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October 5, 2017

Are Traditional US Insurers Getting Pushed Aside?

Disruptive FinTech Insurance Companies Hit the Scene

The traditional US insurance landscape is facing rising competition from an unlikely source: FinTech. Much like the banking and financial sectors of the US economy, innovation is driving these changes and consumers are lapping it up in their droves. The insurance industry has typically been associated with mounds of paperwork, bureaucratic gobbledygook, and highfalutin jargon. Some customers are having none of it, and switching to alternative insurance options.

One of the most notable recent FinTech insurance companies to hit the scene – Insurtech - is Lemonade. This startup has become a major disruptive force in the insurance industry, along with many other companies, whittling down the waiting and approval time for home insurance, or renters insurance to mere minutes. The use of AI technology (artificial intelligence technology) to guide customers through the process is quick, easy and seamless. The benefits of using these Insurtech-style products and services is evident in the cost savings, comfort and convenience of these mobile apps. Since there is no paperwork to complete, everything is easily done with the click of a few buttons.

Squeeze a Little Lemonade into your Insurance Portfolio?

But Lemonade is only one of many hot new FinTech insurance companies to hit the scene. There are many others in the wings, and they are all predicated on similar models. Today, these disruptive elements in the US insurance industry have raised hundreds of millions of dollars, and they show no signs of slowing down. Americans are heavily invested in insurance plans, policies and products, since financial security is at the heart of American society. Various insurance options in the FinTech arena have sprung up in recent years, notably product insurance, life insurance (term life), automobile insurance, home warranty insurance, and the perpetual search for affordable life insurance coverage. The inclusion of FinTech companies in the insurance arena is shaking things up, and driving traditional insurers with legacy systems towards more dynamic systems.

Projections for the Insurance Industry

According to Deloitte, the insurance perspective for 2017 is described as ‘nimble’, in an ever-changing marketplace of new products, services and customer demands. All sorts of changes on a macroeconomic level are taking place, and insurers are having to adjust to these changing preferences on a moment’s notice. Deloitte estimates that technological dynamism will play a big part in the growth challenges facing the insurance industry. While there has been a modest recovery in the US economy, insurers are likely to continue experimenting with a range of products and services for different business models. Legacy systems in the insurance industry are likely to be replaced by FinTech insurance a.k.a. Insurtech as a more dynamic, nimble and aggressive growth paradigm. Naturally, the insurance industry is geared towards growth, profitability, and greater attention to customer service.

These disruptive enterprises in the US insurance industry are going to force competition and bring down costs. Consumers are enjoying the benefits of these groundbreaking changes, thanks to the modernization of the insurance industry towards greater growth and efficiency. Deloitte analysts believe that the direction of the US economy is somewhat unknown. The economic emphasis of the Trump administration appears to be one favouring tax reform, fiscal expenditure, and a policy of America first. Precisely how these measures will impact the insurance industry remains anyone’s guess. Across the Atlantic, additional pressures are being brought to bear on the United Kingdom vis-à-vis the Brexit. We have a state of being where investment income is being pressured by historically low interest rates. While the Fed may hike rates on December 13, 2017, this is likely to be a nominal increase of just 25-basis points.

The US insurance industry is also dependent on infrastructure expenditure. The more building and construction that takes place, the greater the need for insurance products. If interest rates rise too quickly, this will act as a disincentive to investment since it will raise the cost of mortgages, business, and personal loans. As for homeowners, a burgeoning housing market will lead to greater demand for home mortgage insurance, home warranty insurance and the like. There is a downward trend in the number of premiums being written, and insurable exposures, however smart homes may force policy changes over the long-term. Changes to the Dodd Frank Act could dramatically alter the financial arena by easing up on burdens. Other issues that can likely play a role include tax reform – notably personal and corporate tax changes.

Performance of key US insurers

In 2016, American Home Shield generated revenues of $1 billion, indicating strong growth and stability for this insurance titan. American Home Shield is also releasing a series of additional services such as the re-key program for new real estate home warranties. Customers in 18 states including DC will be enjoying the additional services provided by American Home Shield, and thanks to the positive responses from clients, the service is expanding across the country. Homeowners now have a cost-effective way of covering home appliances, home systems and the breakdowns associated with these systems.

The new home warranty service allows customers to simply use a mobile or tablet device to send in their request and a contractor from the company will contact the home owner/policyholder for an appointment. According to this re-key service, up to 6 doors will be re-keyed with keys provided for these locks. The cost of this service for AHS customers is just $75 service fee, as opposed to the $140 without the home warranty. Overall, US insurers are benefiting from the dynamism in the industry, and this bodes well for a leaner, more cost-effective and customer-centric range of home warranties and insurance systems.

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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