The origins of life insurance show up at least as long ago as the middle ages, when the notion of providing mutual aid emerged in organized structures. People came together, then via benefit societies for those in need and for the good of all.
Similarly, modern-day carriers originated as mutual ownership based – a construct that prioritized maintaining an asset pool to cover claims at any time, including ones that might occur decades into the future.
A lot has changed. The top 25 life insurance carriers control 72% of the market, are largely public companies, and so they must serve the demands of shareholders, not just policyholders. State, federal and global regulatory authorities watch over insurers’ moves with many oversight goals – a big one being carrier financial stability. But these efforts do not solve a problem highlighted in this year’s Insurance Barometer Study:
One-third of American households would have an immediate problem paying basic living expenses if the primary breadwinner died. And an additional one-third has no idea what they would do should they find themselves in this situation.
Ask people inside the sector and the answers to the question, “why doesn’t everyone buy the coverage they need, and may even know they need?” Responses are variations on three themes: (1) potential buyers perceive the products are too expensive, (2) they don’t understand how insurance works and what its value is, and (3) they put it low on the priority list relative to other financial commitments.
None of these explanations are flat out wrong. But they risk derailing innovators from solving a problem that will continue to impact people in need and the rest of us, too. It is a problem worth solving.
Insure-tech has become a hot sector, but life insurance is a product category that gets relatively limited focus from either startups or investors. Why? Experts offer a few theories: It is complex – loss curves run for decades. Unlike auto and home insurance, there’s no requirement to own life insurance – so there is no definite group of buyers. Asset growth in this economic and regulatory environment has become trickier. Capital requirements are tougher. And maybe founders and funders themselves don’t want to look death or the greatest personal catastrophe in the eye.
While these reasons sound plausible, there is a way to think about how to uncover sources of value and solve a marketplace and social problem hiding in plain site. Here is a proposed three-part plan:
- Reframe the problem that the successor product set to legacy life insurance should solve. Life insurance has historically addressed the problem, “what if I die too soon?” The questions asked now about financial health sound more like, “How can I be sure I’ll cover my monthly expenses given my earnings?” “How will I ever retire?” and then, “What if I live too long?” Fears about dying too soon have been pushed down the priority list. In an era of longer life expectancy and lower inflation-adjusted income for many Americans these are smart priorities. Consider, therefore, how to solve these problems. Listen to people’s desire for products that pay the living, provide coverage for long-term care and/or medical expenses, and are architected with far greater transparency than today’s living benefit products. (Try to read an annuity contract and you will get the point.)
- Understand what motivates people to take action on life insurance. Loss aversion theory, first proven by Nobel Laureate Daniel Kahneman and colleague Amos Tversky , demonstrates that people prefer to avoid loss rather than pursue the opportunity to realize an equivalent gain. No surprise then that confronting one’s mortality is a topic to be avoided – it is the ultimate loss — especially compared to a view held by many that there is no upside to buying a life policy: “When I win I lose.” There will be traction for those who can get to a nuanced definition of “trigger events,” beyond the tired and obvious ones. Trigger moments are when people will be more likely to evaluate the loss/gain relationship in a new light.*
- Go after product/market fit versus playing around the margins of what already exists. Be open to the possibilities that: (1) Potential buyers who say your product is too expensive are trying to tell you that the price/value relationship is weak. (2) People don’t understand the value of many life insurance products because these products are too complex. (3) In a world where people fear the consequences of living too long, a product that focuses on one’s death seems out of step. Test the receptivity for product concepts that include living benefits, and allow people to make feature tradeoffs. On the critical path: (1) cracking the code to combine delivering value to the buyer and financial feasibility all the way through claims payment, (2) executing with minimal fine print, and (3) creating products that can be distributed through a cost-effective, multi-channel platform that leans digital/call center, innovates commission structures, and defines a new agent archetype.