R&D Tax Credits for the Modern Insurance Industry
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.
