Last week we found out that Prudential spent $2.35B to acquire a health and financial wellness start-up that is barely three years old. Two weeks ago, Ethos – a three-year-old Life Insurance start-up – was valued at nearly half a billion dollars. These are not anomalies. Carriers from A(XA) to Z(urich) have been dumping billions of dollars into Life Insurtech ventures for the past decade.
Taking these facts into consideration, you can probably understand why many people might call me crazy for prognosticating the downfall of the Life Insurtech industry. But here I am and mark my words, heads will roll. There is one major reason why.
These firms are bringing nothing new to the table. The goal of a tech start-up is to update an antiquated process and/or product by introducing Technology. The way Tesla builds their cars, their functionality, the sales experience, the driving experience, everything about it, is a far departure from how Ford operates.
What are Life Insurtech firms doing?
Creating New Carriers:
Due to the heavy regulations in our industry, they look no different than traditional carriers. Their two strengths lie in the fact that they do not have large books of unprofitable business hanging over their heads and their systems are generally more efficient as they are built on current technology and not a dozen legacy systems. The major drawback for them is that nearly all of them only offer Term Insurance. Their margins are razor thin and Venture Capitalists want serious returns in half a decade. This does not mean that they will not succeed, just that they are not disrupting the marketplace.
Harnessing Accelerated Underwriting:
To date, the fastest I have ever processed a case with a traditional carrier is twelve hours. That is like Mach 3 compared to where we were a few years ago when three weeks was a feat, however it is still lightyears behind the less than ten minutes it takes for some of the new entrants. I am not on board with this… yet.
We work with firms that have been around since Abraham Lincoln’s presidency. A firm does not thrive for that long by taking unnecessary risks. It helps that our industry must be conservative by its very nature. We have an obligation to be there financially for people when they need us most. The number one thing we cannot do is take risks.
Accelerated Underwriting programs are fantastic and are slowly being adopted industry wide. However, forcing them through without proper vetting will prove to be catastrophic. Due to low margins, it is not a maybe, it is a will be. While a consumer might be excited to get a policy before they finish their morning coffee, when the carrier becomes insolvent and their policy starts bouncing around, you can be sure that the next policy they purchase will be from a reputable carrier that has been around longer than their Apple Watch. This will not be a problem for long, the old guard will catch up when they feel they can offer these solutions viably.
Engaging Strategic Marketing:
Traditional carriers spend massive amounts marketing on television, radio, and print. Head over to Youtube or Facebook and you will see ads about cheap insurance if you run a 9-minute mile. The new entrants are trying their best break the online marketing problem our industry has. They have proven one thing thus far, the adage is true, Life Insurance is not bought, it is sold. For all the new ways to purchase Term Insurance online and the saturation of advertising, sales continue to decline.
As stated earlier, new carriers do not have to deal with decades of old systems in place. However, this is not disruptive, seamless integration of all systems should be a priority for any business. Some start-ups address this concern, but sadly, not enough. I believe this area is the only one viable to disrupt the industry but mainly in terms of efficiency on the back end. If the carriers had invested their billions of dollars focusing on updating their systems over the past decade – instead acquiring toddler firms – I believe they would already be realizing the increased margins that efficiency brings.
Selling Through New Distribution Channels:
The rise of planners that refuse to sell products or take commissions has led to customizing solutions that these channels can embrace. Traditional Carriers have embraced these solutions, but we have seen a lack of interest in updating them to comply with Principals Based Reserving. This tells us that they were either not adopted at the rate we were being told they were, that they were not profitable, or a mixture of both – which is most likely.
All these combined is why there is no Tesla in our industry and I highly doubt there ever will be. It is too expensive and Life Insurance profit margins sit comfortably between low and liability. To date, no Insurtech company has been able to disrupt this, even though some will claim they have or will.
Why? Because the major costs they strip out lead to other costs they must factor in.
For instance, everyone loves hating on commissions, but subtracting advisors from the equation forces a carrier to spend more (Many times much more) on acquisition costs. That is a major reason why Ethos’ rates are between 45% and 70% higher than the top rates at other carriers. Mind you, they claim on their front page that their rates are competitive right before showing sample rates that are clearly not. It is not just them; Haven Life’s Term rates aren’t much better.
Paying a producer to prospect (and field Underwrite) is simply much more cost effective for a carrier.
Where do we go from here?
First, the Venture Capital funds will dry up. VC firms have short attention spans. While the “valuations” of these Insurtechs may skyrocket in the short term, they are all losing money. Term Life takes decades to make it into the black. Far outside the five-year turnaround VC firms look for. This has begun manifesting itself with the limiting of VC dollars being allocated to Life Insurtech firms.
Second, a lot of people will be fired. I feel terrible for the team at Prudential involved in the Assurance IQ acquisition. I get the desire to combat John Hancock’s Vitality program but trying to combat a Global Brand that boasts over two decades of success with a firm no one heard about until it was acquired, is terrible judgement.
Third, most of the new firms that consider themselves Insurtechs will pivot to the SelectQuote model if they want to keep the doors open. This is where an agent follows-up anytime a Life Insurance quote request is made. Health IQ’s success has come from adopting this model with their clever (dishonest) marketing strategy.
Life Insurtech companies can teach us a great deal. Sadly, they are not new lessons, but rather reminders.
Life insurance is not bought, it is sold.
It is important to maintain current systems and processes.
There are new methods of disseminating information that should be taken advantage of.
There are new distribution channels and products to embrace.
Perhaps the greatest lesson we can learn though, is that the old distribution model, is still the best. Fewer and fewer advisors are selling Life Insurance or utilizing it in their planning and there is no amount of internet ads that can stop the resulting decline in sales.