I’ll Be Back
A few days ago, a really interesting blog post by Lemonade caught my eye. In it, the Lemonade team discussed that they had hit a world record in claim payments. A client of theirs had insured his $979 Canada Goose Langford Parka, and it went missing. After realizing it was gone for good, said client went onto the Lemonade app, made a 61 second video and sent out a 140 character message. Within three seconds, his claim had been paid.
How’d they manage to do it? To quote the blog directly:
“Between 5:49:07 and 5:49:10, A.I. Jim, Lemonade’s claims bot, reviewed Brandon’s claim, cross-referenced it against his policy, ran 18 anti-fraud algorithms on it, approved it, sent wiring instructions to the bank for the transfer of $729 (Brandon has a $250 deductible), and informed Brandon of the good news.”
This bot was based on Jim Hageman, the Chief Claims Officer at Lemonade. It’s likely a simplistic enough algorithm which deals with easy, by-the-book claims, and the Lemonade team explained that when a case was more complex, it would escalate the issue up to Mr. Hageman for review. Regardless, it stops to make you think.
Now, there are some issues with the Lemonade model worth noting. First off, one has to wonder what fraud premiums will look like when the ability to pay a month’s rent is just a quick video and text message away. Lemonade tries to minimize fraudulent activities by giving away its “underwriting profit” to a charity of the client’s choice – that is, unused money allocated to its fraud fund will be given away to charities. The hope, naturally, is that this will reduce fraudulent claims that may be increased by the lack of friction in filing a claim. Time will tell whether this works, though my money is on the worse angels of our nature, not the better ones. Second, Lemonade relies on a pull model of insurance. That is, it needs people to come to it primarily. If you’ve ever sold insurance, you likely have seen how reticent most people are at buying insurance. Traditionally, this has been very much a push product – that’s why there’s an entire industry of insurance advisors who cold call and go to networking events. Finally, Lemonade deals with less complicated types of insurance. There are minimal complexities when insuring a piece of property, compared to dealing with life, health, or benefits.
Regardless, if you’re an insurance agent, this is undoubtedly a worrisome development. All over insurance, we’re starting to see automation take place. Much of it is in the back-office. For example, a Japanese firm has just replaced more than 30 employees in charge of policy payouts with IBM’s Watson system. Startups such as Cover, the aforementioned Lemonade, and many others are trying to edge their way directly towards the client. More established technology companies like Zenefits are working towards displacing the group insurance broker.
Are Advisors Going the Way of the Dodo?
At Finaeo, we are currently raising capital from investors. As such, we have been forced to address the market situation head on a number of times. The first question investors always ask us is along the lines of – “aren’t insurance brokers going to be pushed out of business?” Sometimes they ask us why we don’t attempt to disrupt the insurance space and push advisors out of business ourselves, instead creating a direct-to-client solution. Other times, they are certain the trend lines are pointing towards a future without insurance agents, and ask us to explain why they’re wrong.
For a long time, we struggled to answer this question convincingly. Fundamentally, we believe that financial advisors were not obsolete. That all they are truly missing are the tools needed to empower them – to help them manage more clients, reach more people, and stay organized and on top of their books. But when asked to defend this point, it was always a bit difficult to explain why we believe this. Our experience in the industry led us to see that there was something to the advisor-client relationship that mattered. We never thought it had to do with the technical aspects of the insurance products. While customization is certainly an issue today for a robo-advisor, this is the kind of technical challenge that machines can easily tackle. If you can draw a flow diagram of how to arrive at a certain solution, a computer can do it 1000x faster than you.
Instead, what we saw was that there was a certain je ne sais quoi about the client-advisor relationship. We couldn’t quite put our finger on it, but we knew it had to do with the human element. There was something in the relationship that was necessary and would be hard to displace by machines. We thought over this question for quite a while, tried to put it into words. In the end, we came up with two big reasons why we believe that many financial advisors will be able to not only survive, but thrive in a future technological world.
Reason #1 – The Human Touch
The first buffer for insurance brokers and financial advisors is the human element. When people deal with insurance and financial decisions, they often want someone to hold their hands through the process. A big part of that is simply not knowing what to do. Of course, the astute reader will argue that if it’s just about understanding what decision to make, a smart algorithm could easily do that for you. But what a machine lacks is the empathy and rapport aspect. As Aly, the CEO at Finaeo, told me once, “I used to believe I was more of a therapist than a financial advisor – people would come into the office and tell me about their marriage problems.”
Clients are looking for empathy when making big decisions that could affect their lives or the lives of their loved ones. They want to hear about others who have done the same, what the outcomes were, and be comforted by a human being who has gone through it many times before. In other words, they want to talk and they want to be heard. They’re, ultimately, looking for peace of mind – that they’re making the right decision and that things will turn out well for them. As complex as algorithmic customization for insurance products may get, it will be a very long time before an AI can comfort a person about their decision over life insurance.
A second part of this human touch is rapport. We’ve talked about the PWC article on wealth managers in this blog before (see here), but it’s worth reminding readers that rapport was cited as one of the main reasons why individuals stayed with their financial advisors. That is, merely liking their financial advisor protected said advisors from being displaced by other advisors or robo-advisors. That’s a fairly powerful concept and one that we push very hard with the Finaeo platform. At the end of the day, it isn’t just about closing the deal, it’s about nurturing the relationship after the close. Build the rapport and you’ll be very hard to displace.
Reason #2 – Most Insurance Products are Push Products
I mentioned this a little bit above, but it’s worth discussing more thoroughly. Briefly, in marketing speak, there are two kinds of products – push products and pull products. Push products are the types of products that you have to PUSH towards your client. A client, alone, is unlikely to buy a push product. Instead, the sale requires someone or something to nudge them towards it: chocolate bar displays at the checkout line, a knock on the door from a salesperson, or a conversation about the product at a networking event. A classic example would be knife sales, done door-to-door. Most people have a set of knives but wouldn’t actively go to replace them, until a salesperson shows up and demonstrates why they should really upgrade.
A pull product, on the other hand, is the kind of product that people line up for. That is, it builds a strong enough brand that people go out of their way to purchase it. The quintessential modern example is the iPhone. People don’t buy iPhones because an Apple salesperson shows up at their door and convinces them. They stand in lines for days before launch just to get a chance to buy it – that’s pull marketing at its finest.
So, what about insurance? Is it a push or a pull product? Well, I’d argue it depends on the type of insurance. Car insurance, for example, is a pull product. You get a car and you’re forced to pick up a policy. I’d also place property insurance in a similar boat. You buy a house and you insure it pretty quickly. This type of insurance is based on a triggering event. You buy something (e.g., a car, a house) and you insure it as a response.
On the other hand, many other types of insurance can be seen as push products. Life, health, long-term care, disability – these all fall into the push category. How many times have you sat down with a prospect, explained a life insurance product, and had them agree that they’ve needed it for a while but haven’t gotten around to buying it yet? There’s a reason why cold calling and door-to-door sales work for insurance brokers – these are products people need but often don’t bother buying.
And it’s not shocking – who wants to think about their impending mortality enough to get excited about life insurance? Who wants to think about getting old and frail, two prerequisites for requiring long-term care insurance? It’s not that people don’t recognize the value of these products – it’s that they put them off for as long as possible. Most people need a swift kick in the behind to be prompted into the actions they know they should do when it creates existential anxiety, and insurance is prime and center such a product. For example, during his time selling insurance, Aly never once had someone voluntarily purchase mortgage protection insurance, but quite a large number of his clients purchased it once he brought it up.
This is important. If the majority of insurance products require a friendly push, then direct-to-consumer brand building may not be as successful as one would hope. That is, one of the big value adds of insurance advisors is that they can guide the client through an uncomfortable situation – thinking about their own mortality – all the while helping them arrive at the right solution to keep themselves and their loved ones safe.
To me, this is the key insight to understanding how this industry will transform over time. While we will see smarter technologies to empower insurance companies and back-office processes, I believe that the insurance advisor has a long future as a profession. Why? Because a great many people will not buy insurance products themselves en masse, no matter how frictionless the process. You will always need the insurance broker to guide them through the process.
So What Does This Mean For You, The Insurance Advisor?
Well, in many ways, if you’re an insurance advisor, this should come as a relief. You can take a deep breath of air and feel confident that your job won’t be displaced by a robot in the next few years. While the industry changes, insurance advisors will continue to be a necessary part of the equation. However, that doesn’t mean changes aren’t coming.
For one, technical product knowledge will become less and less important moving forward. Why? Because we’re about to enter an age where an algorithm can better recommend a product for your client than you can. That is, you or your client will provide the algorithm with information, and it’ll be able to help you find the right policy for said person with ease. This means that you will not be able to differentiate yourself on really understanding products better than your competitors.
As such, your biggest differentiator will become your ability to create, nurture, and maintain relationships. From prospecting new clients to retaining old ones, your job will become more focused on relationship management than ever before. At the same time, new technologies (such as Finaeo) will help you manage a larger volume of clients without allowing any of them slip through the cracks.
In other words, customer success, support, and service will become even more paramount than they are today. Advisors who do it successfully will be able to stand out from the pack. Those who fail to do so will find themselves quickly displaced by tooled advisors. If you find yourself still working with old technology that doesn’t keep you organized, prepared, and on top of your relationships, now is the time to fix the situation. As the old proverb goes: “The best time to plant a tree was 20 years ago. The second best time is now.”