R&D Tax Credits for the Modern Insurance Industry



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Modern-Insurance

        Some call it the tech revolution, while others think of it as the information age.  Entrepreneurs see it as a way to cut expenses and provide better services to ever-broadening markets.   Whatever the case, modern technology is shaking up the insurance industry in remarkable ways.  Innovative insurers use telematics, social media, and the Internet of Things to market their products, calculate risk, interact with customers, and provide overall smarter and more efficient insurance products to their clients.  

        In the auto insurance industry, sensors collect data about driver behavior which enables policy pricing tailored to each individual consumer.  In healthcare, insurance products provide a central source of client information for doctors, nurses, and therapists along with an equally intelligent information platform for patients who want to understand more about their conditions.  Even homeowners insurance is evolving as insurers are gaining the ability to utilize real-time, machine-to-machine communications for the prevention of loss and the assessment of risk in the home.  In the near future, an app will send an alert to a smart phone telling the homeowner to unplug their blow dryer before they lock the door behind them.  The aggregation of existing technologies and the unexplored potential of emerging ones are going to mark a fundamental change in the insurance industry all around.  Federal and state research and development tax credits are available to help stimulate these efforts.


The Research & Development Tax Credit

        Enacted in 1981, the Federal Research and Development (R&D) Tax Credit allows a credit of up to 13 percent of eligible spending for new and improved products and processes. Qualified research must meet the following four criteria:

  • New or improved products, processes, or software
  • Technological in nature
  • Elimination of uncertainty
  • Process of experimentation

        Eligible costs include employee wages, cost of supplies, cost of testing, contract research expenses, and costs associated with developing a patent. On December 18, 2015 President Obama signed the bill making the R&D Tax Credit permanent.  Beginning in 2016, the R&D credit can be used to offset Alternative Minimum tax and startup businesses can utilize the credit against $250,000 per year in payroll taxes.


Data Analytics

        The use of big data may be the single most disruptive force in the modern insurance industry. With no physical products to manufacture, data is one of the industry’s most important assets.   It forms the basis for actuarial calculations, risk assessment, the identification of emerging trends, and financial management.
 
        In today’s competitive online markets, insurance quotes and policy underwriting must be generated in an instant. Compounding the challenge is the demand for a flexible service that is based on the specific needs and behavioral patterns of each individual customer, instead of broad demographical categories.  If a person with a red car has an immaculate driving history, he expects to pay the same rate as a driver in a blue car.  The demand in modern insurance markets is for a service that can identify low risk consumers and reward them accordingly.  This means a large amount of information must be collected from a range of sensors, central data bases, smart devices, and customer surveys in order to identify those people.
        The color of a person’s car might be relevant for the risk assessment of one driver but not another.  The computer must be able to make a snap decision on that inquiry and balance it against other relevant catalysts.  Insurers that are able to provide the most precise risk analysis will be able to price their products most efficiently.  That will enable them to not only attract more customers with lower fees but also to generate higher profit margins and reduce risk.  They can then pass that intelligence on to a re-insurer who will in turn provide the same benefit to them that they provide to their clients which will essentially compound the benefit.  


The Internet of Things (IoT)

        Despite the emerging intelligent technology, there is still a wealth of relevant information about policyholders that remains untapped.  The Internet of Things (IoT) has the potential to unlock unprecedented value for underwriters and actuaries who will soon have access to a broad range of personal behavior information, pinpoint data, and dynamic customer characteristics they can use as inputs for risk calculation, trend identification, and efficient marketing strategies.   

        Consumers will also be able to use the data to analyze their own behavior and adjust in order to lower risk.  This means that insurance rates will become more dynamic as insurers will soon have the ability to make real-time adjustments based on changing behavioral patterns.

        In addition, the IoT will soon make it possible for sensors to remotely identify a broken pipe and notify homeowners of the need for repair.   With this information, homeowners will be able to fix the leaky pipe before a flood breaks out.  This reduces risk for the insurer as well who will also be able to identify hazards before they manifest into casualty claims.


Just-in-Time Insurance

        Modern digital insurers need to understand their customers thoroughly not only for the initial quote but also throughout the entire policy period.  Products are coming to market that provide instant, constantly adjusting rates as a person moves through a set of dynamic spaces.  The regular activities of each person represent different risks such as driving a vehicle, skydiving, or working in a hazardous environment.  Some other activities may reduce risk as well such as going to the gym to improve overall health, eating vegetables, and regular doctor check-ups.    A “pay-as-you-live” product would be able to monitor the activities of each individual policyholder in order to provide efficient pricing and eliminate a large chunk of risk.  This in turn would allow insurers to estimate with better accuracy the exact amount of cash they need on hand to pay claims at any given point.  Not only are insurance quotes provided “just-in-time” but inventory is maintained that way as well.    


Customer Interaction

        The way modern insurance companies interact with their clients is rapidly changing. Consumer willingness to switch insurance providers has reached an all time high. Twenty-first century customers expect to see real-time price changes on their smart devices, receive notifications about their changing behavior, to reach call centers quickly and to engage with insurers on multiple media outlets with user friendly interfaces.   If their provider lacks these capabilities, they are able to receive quotes from a competitor in an instant.

        Esurance Insurance Services, Inc. recently challenged Geico’s old mantra “15 minutes could save you 15% or more on car insurance”.  Well publicized ads by Esurance state, “15 minutes for a quote is crazy.  With Esurance 7-and-a-half minutes could save you on car insurance.  Welcome to the modern world.”  

        In reality, both companies are very quick in generating quotes.  One test estimated that they are about equal, taking around 3-3 ½ minutes to generate a quote, while making the experience as simple as possible for the user.

        MetLife Inc. is investing more than $300 million in information technology initiatives that the company promises will “transform the customer experience” and fulfill unmet needs. Among the innovations is a product called “MetLife Wall”.  Similar to the Facebook interface, the  software app aims to ease and speed interactions between service agents and customers.  The software platform provides a complete timeline of customer’s transactions, i.e., claims, records, status, etc., which  enables MetLife agents to quickly retrieve and cross-sell solutions.  The company is also looking at integrating other sources of customer info, including social media and mobile apps.

        This is all part the current trend away from the traditional business model of selling large numbers of products designed for mass markets through agents and brokers.  


Virtual Insurance

        Increasingly, underwriting, sourcing, and construction of insurance portfolios will be done by automated advisors and artificial intelligence robots.  This approach, if perfected, is expected by enthusiasts to be significantly more efficient and perhaps even more effective than traditional human advisors.  The advance of natural language technology could provide a question answering system like Watson with the ability to answer an agent’s questions about products, or a policyholder’s questions about the coverage that their policy provides.

        The source of the answers for the questions would come from text generated when the various policies were developed. The knowledge domain that the robots look to in order to generate answers might also include regulatory filings and prepared answers to commonly asked questions.   

        Innovations in automation is not however limited to artificial intelligence.  Virtual Insurance Pro is an innovative call center outsourcing company that uses technology and human resources to deliver customer service solutions to clients.  Their services include automated call distribution, computer telephony integration and interactive voice response. A number of other companies are innovating as well.


Innovative Start-Ups


Oscar
        Oscar is a health insurance start-up company launched in NYC in 2013.  The company differentiates itself from competitors by providing a user friendly interface to those shopping for health insurance. Co-founder Kevin Nazemi was inspired to start the company after receiving his health insurance bill in the mail and realizing that none of it made sense to him.  He and his team of engineers from MIT and Tumblr Inc. see the Affordable Care Act as an opportunity to fill market inefficiency.

        The influx of new Americans who now have access to affordable health insurance of their choice along with government, web-based marketplaces with plenty of issues has provided a market opportunity for innovative tech companies with the ability to simplify government bureaucracy.  Oscar offers a Facebook-like interface of members’ medical lives and detailed information on doctors, hospitals and other common services.  


CoverHound Inc
        CoverHound, Inc. is an innovative insurance broker start-up based in San Francisco, California.  They provide instant, accurate rates with easy online access backed by personalized human service when needed.  They differentiate themselves from competitors by providing a cleaner and easier to navigate interface that can provide a range of quotes in a matter of seconds.  They have a number of engineers working for them to improve the online interface for those seeking access to the best insurance rates in the simplest and quickest time.  Founder and CEO Basil Enan says, “Until now, the internet has failed to give users a positive, transparent experience when shopping for insurance. We provide instant and actionable rates from major carriers, so they can pick the best policy for themselves.”


Crimson Informatics
        Crimson Informatics Inc. was started by Steven McKay and Mac Gregor in 2010 to provide data analytics gathered from an electronic car monitor.  Crimson’s data-capture monitor plugs into the diagnostic computer inside a car and transmits information that records driving habits and makes recommendations to the driver for improvement.  It also turns that info into a score that can be used by insurers to evaluate a driver in order to provide a more accurate insurance quote.  


Conclusion

        Modern technology is shaking up the insurance industry.  Big data analytics, IoT, just-in-time insurance, enhanced customer interface, and virtual insurance are among the latest innovations that are driving this trend.  Federal and state R&D tax credits are available to help support and stimulate innovative developments in the modern insurance industry.

Article Citation List

   


Authors

Charles R Goulding Attorney/CPA, is the President of R&D Tax Savers.

Michael Wilshere is a Tax Analyst with R&D Tax Savers.

Andrea Albanese is a Project Manager with R&D Tax Savers.


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