger, more expensive, more established competitors in the cable industry.
So why is the insurance industry, specifically, so ripe to be displaced by disruptive innovation, and what could that disruption look like?
The past decade has not been good for trust in financial institutions. In the wake of the financial crisis of 2008, consumer trust in banks, insurance companies, and other financial organizations plummeted, and trust has gone down even further since then. People see financial corporations as greedy, ruthless, and in some cases, unscrupulous, so they’re primed to seek out a company or alternative service that circumvents the status quo.
Some financial companies are working harder to achieve transparency, increasing consumer trust by providing them with resources that explain how their services work. It’s a good start, but might be too late to win back consumers who have already made up their minds.
Another major issue for modern insurance companies is the tendency to consolidate. Big insurance companies tend to gobble up small, independent agencies; though the rate of mergers and acquisitions slowed in the wake of the great recession, we’ve seen an increase in transactions ever since 2009.
The motivations here are twofold, and both motivations stem from the simple truth that big insurance agencies tend to perform better than small ones. Big agencies are incentivized to get even bigger, to control a greater market share and defend against other big agencies doing the same. And small agencies are incentivized to sell, reaping what profits they can, knowing they may not be able to compete otherwise.
The dominance and ever-increasing size of these agencies makes it hard for new companies to enter—but may leave customers wanting something different.
Insurance-related technology (Insurtech) is also starting to radically transform the insurance industry has been growing impressively over the past few years, peaking with 173 closed deals in 2016 and $1.69 billion in funding. New technology could have several distinct and profound effects on the industry; it gives insurance companies more tools to analyze data and better understand customers, it gives customers more power and options, and in some cases, introduces innovative new dynamics with the potential to change how insurance works.
Big companies have a few options here. They can enlist these technologies to improve their offerings or, in some cases, buy them out to get exclusive rights to them. But if just one of these companies comes up with a model to displace our current standards for insurance, it could represent a viable threat—especially considering how nimble startups are, compared to giant, lumbering corporations.
For health insurance specifically, rising costs are a major problem. There are several reasons why health insurance (and healthcare) costs in the United States are more expensive than in other areas around the world. For example, there are more administrative costs, access to better technology, and the tendency for healthcare providers to charge more in an effort to get more out of insurance companies. Lawmakers, insurance companies, healthcare providers, and consumers all seem to agree that health insurance is a bureaucratic nightmare—yet nobody can agree on a solution.
The American workforce is aging, which puts a ton of pressure on health insurance companies and HR departments around the country. More than 10,000 baby boomers turn 65 each day, which is a pace likely to continue until 2030. Moreover, because life expectancies have increased thanks to better technology, insurance companies are forced to pay more money for services (and for a longer period of time) without much of an increase in revenue.
So what would a disruptive innovator in the insurance industry look like? It would be tech-driven, small, and nimble, unlike its bureaucratic and slow-moving giant contemporaries. It would be low-cost and accessible to a small demographic at first, eventually scaling to appeal to a broader section of the population. It would also make drastic changes to the typical insurance model, introducing more transparency and more affordable options, and may have a solution to handle key challenges like aging populations and rising costs. It may seem like a pipe dream for now, but the insurance industry is begging for a disruptor, and it’s only a matter of time before it gets one.