Evolution of Digital Insurance, With Instant Verification and Real-Time Monitoring
Updated: Sep 21, 2020
The Genesis of Standardization in the Insurance Industry
After a few hundred years of insurance companies having their own rules an industry-standard was adopted, Acord. Acord was created to establish a systematic way to send and receive data. In the 1970s the forms were mailed to one another to collect the needed information to properly underwrite and mitigate risk. Over time we evolved with technology, eventually using fax machines, and then email in the late ’90s and early 2000s.
As technology evolves you would assume the standards would evolve with it. While we have many more ways of collecting relevant data, Acord, by and large, is still the standard within the insurance industry. Using the same forms, the same way, we’re just not mailing them anymore.
Certificates of Insurance - What They Aren’t
Certificates of insurance have been around since the 1970s to verify that another entity has insurance in place. Whether it’s a lender verifying that their investment is properly insured, e.g., home loan, or a business with an insurable interest in another business, e.g., general contractor and subcontractor. It was certainly a useful document for quite a while. However, it’s not a lot of things people assume it is. Here’s a list of what a certificate of insurance isn’t:
It is not a contract
It confers no rights to the requestor (certificate holder)
If guarantees nothing
It is not the policy
It doesn’t confirm insurance coverages
It doesn’t show coverage changes
It is not real-time
You may be asking yourself, why are we using the form then? That’s the same question I had and am on a quest (yes, I’m a fantasy fan) to solve it.
Wait? More Problems With Certificates
Absolutely. You thought the above was bad, well, I hate to be the bearer of bad news but there’s more. Certificates of insurance are so widely used that they are assumed to be the best risk mitigation tool available. However, I believe that the certificate of insurance does more damage than good.
Certificates of insurance offer a false sense of security by providing data that isn’t guaranteed or actively monitored. What I mean by that is the moment a certificate of insurance is sent, the data becomes dead. What you have in your hand isn’t necessarily the truth.
Did you know that often certificates of insurance are manually created? In the commercial insurance world data that is received from insurance carriers to agency management systems (glorified CRM in the insurance industry) isn’t very reliable. It’s not being sent by API and it’s not real-time. The data often is so bad that insurance agencies will opt-out of the “download” process. Yes, you heard me right, they have to download the data.
So, why are we still using them?
Evolution Takes Time and Cooperation
Inertia has plagued the insurance industry for quite some time. Consider this for a moment, insurance is typically a product that is necessitated by another entity. When you buy a home, the bank requires it, when you buy a car the lender requires it, when you rent a space the landlord requires it, and so on. If insurance is necessary, do they need to innovate? Not as much.
Necessity is the mother of innovation and when the need is stagnated by the industry, they are much slower to evolve. So is the same with certificates of insurance. They have been in circulation for so long and widely accepted that it’s often overlooked as something that needs to be evolved.
Getting all the stakeholders to cooperate is extremely challenging as well. Insurance companies are extremely slow to move, as I’ve stated before, and so if the value proposition to them isn’t extremely compelling, they have no incentive to do it. This is why I believe the certificate of insurance still exists.
If the carriers don’t care as much because they don’t see it as directly affecting them, then who cares? Businesses that take on risk. Guess who that is? You guessed it, all of them.
What’s On the Horizon
I believe the insurance industry will evolve dramatically in the coming decade out of necessity. Remember, without necessity nothing evolves. Here are a few reasons we have to evolve:
Aging demographics within the industry
Not as many coming into the industry
More insurtech startups challenging the status quo
Reinsurance carriers interested in innovation
Technology outside of the industry is evolving
More complex exposures
Rapid technological advancements
I see the landscape a bit differently than many of my peers. Where the agent currently plays a role as a facilitator in the risk mitigation process, I don’t see them as being a necessary part of this evolution. I believe entities such as banks or general contractors should have the ability to see in real-time the status of their insurable interests’ insurance without the use of certificates of insurance. I believe certificates of insurance should be eradicated as they do more harm than good. I see core systems within each industry that should be able to be armed with the data they need to mitigate risk effectively.
Overall I see ecosystems being able to integrate seamlessly within the insurance ecosystem. Coverage will be coupled with risk. When there is risk, insurance is offered at that moment, not reactively. There is a bright future ahead of us.
If you or anyone else you know is passionately interested in insurtech and the evolution of the insurance industry, I’d be very interested in talking with you. Please reach out to me so we can challenge the status quo and change the world.
Wade Millward Book recommendation: Play Bigger: How Pirates, Dreamers, and Innovators Create and Dominate Markets, by Al Ramadan, Dave Peterson, Christopher Lochhead & Kevin Maney