Insurtech Culture and Underwriting

We can see that the world is changing in reaction to the COVID-19 pandemic. The specific financial environment that enabled Insurtech companies to thrive in recent years will be a part of this change. Business models that require easy access to capital and uncertain profitability will become harder to sustain. Recent weeks have shown potential examples of this at Cover, Bold Penguin and Jetty.

The demand for insurance is inelastic, however. As long as the business is getting done, insurance is a required purchase. This tells us that insurance companies aren’t going anywhere. When the Board of Directors for an Insurtech finds itself thrust into this new environment, acquisitions by or joint ventures with traditional insurance companies may have newfound appeal.

But what is an Insurtech and what kind of culture would it bring, if combined with a traditional insurance entity? My experience with Insurtech organizations has shown them to be staffed primarily by people with insurance agency, technology or consulting backgrounds, or simply people who are relatively fresh out of school. The culture is innovation-based with a focus on incremental and continuous product development. The customer experience and services are constantly getting broader and better, but this is by nature a frenetic, tactical culture. “How do we fix this?” “How do we make this better?” Etc.

Over time, this culture can create truly amazing results. In contrast, the traditional insurance organization may appear slow, flat-footed, unimaginative, etc. The funny thing about culture, however, is that once it’s established, it’s difficult to change or adapt. People with experience in corporate mergers and acquisitions know that the success of the endeavor is typically not a matter of money and resources, but a question of whether the combining cultures can fit and work together.

So what is the culture of a traditional insurance company? The principal business activity of an insurance company is underwriting. There are other activities performed by the company, but underwriting is what “drives the bus”. Underwriting decides what types of insureds will supply the revenue to the company. This happens whether it involves the review and negotiation of individual accounts, or selection and oversight of MGA’s, or the design of computer software and artificial intelligence models. These activities create an “underwriting culture” that is dominant in most insurance company environments.

Underwriting culture forms from the process of selecting risks and making judgment calls that are based on available information and prior experience again, and again, and again, and again. Underwriting culture values track record, longevity and wisdom. New underwriters who join the company out of school are basically clueless, as the intelligent among them would admit. Mentoring is key and it’s not uncommon for underwriting divisions to be led by a “Chief” with a large team of people who are much more loyal to him or her then they are to the company. The underwriting culture embraces a philosophical approach to problems and does not embrace the concept of, “Let’s figure this out as we go.” It. Just. Doesn’t.

Underwriting culture is also driven by financial incentives. Underwriters are judged by measurable profitability results. Most liability insurance products take five to seven years before an underwriting profit can be said to have been made or lost. The book of business and its profitability today is actually the result of underwriting decisions that were made many years ago. And the underwriting decisions that are made today won’t be realized as producing a profit or loss until many years into the future. Hence the values of longevity, predictability and track record.

Note how this contrasts with the Insurtech, where decisions are made in a continuous feedback loop of interactions with the customer with the goal of innovation and improvement, as opposed to bottom-line profit. The underwriter plays a risky game with every significant decision. There’s not much margin to innovate for sake of creating something new and possibly better. Covid-19 will present underwriters with many opportunities in this area, but notice that the phrase “federal backstop” will almost always be mentioned in that conversation.

The compensation structures of many traditional insurance companies provide that if the underwriting unit is not profitable, then none of its members get a bonus. Further, underwriting teams can have their ships lashed together, so that if the entire group isn’t profitable, then none will receive a bonus. This can tie together the results of diverse underwriting teams within a company and make them cross-accountable to each other, which is a powerful incentive for each to perform well within its own wheelhouse. For capital and technology investments, however, this produces lowest-common-denominator and team-specific “siloed” thinking.

None of this is to say that opportunistic choices going against a group’s natural bias can’t be reasoned through and made. The Insurtech culture of innovation has unquestionably changed the game for all participants in the space. But there remains a disconnect between the establishment insurance company players and the upstarts. There is a reason why most of the carrier investments in Insurtech come through separate Skunk Works (aka incubator) labs. A room full of executives from an Insurtech and the traditional insurance company would quickly discover that they are all interesting people, but come from different cultures, with different languages, habits, and ways of thinking.