The Five D’s of Fintech: Disaggregation


“Death by a thousand cuts”, “Sandblasting”, “Mastodons attacked by ants” and similar such metaphors have been used to describe the scourge of fintech and insurtech insurgents and their impact on incumbent banks and insurance companies. “Disaggregation” or “Unbundling” of products services lies behind fintech’s poaching of customers from banks, not singlehandedly but collectively, one product or service at a time. Stories and studies abound on how technology is unbundling not just products and services, but impacting entire value chains. This disaggregation is now well established in traditional banking (See CBInsight’s blog post as an example), but only now emerging in insurance. Disaggregation is the topic of this post, the second installment in the fintech series (see The Five D’s of Fintech: Introduction), in which we will look at where and how such disaggregation is taking place in the insurance industry.

The insurance industry is experiencing a technological double whammy of sorts: not only does technology enable creation and usage of new behavioral context which fuels new competition, but also it stands to threaten the underlying business economics of the industry. Insurance experts talk about “behavior disaggregation” to describe how consumer behaviors can be tracked and analyzed to engage with consumers directly in real-time, price risk accurately and discretely, and provide frictionless services. For example, It is not hard to imagine a “connected home” where various safety measures one might take e.g., installing a burglar alarm, are instantly used to recalibrate risk and thus adjust the homeowners or renters insurance. Tech savvy startups are already leveraging such behavior disaggregation: pay as you go car insurance, from Metromile is an example where driver behavior can be tracked to provide fit for purpose policies. Oscar, a health insurer in New York, gives all its policyholders a fitness tracker; whenever they hit a set goal (walking 10,000 steps in a day, say) they get a refund of a dollar. Where incumbent insurers put their consumers in a policy straightjacket based on blunt risk indicators such as age and occupation, insurtech players leverage technology to study behaviors down to the ‘last mile’ to offer highly flexible solutions, customized not just by the asset type insured but also by duration, for example through “micro duration” policies. These companies have the focus and the agility to build this specialization: like Metromile has done for car insurance, Trov has done for general merchandize, Ladder for life, and Hippo for home. Increasingly traditional insurers may find that insurtech’s win-win value propositions are hard to beat with traditional product bundles – hence the case for unbundling. But unbundling existing products is not enough. Unfortunately for traditional insurers, insurtech’s micro targeting of risk reduces incumbents’ existing risk and profit pools: they are thus forced to not just compete with the upstarts, but also seek out new revenue sources.

Insurtech is forcing disaggregation at an industry-level scale. Incumbents all have traditionally managed the entire value chain spanning product/service distribution, underwriting, claims management and investment/risk management. Using independent agency networks, conventional underwriting models and re-insurance for risk management, carriers have thrived in the marketplace. This value chain is now coming apart as each link in the chain is impacted by technology. New digital sources of distribution are threatening to disintermediate carriers from end consumers – just witness the rise of CoverHound for auto, PolicyGenius for life and disability, Abaris for annuities, and various others. Traditional risk pools are shrinking, risk is migrating from consumers to products, and the nature of risk is evolving thanks to self-driving cars, IoT technologies and the sharing economy — all this has led to emergence of new competitors offering alternate underwriting models such as Lemonade, Guevara, and Friendsurance. Upstarts such as Claimable seek to intermediate to provide easy claims settlement experience to end consumers. New arrangements such as Managing General Agents, catastrophe bonds and collaterized reinsurance are disaggregating the carrier/re-insurer relationship: now carriers can go directly to capital markets, and re-insurers can strike up business arrangements with startups focused on customer acquisition.   The neatly linked insurance value chain is slowly moving to horizontal stacks based structure (see BCG’s Philip Evans’ idea of stacks here).

Insurance is different from traditional financial services in that players in insurance, unless they are pure brokers, have to take on element of risk and hold associated capital, all of which comes with ton loads of regulatory requirements. Due to these reasons, insurtech has been slow to penetrate the $6 trillion insurance industry goliath. The pace however may accelerate. According to McKinsey, automation could leave up to 25 percent of the insurance industry’s current full-time positions consolidated or replaced over the next decade (see Automating the Insurance Industry). If nothing else, carriers should do everything in their power to prevent disintermediation, which will be the topic of the next installment in the fintech series.