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The Insurance Industry’s Reliance on Friction: A Good Strategy?

Eye of the Storm: Natural disasters, the insurtech market, and other musings from Bob Frady, CEO of HazardHub


There's an expression in the insurance industry that goes something like this: “Insurance is sold and not bought.”

Why is that?

An earlier blog post highlighted THE fault of all actuarial models: because they require a lot of data to work properly, customers and back-office folks spend an awful lot of time gathering data, including trying to find answers to questions that they simply don't know. Most insurance applications have a series of questions that are only designed to do one thing -- providing data for existing actuarial models.

The result? An exceptionally painful process for applying for insurance. Add in the vague coverage language and you have a recipe for something being “sold” rather than “bought.” The inherent friction of the process means that people don’t like to do it. They’ll stay with their existing provider because it’s such a pain to change.

What's interesting is that the insurance industry has come to heavily rely on this difficulty as a means of maintaining their customer base. The industry knows that switching is a difficult process. Traditional carriers have been slow to integrate prefilled data, streamline underwriting, and having a pleasant UX to their application processes. Why? Are they afraid that if the process became clearer, their customers will churn far above their current levels?

The good news is that retention rates continue to remain high. The bad news is that, for the most part, creating such a friction-laden experience has left the insurance industry with an extremely bad reputation for not being customer focused.

Here's the other bad news. A friction-filled process is no longer a sustainable competitive advantage. Just ask any bookseller. Or video store operator. Or retailer. Or travel agent. “Tech” companies operate under one truism – take something that’s a pain and make it easier. The stage is set for customers to expect an easy and frictionless buying experience. And what reduces friction? Oil. And you may have heard that data is the new oil.

It's this friction that is squarely in the crosshairs of insurtechs. Their philosophy, proven during the fintech revolution of the last decade, is that better access to data, along with a significantly improved UX, can make the buying process more appealing to the insured. Insurtechs not only make the application process more pleasant; they can also share information with the applicant that will help the applicant self-insure against risk. Smart insurtechs inject data much higher in the sales funnel than is typically done, allowing them to better “cherry pick” the risks they want, leaving the rest for carriers that don’t adapt.

The traditional carrier's response has been sadly typical: incredible amounts of advertising. Repetition counts in the marketing world. The more people hear your name, the safer you become as a choice for their dollars. “Scoop, there It Is” is a hilarious advertisement. The question is, does it make someone want to buy insurance? Or is it simply an attempt to repeat that name over and over and over again, so that when the consumer has to deal with a difficult buying experience, the buyer says, “I feel comfortable with this company”?

Insurers have relied on friction in the buying process for a long time. But that time is rapidly coming to an end. How does your business change when this friction goes away? Are you ready to meet customers on their terms, rather than yours? Insurance will live on and prosper. The question is, who's going to win?    

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