Insurance is a push business. I’ve heard this so often I feel like I’m a guest in a delivery room at a hospital, with the doc shouting, “Push Push, one more deep breath, and Push.” I blame such useless visual & graphic imagery from my days in Airtel.
In Airtel, I was constantly involved in discussions of moving a form from one company function to another. At some point in time, someone in his brilliance decided to name the various Lotus Notes Workflow elements as buckets. So, for a connection to go live, a form would move from the sales bucket to the billing bucket to the GIS bucket and installation bucket, etc. My entire day would be spent discussing how many forms were in which buckets and how to move forms from one bucket to another. The weekends at home were reserved for escalation calls where connections did not go through, and all my family would hear me say was, “which bucket is the form stuck in.” I am convinced that my family thought I was a glorified plumber.
But that was Airtel. In Insurance, it’s all about Push, hence the midwife imagery. Insurance is a slightly old and established industry. Ok, let me qualify “slightly old.” Aviva was founded within a decade of the completion of the Taj Mahal. Get it? No, ok, here’s another go. During the age of colonial conquests by Europe, including our very own East India Company, the EIC ships were insured by insurance companies. Over these centuries, the insurance business has developed to have primarily three distribution channels - An agent, a broker, and the company itself (chorus - push push, one more deep breath, and push!).
Brokers come in a variety of sizes and shapes. A broker should represent the buyer and hence source quotes for the buyer across insurance firms. On the other hand, An agent is an agent of the firm and represents the firm. There are largely two kinds of agents, an individual agent, and a corporate agent. Licenses govern all this; there are licenses for everything… In fact, I would say that some of the broker business is highly licentious! But now we are ready to understand why insurance, after centuries, is a push business dominated by brokers and agents, the margins, the conflicts between channels, and what have you. Finally, we may be able to understand investor interest in this space. (chorus - push push, one more deep breath and push!)
Insurance is a promise to pay. Hence highly regulated. Promises made need to be kept. The profitability of an insurance book plays out over time. Therefore, if a set of users come in and break the insurer's assumptions, the book becomes unprofitable. Put more simply, if the claims that come from the users exceed the premium collected, then the insurer goes out of pocket. This is where underwriting models come into play and make insurance terribly exciting for the quant. All underwriting models represent philosophical choices and eventually make their way into the ATCG chain of the org DNA. Thus, every insurer develops a certain pattern of risk they underwrite and some risks they do not take. The job of the broker/agent combo is to understand this risk profile and bring in users that are all win-win. This is the first source of power of the intermediary - for their acquisitions control the destiny of the insurer in some sense. (chorus - push push, one more deep breath and push!)
Mutual funds are subject tomarketrisksreadtheofferdocumentcarefulybefore….
Insurance policies are ONLY about risk. This is why insurance policies are called contracts, and insurance companies are full of lawyers. And hence the common consumer doesn’t understand jack about insurance contracts. Think about it; even someone as brilliant and mighty as Arjuna got mind-ragged and required Lord Krishna to guide him at his moment of crisis. Pray how then, will a mere consumer be clear about a future potential crisis and thereby understand a legal document? Thus enters the intermediary. The person a policyholder trusts and who “explains” the policy to the unsuspecting commoner. And this is the second source of power of the intermediary. A complex regulated legal-speak-driven insurance offering, which requires to be simplified. (chorus - push push, one more deep breath and push!)
These historical reasons have kept insurance firmly in the push territory and given rise to intermediaries with huge margins compared to any other industry or business. This has led to new business forms - from aggregators for the consumer such as Policy Bazaar to aggregators of agents such as Turtlemint & Renewbuy. Companies such as Acko are built entirely on the premise of disintermediation and making insurance simpler and more affordable. These changes are the first wave of disruption in the insurance business, which has tremendous depth. The second wave of disruption is in the healthcare space we see around us, but more on that later. That would require a quick prologue into Insurance Metrics & the Insurance Product, which I shall cover (pun intended) later.
For now, insurance still remains a Push business - push push, one more deep breath and push!
[This is Chapter-3 of a Tripping while Sleepwalking Series]