The potential to disrupt the historic insurance industry model has made insurtech one of the hottest new areas of innovation and investment, with entrepreneurs developing technologies at a breakneck pace and venture capital firms seeking to put investment dollars behind an exciting range of new products and services aimed at efficiencies and cost savings. And while enthusiasm abounds, proliferation has been slowed by a rusty set of insurance regulations administered on a state-by-state basis that have created a thicket of constraints, tripwires, and challenges. What can an insurtech start-up or investor do when new technology and old regulations butt heads?
High Stakes for Product Development
Deep knowledge of the rules of the road can be the difference between success and failure. It is critical to first understand the regulations — and the underlying basis for them. Only then can entrepreneurs and investors determine how to ensure those fundamental principles will be addressed through product development and disclosures as well as how the technology’s value proposition can be communicated to the market without running afoul of regulations.
For example, state insurance regulators have raised eyebrows at statements like “killer” prices (https://coverager.com/lemonade-launched/) and “immediate” claim payments (http://www.assuredriskcover.com/). Laws regulating “unfair trade practices” prohibit an insurance company or intermediary from misrepresenting the benefits, advantages, conditions, or terms of any policy. Fast claim payments are often made possible with new advanced software, but settling a claim within minutes usually happens in limited circumstances, which must be disclosed to customers so they understand what they are buying. Oversimplified claims or underwriting processes can open the door to fraud. While regulators are concerned about adequate disclosure regarding coverage features, they are also concerned about making sure an insurance company or intermediary isn’t susceptible to fraud, which will only lead to financial risk for the insurer. Devoting insufficient attention to these critical details can lead to significant setbacks.
An insurtech start-up with a new personal insurance app that sought our legal counsel last year offers a cautionary tale. The underwriting software and app were built and ready for launch. Unfortunately, the format, pricing model, and lack of disclosures violated numerous insurance regulations. We worked with the founders to create a solution and product consistent with their original idea, but they spent weeks reengineering their software and app.
The experience of Energetic Insurance, however, underscores the value of putting strategy before technology when it comes to high-stakes product development. From the beginning, the start-up wanted to know how to design a product that was insurance regulatory compliant. We worked with them to add coverage features that removed the product from the highly regulated admitted insurance market, instead positioning it in the less regulated surplus lines insurance market, where they will be able to offer a unique and even more desirable product to the solar industry with a fraction of the regulatory headaches. The initial concept alone might have resulted in some of the most onerous insurance regulations in the U.S., making it nearly impossible for them to quickly or easily grow the business. By embracing the problem first, they identified additional opportunities and solutions for their customers and are now building a business model around underwriting, risk mitigation and claims services to create multiple revenue streams.
Similar advice applies to VCs. A key component of the due diligence process is making sure what you are investing in can and will get past the various regulatory tripwires and, if not, identifying what might need to change. Effectively navigating the insurance regulation game can result in maximized profits and competitive advantage. Below is a snapshot of other companies that in one way, shape, or form have adopted the proper mindset to drive efficiency in the space of regulation.
- Clover, which earlier last month announced it has raised $130 million at a $1.2 billion valuation, is known for its mindset of “compliance isn’t meant to be disrupted.” The health care company has built into its software the ability to produce reports and data in a speedy manner to resolve claims quickly.
- CoVi Analytics is a technology vendor offering compliance-as-a-service software that utilizes AI to automate compliance activities for bankers and insurers.
- HELM offers a solution to allow companies to navigate the complex compliance rules and better understand which rules apply to them.
- QuanTemplate, which has raised $10.25 million since its inception in 2012, offers data analytics services including regulatory reporting.
- REG UK provides a regulatory compliance platform for brokers that generates 24/7 alerts for financial, corporate, sanctions, and regulatory changes in a broker’s information, with electronic exchange of terms of business agreements (TOBAs).
- Tradle is a regtech infrastructure provider leveraging blockchain.
- Zenefits, or better yet Z2 — the company’s new branding after its compliance scandal, which forced its founder out of the company — is offering a cloud-based app on the Salesforce App Cloud that automatically verifies brokers’ licensing status and prevents their assignment to an account if they lack a valid insurance license from the correct state.
A More Favorable Environment
While innovators and VCs in the U.S. will decrease time to market and increase profitability by embracing the regulations and learning how to innovate within their framework, not every market is as challenging. Look no further than England, which is doing a far better job of advancing innovation through the Financial Conduct Authority‘s “Regulatory Sandbox.” The mechanism allows start-ups to test innovative products, services, business models, and delivery mechanisms in a live environment without the fear of being bitten by the regulatory watchdog.
That said, there is hope that regulatory change favorable to insurance innovation is on its way. At the most recent National Association of Insurance Commissioners (NAIC) meeting in April, http://www.naic.org/meetings_events.htm, an “Innovation and Technology Task Force” representing 30 states met to create a number of working groups to tackle the gap between decades-old insurance regulation and the fast-paced world of insurtech. It was encouraging to see California, Massachusetts, Florida, and Texas were a part of that group, although New York was noticeably not on the list.
The task force goals are clear: (i) foster innovation, (ii) encourage insurtech and insurance companies to work collaboratively with state regulators, and (iii) develop a competitive marketplace while appropriately balancing consumer protection. While time will tell how these goals play out, in the near term, insurtech companies are encouraged to help regulators understand their place in the new ecosystem.
New technology and insurance regulation will never be a perfect match, but with some understanding, a bit more creativity, and collaboration, there can be a middle path. Of course, modernizing our 50 state insurance regulatory scheme can only help.
The author thanks Shefi Ben Hutta (@ShefiBenHutta) for providing the market data.