Innovation in the insurance industry

Innovation in the insurance industry

Colin Mason recently caught up with Kate Armstrong, former PhD student of the Adam Smith Business School, who was responsible for one of the major innovation disruptions of the UK insurance industry. She shared reflections on the industry and her part in changing the way people buy insurance.

The UK has the largest insurance industry in Europe and the third largest in the world. According to the Association of British Insurers, the UK insurance industry manages investments of £1.8 trillion - equivalent to 25% of the UK's net worth.

The very recent history of the insurance industry is one that can be characterised by disruptive innovation. The first of these was the introduction of Direct Line. From 1985, Direct Line offered its single product, car insurance, over the phone. For the first time, consumers could purchase insurance direct from the provider, rather than going through a third- party broker. This was appealing to consumers, as there  was  no  commission to pay, no excessive paperwork, which had become synonymous with the insurance industry, and the process of buying insurance was streamlined and simplified.

"The very recent history of the insurance industry is one that can be characterised by disruptive innovation. The first of these was the introduction of Direct Line."

Many more direct insurers followed, permanently changing the insurance market. One of these, Admiral Insurance Group, was launched in 1990. Founding CEO, Henry Engelhardt, was previously Sales and Marketing Manager at Churchill Insurance, a direct insurer which had been launched in 1988. “Henry felt that there was a market for non-standard direct insurance. In those days, insurance  was  mainly sold through brokers, and Churchill broke the mould, along with Direct Line. But Henry thought there was a huge part of the market that wasn’t being addressed.”

Admiral sought to address this part of the market by developing insurance brands that would appeal to different segments of consumers, such as Diamond Insurance for female drivers, and Elephant, which appealed to younger drivers. This focus on developing strong brands beneath the Admiral umbrella was relatively new to the insurance market.

“During the late 90s, there were a lot of insurance brands out there and a lot of consolidation in the market at underwriter level and not at brand level. We would do big yearly focus groups to try and understand how the market was moving.”

This research led to the next major innovation in the insurance market in the UK, Confused.com, the UK’s first insurance comparison site. Kate Armstrong was Confused.com’s founder and first Managing Director. She first researched the idea in the late 1990s, but the industry wasn’t ready yet.“Consumers loved
the idea of it when you described what it was, so there seemed to be an opportunity. The difficulty in the late 1990s was that it was almost impossible to do a comparison because up until everyone went online in the early 2000s, it would be a long drawn out process to get a quote.”

Kate Armstrong was working with Admiral Group at the time, where she was involved with founding Elephant Insurance. Elephant, an internet insurance brand, was launched in 2000. It paved the way for Confused. com. “Early adopters were young, and that was a target market for Admiral’s influence. It seemed sensible to create an insurance only brand that gained traction with early adopters.” By 2001, when Confused.com was launched, many insurance sellers were making the transition to selling online. In retrospect, it seemed like an obvious idea. Before the internet revolution, choosing insurance was done mainly through brokers or personal recommendations. Insurance is based on many underwritten factors, and companies are constantly working with and adjusting these factors throughout the year. This work behind the scenes remains a mystery to the consumer.

"The insurance industry by nature has got to be innovative, because there is so much change going on, and it’s a very turbulent environment."

“When a dad recommends his  insurance  company and then a younger person contacts the insurer, they may be quoted a fortune  as they aren’t wanted as a customer.” Kate explains. And a company that may have worked well for you 12 months ago, may not work now. “You may not be the sort of client they want anymore, so they’ll drive up your price, and when you ring them they won’t tell you that it is because they are looking for fewer customers in your segment. The idea behind Confused. com was that people would simply put in one set of details and get everyone’s price in the market.” The Admiral Group benefited from the internet revolution for insurance companies, but it helped spark that revolution as well. “When Confused. com first launched, there wasn’t a huge online density. Confused.com helped all the players on its panel grow their internet market share. Admiral has always been innovative with brands and with the way it underwrites, it’s always been a good adopter of technology, it’s been innovative in ways such as moving the business process from call centres to online.”Direct Line and Confused.com created paradigm shifts in the way people bought car insurance. But what is the next disruptive innovation on the horizon for the insurance industry?

“The insurance industry by nature has got to be innovative, because there is so much change going on, and it’s a very turbulent environment. You have to be able to adapt very quickly. I think mobile technology connected to GPS systems, giving real-time data about the way people drive will cause some disruption. But the insurance industry is full of risk. Typically, there are very few periods of profitability and there are long and deep troughs of unprofitability, where the cost of getting a customer, the cost of the bricks and mortar, the costs of staff and the cost of claims all add up to over a hundred percent of what you’ve taken in as a premium.”

Kate Armstrong

Kate Armstrong, PhD at the University of GlasgowRetired in 2005 after Admiral’s flotation on the London Stock Exchange. A few years later, she enrolled on the PhD programme at the University of Glasgow. Colin Mason asked her why:

Good question. I’ve always been interested in the theory of business and get a little frustrated reading articles where you think, if you ask anyone who works in business, they know that. How is that adding vastly to the knowledge out there? Academic work goes deeper, and I was interested in learning how or if the Admiral story could contribute to innovation, entrepreneurship organisation culture, or a number of different areas. I loved the PhD process. What I loved about it was that, I started thinking that I knew what I wanted to do, but then  by  the  end of the first year I  realised, no, that isn’t what I wanted to do. I like the way it focused me and made me think about things and the way I was challenged by my supervisors, who were fantastic and made me work for my thinking process and played devil’s advocate, challenging me on every point. In the end I think I produced a pretty good piece of work. I could have written about 17 PhDs from my data. I’m quite interested in developing tools that potentially venture capitalists can use. One of the things about entrepreneurial companies, when they become much bigger and get sold, is they often don’t perform as well as they did. From my data, I can see why that might be, and I would quite like to develop some diagnostic tools around that.