The sudden rise of upstarts is the latest evidence that the U.S. health insurance industry is facing significant disruption. Just earlier this year, the upstart Clover Health raised $160 million in new funding, bringing its total to $285 million. The San Francisco-based company saves consumers money by using its technology to offer preventative care. Using data, the company aims to recognize early when a consumer might need care—reducing costs for both consumers and the insurance company.
Venture capitalists have been eagerly pouring money toward startups like Clover Health. In 2015, investing in the so-called digital health tech sector reached an all-time high of $5.8 billion, with deal activity jumping over 20 percent year-over-year.
Interestingly, a similar trend is happening in the financial investment industry. Fintech startups had the best year in 2015, receiving $21.6 billion in venture funding. Even social media companies like Facebook and Snapchat, sensing an opportunity, are entering into fintech.
So why are the health insurance and investment sectors suddenly a tech battlefield? Simply put, venture capitalists are recognizing that, due to many economic and social factors, the time is ripe for disruption in these industries.
Customer empowerment and the health insurance and investment industries
For decades, the greatest firms of the insurance and investment sectors have been able to grow despite having little or no direct links to individual customers. Even the brokers who sold their insurance policies and mutual funds often have only intermittent contact with policyholders and investors. It’s been a tidy arrangement, but customer empowerment is compelling firms to reach out to customers in ways they’ve never done before.
This shift is being acutely felt in health insurance, where the Affordable Care Act has changed the landscape for all healthcare providers. A decade ago, an insurance company’s most crucial relationships were typically with the firms who offered health insurance to employees as part of a benefits plan. In essence, insurance was bought and sold wholesale. The individual market for health insurance was a minor part of the business.
Today, as a recent report from PWC states, the Affordable Care Act has spurred a “shift from the business-to-business (B2B) model of the 20th century toward a post-ACA business-to- consumer (B2C) model.” As millions more Americans enroll for coverage through health exchanges year after year, insurers are getting a crash course in how to manage a retail business. Exchanges allow customers to comparison shop for health insurance just as they would for a microwave oven. At the same time, studies show that the majority of policy holders don’t understand their coverage. They also expect insurers to provide many of the things they’ve come to expect from other retailers, including loyalty rewards, better quality and product transparency. The era of the empowered customer confers a competitive advantage to insurers who best understand what customers are looking for, and are best able to communicate to them in clear and simple terms.
Meanwhile, the Affordable Care Act has also created what PWC calls a new “cottage industry:” over 90 new health care companies have been created since 2010, from telehealth companies and health educators to data-analytics firms and process improvement consultants—and even new entrants to the insurance business itself.
The entire healthcare sector is still evolving to meet the goals and demands of the ACA, but the old passive-policyholder model has been replaced by one in which empowered customers make the health insurance decisions that affect their lives.
A similar dynamic is underway in the investment industry, where many management firms, which in the past dealt primarily with institutional investors and financial advisors, now find themselves needing to communicate directly with individual investors as part of their growth plans.
Many of these firms—managers of mutual funds and other investment vehicles—are as unknown to customers as their customers are to them. Their desire to reach out is driven in part by the increasing popularity of self-directed Individual Retirement Accounts, which place all decision-making in the hands of each individual investor. But because these firms have never invested in the consumer face of their brand—their web sites and communications are tailored to specialist audiences rather than general ones—they are effectively allowing their brand to be shaped by the online news reports and social media discussion that many do-it-yourself investors rely upon. Social networks spread information faster than broker and advisor networks, prompting investment firms to step directly into the conversation.
Meanwhile, in other jurisdictions around the world, a new regulatory environment is taking shape that is also spurring direct communication with customers: governments are lifting the veil on the compensation arrangements between investment houses and financial advisors. In Australia, the United Kingdom and (beginning this year) Canada, changes to legislation now require financial advisors and brokers to show clearly, and in detail, how much people pay for their services, including deferred sales charges, trailing commissions and other costs. Customers have welcomed these reforms in the sense that they have embraced the new information—though the resulting discussions with their advisors have perhaps been more uncomfortable. What’s clear is that, with the advent of self-directed investing, mobile financial services and greater transparency, the empowered customer has arrived in the investment world.
The infusion of billions of dollars in health insurance and fintech is a direct result of customer empowerment. In financial services, for instance, tech-savvy and empowered younger consumers are more likely to reject traditional companies in favor of more nimble and innovative startups. Interestingly enough, heavy investments in this industry will only accelerate customer empowerment by providing consumers more choices and more control over their health care and their finances.
As the industry transforms from a B2B model to a B2C one—and as more and more startups enter the scene—established investment and insurance firms can’t afford to stay on the side lines. To survive, companies in these industries need do something they’ve traditionally delegated to smaller retailers: engage directly and continuously with their consumers. To survive, established insurance and investment firms need an ongoing source of trusted customer feedback in order to learn how they can tweak their products, services and business models to better serve the changing expectations of empowered customers.