Software is Eating the World and Insurance is on the Menu Kevin Mason, Chief Strategy Officer | Apr 19, 2016

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In August of 2011, Marc Andreesen, founder of Netscape, wrote an essay for the Wall Street Journal entitled “Why Software is Eating the World”. The essence of the article was that more and more industries were going to be disrupted by software, and that software was poised to take over large swaths of the economy.

At the time the article was written, software-enabled ventures had already upended many established industries and business models.  Consider Amazon’s displacement of Borders and Blockbuster’s demise at the hands of Netflix. More recently, Uber has begun reshaping the taxi industry and LinkedIn is encroaching on executive recruiting.

Early Warning Signs

The phenomenon is now accelerating and spreading to new markets, as widely-available capital enters the market from globally-dispersed sources and combines with the low cost of software creation and distribution. The insurance industry is ripe for change, and the ripple effects of software innovation and new capital are already taking shape. These are some of the early warning signs of a full industry disruption:

  • The pool of available investment capital is rapidly expanding as global investors, from emerging economies such as China and India, seek opportunities to park their newfound wealth. Like the enabling technologies that have been readily-available for some time, capital is now quickly becoming table stakes.
  • The influx of capital is causing a disruption in the insurance value chain, as investors try to get themselves closer to the customer with the new ventures they fund.
  • Insurance companies are changing business models and operating practices, using technology enablers centered on the “SMAC stack” (Social, Mobile, Analytics, Cloud).
  • Tech-enabled disruption in other industries is creating vast new opportunities for insurers. Some of these are changes to existing insurable risks, like business interruption, which can come from far-flung geographies (e.g. tsunamis disrupting disk drive manufacturing), while some are new risks with unique profiles like cyber security.
  • Capital is appearing in our industry as “alternative capacity”. In 2014 it was $60 billion, and Guy Carpenter projects it will reach $115-150 billion by 2018.

Learning from Silicon Valley

As readily-available capital and low-cost software deployment lower the barriers to entry in many industries, new entrants are applying the lessons of Silicon Valley to shake up the status quo, and insurance is no exception. These new ventures forgo multi-year, multi-million dollar projects in favor of projects predicated on speed to market, software-as-a-service (SaaS), and high user involvement. They focus on implementing and producing quickly, while spending a low amount of capital to engage customers and create brand equity.

On the flip side, the dynamic among established players is changing, too. Investment from new sources is being funneled into the value chain through reinsurers, fronting carriers and multi-year capital providers such as pension funds. They all have the same goal of getting closer to the customer, and that is causing three major points of disruption:

  • MGAs are acquiring their own systems, giving them greater flexibility in choosing partners. Reinsurers are taking advantage of this by working directly with the MGA or wholesaler, and jumping up to the prime location in the value chain – next to the customer.
  • Carriers facing intensified competition are turning to more cost-effective solutions in order to compete with the influx of capital.
  • Fronting carriers, alternative capital providers, and reinsurers are investing in technologies and partnerships to enable deals that would otherwise not have been possible.

Silicon Valley approaches are also influencing the processes of traditional insurance companies. Lean business practices are taking over, leading to minimal viable products, a “build-learn-measure” dynamic, and greater program experimentation. Iterative agile development is maximizing customer satisfaction and delivery times are more streamlined than ever before.

The customer experience is changing, too. Web-based portal front ends, and automated quoting and underwriting, are placing more control into the hands of the customer, and dramatically reducing the time and cost required for an insurer to process a policy.

Survival of the Fittest

Amidst all of this industry flux, carriers are clearly feeling the greatest pressure. In a recent report from A.M. Best, 77 percent of insurers saw the marketplace as more competitive. Most traditional industry players recognize a problem, but cannot quite put their fingers on what is causing the disruption. If they just “follow the money”, the influx of new capital leads straight to the source of their angst. The Darwinian Economy is alive, and the leanest, most efficient, and most adaptable will survive. Software is eating the major industries of the world, and insurance is next on the menu.

Kevin Mason has worked in many aspects of software development since 1981, including roles as product strategist, software development methodologist, project manager, and technology architect for companies such as Cincinnati Bell Information Systems, SHL Systemhouse (now part of EDS), AGENCY.COM, and GENECA. He joined Instec in 2008 and is responsible for development associated with all products. He holds a BA in Political Science, from the University of Iowa and an AS in Computer Science.