The new kids on the block (#insurtech startups aiming to be disruptors) have not made a dent and for sure will not kill insurance incumbents. So, why should an insurer innovate? Because technology and data are incredible opportunities to lower the loss ratio and improve return on equity. (Do you remember my Insurtech 4Ps?)

Let's look at auto insurance. Root (the new kid on the block) once upon a time was a telematics-based unicorn, but it has never used telematics data well. Nowadays, they have given up on telematics (their latest storytelling is about embedded), and their market cap is about $50M (in March 2022, it was about $500M).

By contrast, Progressive (with a market cap of $81B) presented their 2022 results on Feb. 28 and dedicated all their earning call to telematics, providing tons of food for thought for anyone working on auto insurance in the U.S.

Below, I'll analyze nine key takeaways (with facts and figures) from this earnings call, exploring the future of auto insurance. (Spoiler: The future will be telematics-based! And you will get the reason for the headline of this newsletter edition.) 

Mobile-based telematics has made it feasible to apply this technology in any insurance market worldwide. Here, you have a recent example of the success at Cambridge Mobile Telematics in implementing telematics in Japan. There is no such thing as "a market not ready for auto insurance telematics," only telematics programs that are not good enough.

Are you working at an auto insurer that has not yet figured out how to use telematics capabilities to make more revenue, improve driver behaviors, price risks more accurately and retain more customers? You are leaving relevant opportunities on the table! You are leaving behind more than 10 percentage points on your combined ratio!

Source: Jan Myszkowski Oct '22

Let's take a quick look at Root's facts and figures.

• '22 gross written premiums $600M (vs $743M in '21)
• '22 loss ratio (including loss adj. expenses) 91% (vs 99% in '21)
• '22 combined ratio of about 120% (vs 157% in '21)
• '22 net losses $298M (vs $521M in '21)

Basically, Root has cut marketing expenses, reduced new business (more unprofitable than renewed and already pruned business) and reduced overall costs in line with the shrinking of the top line.

A year ago, I wrote: Root is not using telematics data well for pricing and risk selection. Moreover, they have even denied the usage of telematics data for claim management and for changing driver behaviors.

See also: It's Time to Get Back to Basics

They realized it and pivoted to the new buzzword: embedded insurance. Below are the mentions of "telematics" ("telematics" + "UBI") vs "embedded" in their quarterly shareholder letter:

Embedded insurance (with Carvana) represented 41% of new business in Q4 '22 (vs 3% in Q4 '21). That should represent about 9% penetration on cars sold by Carvana.

Wrapping up: They don't have their act together and haven't developed adequate telematics capabilities, and their market cap is an infinitesimal fraction of the money they raised. (Their IPO valued them at about $7B in '20.)

Does this mean telematics doesn't work? No! Absolutely not! Progressive's story, words, figures and acts demonstrate that it works well.

Progressives' earning call gave nine key takeaways for the future of auto insurance:

1. Auto insurance is your most relevant business line and is here to stay, and you have to innovate it

(Do you remember my "rumors about the death of personal auto insurance have been greatly exaggerated"?)

Progressive showed innovations (introduced over the years) and announced many further changes in their telematics-based approach. Progressive's CEO didn't talk about it on the stage of a conference; she dedicated the full Q4 earning call to this innovation journey.

They are not doing it because it is cool to be innovative. You can feel the C-level commitment to using technology and data to do the auto insurer's job better. They are innovating because it contributes to achieving their strategic goal "to grow as fast as possible while delivering a calendar year 96 combined ratio" and represents a concrete opportunity to increase their return on equity! We are talking about the second-largest U.S. auto insurer, with a personal auto loss ratio 10+ percentage points better than the market average in 2022 and a total shareholder return constantly in the top 10 insurers worldwide for the past two decades.

They took this insurtech approach (telematics) seriously and are obtaining terrific results on their most relevant business line. So why are you still ignoring/denying it?

2. The future of auto insurance is telematics-based

This 86-year-old carrier has been a pioneer in using telematics data since 1996, and has constantly invested in developing its telematics capabilities. Progressive has clearly talked about where they see economic value in using it:

• "Segmentation is a key facet of our competitive prices pillar, and nowhere is that more evident than in our investment and usage-based insurance products"
• "UBI is our most predictive rating variable, and it provides unparalleled rate accuracy"
• "It's about segmentation and matching rate to risk"
• "The program systematically helps us retain lower-risk drivers" 
• "Our claims representatives have seen that telematics data can help them settle claims more quickly and efficiently"
• "Offering a service to detect and respond to major accidents [...] customers have consistently told us that this kind of service is something that they really do value"

(Here is an old (gold) paper published with Swiss Re back in 2017: Unveiling the full potential of telematics )

Customers are ready in any market (a recent survey -- done by the IoT Insurance Observatory together with Swiss Re on 10,000 policyholders in nine different markets -- shows a high and consistent level of acceptance: Only a fifth dislike the telematics approach!) Regulation is not an absolute barrier in any market (only a constraint that would influence the execution of the program). And mobile-based telematics removed the old barrier: The telematics hardware was too expensive in some international markets where the annual insurance premium is below $200. The size of your company is not an excuse, either: You don't need to be a 20M policy carrier; there are international telematics success stories from players with less than half a million policyholders. In every market, you can find tech players and system integrators that allow smooth execution in your organization.

It is 2023, and there are no more excuses. What is your reason for still leaving on the table all these percentage points on your combined ratio?

3. Surcharge bad risks

Progressive explained well why it is necessary to surcharge bad risks to create value through more accurate pricing, and how it works:

• "Participation discount is larger now, at 15% instead of 10%"
• "We've increased the size of the maximum potential discount to 45%, and the maximum potential surcharge to 60%" 
• "75% of customers still receive a discount, and only about a fifth receive a surcharge"
• "Renewal rates for the safest drivers who are earning the biggest discounts are about 6% higher than average, while they're about 16% lower for the riskiest drivers who aren't receiving a discount"
• "We had deployed this new continuous model in 12 states, representing over a quarter of our net written premium, and plan rollouts to most of the rest of the country during 2023"
• "Early on, we weren't pricing to the full curve. So, we understood that a lot of people should be receiving surcharges and that some people should be receiving bigger discounts. [...] I think we are now very close to or almost completely pricing to that curve with the data we have today. [...] we continue to advance the size, continue to pull additional data elements [...] our segmentation game is never ending. We're always trying to continue to advance to find additional data to use that can keep us with a gap between us and the competition"

Telematics Innovation at Progressive (Feb '23)

How many times have you heard at conferences or read in articles that customers don't want to be monitored, don't accept the idea of being surcharged and would massively switch if you surcharge them? Progressive's "the share of our personal auto customers participating in Snapshot has moved steadily upward" seems a definitive answer to these doubts.

Putting together the information from this earning call with the previous ones, It seems that the telematics penetration on the new business is above 46% in the direct channel and about 13% through the agent channel.

4. All the policyholders must have a telematics app whatever the product chosen

This has been the most substantial and most surprising message in Progressive's earning call:

• "We know that despite how times have changed, there's a large segment of customers who don't want their insurance premium to be based on their driving data"
• "That means that if we limit this just to our Snapshot customers, we'd be leaving out a lot of others. So, in March we plan to start making accident response available to all of our auto customers, not just those who are in Snapshot"

(Do you remember the telematics predictions Harry Huberty and I dropped a couple of years ago?: "It will be the norm in the U.S. personal auto market for customers to download their insurer’s app on their phone to be insured. This app will continuously use the smartphone’s sensors to deliver a superior customer experience regardless of what product a customer chooses: pay-per-use, telematics-based renewal pricing or a policy with a traditional rating based only on traditional variables such as age, credit score, etc.") 

Progressive has started monitoring all policyholders to create value for both the customer and the insurer,

5. Wrap services around the insurance contract

Their talk about services: "We'll use data from the sensors on the phone to detect when a serious crash is likely to have happened. We'll reach out to the customer to confirm the accident and to see if they need help. If we don't hear from a customer at all, and it seems particularly serious, we'll request that the police conduct a well check to make sure our customer is OK. Since we know the customer's location from the telematics data, we know just where to send them. [...] This adds value to the customer's relationship with us and can become another reason to choose and to stay with Progressive. Additionally, while other insurers offer crash detection to their UBI customers, we'll be making it available to all of our personal lines auto customers, whether they're in Snapshot or not. Third, we're deliberate about dispatching EMS."

• Honestly, we have merely scratched the surface of the service opportunity ("continuous is a little bit more expensive [...] we're excited about and what Jim talked about, the excitement about it is the services that we're going to provide, especially in some of the claims examples") in the earning call
• However, Progressive has only just started with the continuous monitoring approach. ( "Our most recent addition is continuous monitoring, which began its rollout in the summer of 2022")
• I'm pretty confident they will fully understand the service opportunity in the coming years

6. The IoT paradigm gives tremendous value to claim handlers (and mobile-based telematics data is good enough)

• ”Having this telematics data available, we're able to get their claims started more quickly and able to handle it more efficiently”
• ”Within two minutes of the impact, we reached out to our customer […] That agent dispatched an ambulance and a tow truck […] it took only 10 minutes from the time of the accident to when we had a claim in our system”
• ”This customer had this accident just two days after buying their policy […] we can see from the telematics data that the crash happened where and, importantly, when our customer said it did […] very confident that this loss did occur after and not before the customer purchased the policy”

"Over the last couple of years, we've experimented with offering a service to detect and respond to major accidents," and "We'll use data from the sensors on the phone to detect.” Do you really think that Progressive would have released this feature to all their policyholders if they had not been super-confident with their mobile-based crash detection?  

I told you this in my first LinkedIn article back in 2014:

• “Emergency services with automatic claim detection or buttons for direct-dialing the assistance center”
• "Act more proactively […] make the whole process faster and more efficient, by anticipating: the actual verification of the claim (anticipating the first notice of loss); the direct contact with the client for claim description”

7. Telematics is a capability, not a product

My friend Pete Frey highlighted in an article we wrote together in 2021: "Telematics adoption should be seen “as not just launching a program but actually building a business capability within your organization. The biggest difference as you switch your perspective from program launch to capability building is that you look at building buy-in, understanding and expertise across the organization while launching the program." In an interview with Forbes in 2020, I shared: “building the capability to master the IoT insurance paradigm is an achievable target, and it doesn’t require tens of millions of dollars. However, governing this journey and transforming the way an insurance company does business will require a multi-year commitment and strong leadership.”

I had a couple of meetings in the last few months where two different insurers (both listed) gave me the clear feeling they didn't get it and will not obtain any result from telematics. At least, not with the current leadership teams.

In the meeting with one of the insurers, their main question was: "Can we hope someone will bring us a driving score already calculated? This way, we will have not to deal with app, devices and telematics data". The second insurer (bigger and with an international presence) opened the discussion by saying "for us, telematics is only about claim management. Can that app give us the same data as this device?".

See also: Embedded Insurance Is Everywhere

What have we heard in Progressive's earning call?

• "Getting into telematics is not easy. [...] It's not just as simple as adding a new rating variable. It takes broader and sustained effort, new capabilities and investments"
• "I'd like to tell you about how we've built on that long history in telematics that Tricia discussed"
• "Its efforts and investments over the past 20-some years has established a lot of these capabilities or learnings that we can leverage"
• "We're going to continue to evolve and continue to advance our competitive advantage when it comes to pricing and telematics"
•  "I'd like to share some exciting news that doesn't involve using telematics data to more accurately rate policies but instead builds upon our telematics heritage to provide a valuable service to our customers"
• "Invested in a process of continuous improvement in our UBI products"
• "In parallel to our efforts in personal lines, we were developing UBI for commercial auto products"

A competitor’s product can be replicated in a few months, but capabilities require time to be built and internalized in the organization. A capability gap is going to require years to be closed. The sooner you start your telematics journey, the better.

8. You don't need to wait for OEMs or beg for their data

When you talk to an insurer struggling with telematics, it is frequent to hear the belief/hope/illusion that connected cars will change everything, that OEM data are the inevitable end game, that OEM data will allow insurance telematics to take off and that this will happen soon.

What has Progressive said?

• "Working with data collected by automakers. [...] They've been working to show the value of these programs to their customers so that they'll sign up to share that data with them"
• "And we've been able to tap into that. When a customer comes to us to quote and their driving data is available, we'd ask the customer if they'd like us to use it to determine their price. They say yes, we bring that data in and apply the UBI discount or surcharge to their quote immediately, again, pushing that rate accuracy to where it matters most, the new business quote"
• "This isn't common yet, but we're excited about the opportunity it represents"
• "The framework we're talking about depends upon vehicles with cellular connection. [...] Some, you know, are still working on it. So, it's -- and it does take a while for the fleet to turn over. So, it's very focused on a few OEMs and the most recent model years. [...] So, we expect that this population will grow over time"

Basically, we are talking about customers asking for a quote from Progressive, and already have a driving score generated by their connected cars. This is a specific use case that doesn't happen too frequently yet (but will be more frequent in the future). Progressive is happy to use (and pay for) this additional information at the point of quotation.

Telematics Innovation at Progressive (Feb '23)

I'm pretty aligned with this vision. There are not a lot of data today (insurers insure all the cars in use today, not only the new sales), OEM data can be helpful for some specific use cases (that don't require a lot of data), and a few times you are even able to find sustainable business care considering the high cost of this data.

However, many of the telematics opportunities require continuous monitoring and can be addressed better with the insurer's mobile app.

Here a recent conference where I talked about OEMs and insurers VIDEO 

9. [MISSED] To change behaviors is an incredible opportunity for an insurer

Driver behaviors can be changed, and the most effective way is through frequent and tangible rewards. Over the years, a material part of the IoT Insurance Observatory's research has been dedicated to this use case (in the different insurance domains, not only personal auto). I've seen best practices obtaining up to three percentage points on their combined ratio changing driver behaviors. Last year, in the March edition of this newsletter, I interviewed Anton Ossip (Disovery Insure's CEO), who built a great telematics program focused on changing driver behaviors: Vitality Drive. A broader perspective on behavioral change can be found in the paper I published with the Geneva Association in 2021: From risk transfer to risk prevention

This issue is totally missing in Progressive's talk, and it is a pity because to apply it on all the portfolio (point 4 above) is a fantastic opportunity. I'm sure we will hear even this in Progressive's earning call within two or three years.

This earning call should be read again and again by everybody working on auto insurance. A lot of food for thought.

My advice in a nutshell: Be more like Progressive and less like Root.

The metaverse is coming — fast. In PwC’s 2022 US Metaverse Survey, 82% of business executives (including 87% of insurance executives) said they expect metaverse plans to be part of their business activities within three years. Insurers that move swiftly and wisely to use the metaverse can find success in two ways: 

1. Enhance operations and customer engagement by engaging employees, customers and policyholders in new ways.
2. Create new revenue streams through coverage of new, metaverse-specific risks.

Here is a brief rundown of some of the main opportunities in each area — and five guidelines to help seize them.

Engage and excite your stakeholders

The metaverse is on its way to becoming an immersive, global and decentralized digital world that blends seamlessly into the physical one. This new world can enable insurers to reach customers in new ways and deepen relationships with existing ones. It also can help insurance employees pick up new skills, collaborate more intensely and do their jobs more effectively — all while potentially cutting costs. It can, for example, help:

• Upskill the workforce in new ways. Metaverse tools available right now can train employees in hard skills (such as risk or damage assessments) and soft skills (such as leadership and resilience). Metaverse “campuses” can support remote work, collaboration, recruitment, onboarding, performance management and more. These tools can be both lower-cost and more effective than in-person equivalents.
• Transform underwriting and claims. Instead of (or in addition to) sending staff to inspect physical properties in person, your employees can inspect their digital twins in the metaverse. These detailed, interactive, continuously updated 3D models can help your people better assess risks and identify risk-mitigation measures. That can support more accurate, lower-cost underwriting. Digital twins can also enable claims assessors to virtually walk through an incident scene. They can then better determine damages, recreate and simulate incidents for training and service claims faster. 
• Captivate customers. Offices in the metaverse enable carriers and clients to share information and ideas (e.g., the results of the 3D model assessments we mention above) and assess coverage needs via a personalized and personable immersive experience while saving time and resources.

Close the protection gap — and increase revenue

Like any new set of technologies and experiences, the metaverse offers new risks. There sometimes are metaverse “accidents” (such as service outages at key moments), as well as criminal and malicious behavior including scams, financial fraud, intellectual property theft, data breaches and abusive behavior. 

Because few of these risks are covered today, insurers could create new lines of business through metaverse-specific products. Although it will likely take time to properly assess and price some of the newest risks, there are several potentially attractive entry points for insurers that understand the metaverse and its underlying technologies.

• Digital assets. Digital assets in the metaverse aren’t just cryptocurrencies. They also include NFTs, avatars and virtual real estate. Some are highly valuable. Most are blockchain-based and don’t run through traditional financial institutions, so there may be no recourse if they’re lost or stolen. Virtual real estate also carries new risks, ranging from “cybersquatting” and vandalism to missed mortgage payments, operational failures and new legal liabilities. Demand already exists for insurance against these and other digital asset risks. As the metaverse matures, this demand could grow exponentially. 
• Events and entertainment. More and more brands are hosting metaverse events, which include product launches, fashion shows, concerts and parties. Most risks related to these events are familiar, but “translated” into a digital world: surprise cancellations or delays, technical failures and threats (such as abusive behavior or cyber attacks) to attendees’ health and safety. All these could lead to financial losses or legal liabilities for companies — many of which find insurance appealing.
• Intellectual property. When companies put their IP and brands into an immersive digital world, they also may make them vulnerable to cybertheft. Deepfakes and other forms of digital fraud on the metaverse can also infringe on content, trademarks and copyrights, causing financial loss and reputational damage. Metaverse platform providers and marketplaces may also be liable for some of these IP violations. Savvy insurers may be able to build on traditional IP policy coverage to cover these and other related threats in the metaverse

See also: The Metaverse and Financial Services

Five steps to help start or accelerate metaverse initiatives

To take advantage of the metaverse’s opportunities, insurers will need to:

1. Set a strategy. Chart a course for sustainable success in the metaverse by assessing market opportunities and your own current and potential capabilities. Consider immediately available business outcomes as well as the potential for business transformation and all-new revenue streams. Your strategic assessment can include limited, low-risk tests of new technologies and products with select groups of employees and customers.
2. Choose the right tech. With your strategy in place, determine which technologies and related processes you’ll need. This requires not only choosing the right metaverse platform — based on business and customer preferences — but also buying or developing metaverse-specific technologies (such as specialized AI) and crafting appropriate procedures and controls. 
3. Build skills. For internal use cases, business growth and risk management, the metaverse requires new skills. Fortunately, you can teach basic skills through training in the metaverse itself. For more advanced ones, you may need to send your tech experts for focused training, make new hires, or work with third parties that can provide the key skills you lack.
4. Build in trust. Among the new metaverse-specific risks that every company must manage, insurers should pay special attention to (fast-evolving) regulatory developments and to security. It’s also important to go beyond the letter of the law and design trust upfront and throughout your metaverse operations — rather than having to make fixes later. No one wants to make headlines for suffering a metaverse scam, security breach, privacy violation or tax penalty, and insurers naturally prefer to avoid these risks.

Learn and grow. As you begin to launch metaverse products for business and enterprise use cases, have measures in place to keep managing your risk appetite and expand your offerings. For example, if you begin by adding metaverse-related line items to existing coverages, you may soon be able to offer whole new lines of business as you deepen your institutional understanding of the metaverse.

‘Change’ is a word we have long-been comfortable with in Ohio – in fact, many famous Buckeyes have driven it spectacularly.Steven Spielberg, a son of Cincinnati, altered a generation of filmmakers’ approach to cinema; inventor of the lightbulb and countless other technologies, Thomas Edison, shaped all our lives for the better; and, perhaps most famous, astronaut Neil Armstrong, who came from Wapakoneta, Ohio, fundamentally changed the way we view our world.

I’ve always been fascinated by the process of change. It can be challenging, sometimes painful but always interesting and as a senior director at JobsOhio, I’ve seen a lot of it in the financial sector in recent years. The insurance industry, in particular, has undergone something of a revolution here in Ohio.

What’s driving it? To start with, the availability of better data. Insurance companies, for example, can monitor lifestyle habits to inform life insurance provision. Every month, many of us receive an email telling us about our driving habits, which impacts our premiums. It’s almost something we take for granted now.So, data analytics have been transformative but the real sea-change has been a radical shift in the provider’s relationship with the customer.

Insurance has been flipped on its head; a few years ago, the customer was a passive consumer of what the insurance industry wanted or could provide. Today, and increasingly in the future, it’s about designing products and services around what individuals want and need. And in a post-COVID world, customers want, need and, indeed, expect a personalised, omnichannel experience.

As Adam Erlebacher, CEO and co-founder of Cincinnati’s Fabric by Gerber Life, a one-stop shop to help families ‘master their financial lives’, says: “If you’re a parent and looking to secure your family’s financial future, you don’t necessarily wake up in the morning thinking about life insurance. We need to meet parents wherever they are in their journey.” This customer-centric approach, getting to the places where consumers are, is increasingly achieved through embedded finance, which is a result of maturing partnerships in the supply chain that have seen many founders shift from B2C to B2B and B2B2C models.

Anthony Spiteri, CTO at Battleface, a full-stack global insurance company with modular tech and embedded travel products, based in Ohio, says that partnerships across tech, insurance, travel and finance, have been key to his organisation’s success. Battleface disrupted the travel insurance industry in 2018 by offering extreme customisation for travellers using innovative underwriting and has gone on to develop a global infrastructure to provide claims and emergency travel assistance support under white-label arrangements with partner brands. It recently launched Robin Assist, a single platform offering travel insurance as a service to carriers, brokers, managing general agents (MGAs) and self-insured enterprise partners. It’s designed, among other things, to dramatically cut claim times.

“Technology can really help when you’re filing a claim,” Sasha Gainullin, CEO of Battleface, explained at the launch. “It can find the policy you have. It can eliminate the need for a claim form. It can identify the expense that you’re filing against the policy.”Accessing customers via third parties is now a business imperative.“As an insurtech, we’ve continued to grow and evolve into areas where we see a lot of opportunity. A big part of what we now do is a realignment to go more toward partnerships instead of direct-to-consumer. So, we’ve adopted a B2B2C model,” Spiteri says.

“With travel insurance, the direct-to-consumer model is difficult when considering the circumstances of trying to sell to somebody travelling at the right time, who still hasn’t purchased travel insurance. So, partnering with key partners in the travel and fintech spaces has helped us rapidly grow, and we’ve shifted our focus towards that, versus going direct-to-consumer.”

Also close to ‘home’, Ohio’s Matic is a digital insurance agency built for partners, integrating insurance directly into the property-owning experience. It has grown to work with more than 100 home and auto carriers and distribution partners in industries ranging from mortgage origination, servicing, and banking to automotive organisations and real estate.

“To support our growth, we’ve prioritised increasing our network of insurance carriers,” says Matic CEO Ben Madick. “One of the reasons we picked Ohio as our headquarters is because it is a hub for insurance. There are so many insurance carriers nearby, which helps us build relationships. Today, we have over 45 insurance carriers on our platform, which, three years ago, was probably under 20.“Our partnerships allow us to meet customers where they want to be and choose how and where they want to shop.

“From buyer behaviour trends, we’ve been able to create insurance carrier insights reports and supply this information to carriers in a way that they haven’t seen before. We’ve been working really hard over the last couple of years to design these reports in a way that is meaningful to our insurance carrier partners. It will help them become better in what they do, whether it’s pricing, product availability, or consumer experience. Ultimately, that supports our customers as well and allows us to be the best partner to our insurance carriers that we can be.”

The big daddy in this space is the long-established, Columbus-based carrier Nationwide. It has experience of building a partnership ecosystem with 30 portfolio companies in which it’s directly invested and many more that it’s partnering with. It has also seen and responded to insurtechs’ move towards targeting intermediaries as opposed to an exclusive B2C strategy.

Angie Klett, Nationwide’s vice president of corporate development, leading ventures, mergers and acquisitions, strategic partnerships and brokerage solutions says: “When I started in my role a couple of years ago, it felt as if founders were just focussed on disrupting the sales component of the value chain and replacing the intermediary altogether.

“If you look at all the results in the market, you can see that there’s proof that founders have been able to grow quickly in our industry. The question is, can they grow profitably? Even in the distribution space, there’s been a lot of growth, but given the cost of acquisition to loan-to-value equation in a direct-to-consumer model, we’ve seen more of a shift toward partnering with intermediaries versus disrupting them or eliminating them from the equation. It’s important to us to enable their business models.”

In this vein, Nationwide recently announced a partnership with GloveBox, a client experience platform for insurance agents and carriers, which sees the Denver-based insurtech integrate with Nationwide’s post-bind service APIs to deliver a seamless, digital policyholder service experience.

“This partnership will help agents who find demands on their time immense and growing by digitising some of the aspects of servicing within the agency,” continues Klett. “You’ll see more and more of a shift to partnering with the intermediary in the founder space. Just as consumers and access to data become more costly, the concept of selling direct-to-consumer may not work out.”

The power of the Nationwide brand in this space cannot be underestimated. Some partners with a startup brand can bask in the reflective glory that comes from association with, and endorsement by this behemoth. Being able to say that they’re doing business with Nationwide is fantastic for building their own brands, but the secret sauce in the mix is the technology that allows partnerships to take root and flourish. Nationwide embarked on significant investment in core system modernisation, enabling it to move quickly in the market and to take advantage of its breadth. It also built a partner platform; a digital chassis that’s housed centrally and can be used over and over. Klett says Nationwide has 214 underlying publicly available application programming interfaces (APIs) ‘powering millions of pings each day’.

“Investment in the digitisation of our partners is one of the most important competitive advantages that we have in the market. We’re able to be in-market with partners very quickly. It allows us to be nimble and responsive, which are two words that you don’t typically hear associated with 100-year-old insurance companies,” she adds.

Battleface has also leveraged its own versatile platform and is talking to other companies about taking claims and assistance in-house on the back of their technology offering. “We realised there’s a large market for directly working in the B2B space within the insurance industry,” says Battleface’s Spiteri. “Right now, our focus is mostly travel insurance, but [with our platform] we also see the possibility of getting into other lines, working with MGAs, brokers and insurance companies in the future. I think that’s going to be a big part of our 2023 while we also continue to grow the partnerships that we have, as well as acquire new ones.”

Fabric’s Erlebacher, meanwhile, stresses the need for compatible technology as a pre-requisite for partnering with a third party as well as a ‘forward-thinking strategy when it comes to digital distribution’.

“If the partner doesn’t have that, the best technology in the world is not going to solve that problem. Second, we’re looking for partners with digital backends that we can integrate seamlessly. If you have to build too much technology to take on the carrier partner’s work, it becomes a bit of a mismatch when operating your business.” When Fabric chose to accept an acquisition offer from Western & Southern last year, both the technology and the mindset were key deciding factors.

“It’s still rare to find an insurance carrier with the history that Western & Southern has that is looking so far into the future and willing to make the investments in their backend system to push forward on a digital front. That was extremely important to us,” says Erlebacher. You can’t talk about partnerships, without discussing embedded finance.

Nationwide’s Klett says embedded is ‘a hot topic’ right now and one that her organisation has embraced.

“Many of us are talking about embedded, but I believe at Nationwide, we’re actually doing it,” she says. “That book is growing quickly. We have 150 per cent year-over-year growth and the quality of the risk coming through the book is really good. There have been some stops and some pivots along the way, and we’re leveraging those learnings right now to gain momentum. “The key to embedded is the placement in the digital journey. We have examples where we are B2B2C, as with Matic, and we have examples where we’re B2C, as with Ford or [electric vehicle manufacturer] Rivian. Each one of those provides us with a new set of lessons about how embedded can work in the marketplace. Each partner has a slightly different experience that allows us to learn and grow in embedded. We’re seeing meaningful results there.

“The other important aspect of embedded is growing those capabilities past distribution. There is so much focus on embedded distribution, but what about embedded experiences across the value chain? Things like insurance verification partnerships were born from that concept.” The integration of Nationwide’s insurance verification digital product with Assurant (a global provider of risk management products and services) is a great example of how customers benefit from that. They don’t have to leave their mortgage process to get their proof of insurance.

Rather, it’s an instantaneous process, that comes with a satisfying API ping. “That’s a really simple way of bringing a digital capability to life in the value chain outside of distribution. Keeping that digital mindset and the customer at the centre is pivotal to the overall concept in-market, “says Klett. Speaking to all of these players in Ohio, the recurring themes are obvious: the customer is king; partnerships – whether through embedded finance and/or rewriting the conventional B2C playbook – are key; and technology is the oil in the wheels that allows these partnerships to prosper.

The market has faced its challenges through a global pandemic and now the ongoing global financial uncertainty, but there is huge cause for optimism as insurance operators evolve how they operate and put the customer experience, through partnerships, at the heart of what they do.With that in mind, the final word goes to Nationwide’s Klett. “Our support for the insurtech and fintech world is unwavering, “ she says. “We’re open for business when it comes to investing in or partnering with companies that share our values and believe in our mission. We think that we can make the experience and futures for our customers and businesses better when we work together. “We’re going to continue to invest, look for ways to partner and keep the customer at the centre of our business strategy.”

 

• JobsOhio is a private nonprofit corporation, working outside of, but alongside state government. Speed putting a deal together, getting access to an ideal site, talent finding, having a working relationship with the administration and the legislature, and maintaining a network of economic development professionals, are all ways in which Ohio competes and JobsOhio creates an advantage.

 

Solving a headache for parents

A ONE-STOP SHOP FILLED WITH FINANCIAL TOOLS TO HELP FAMILIES PLAN THEIR FUTURES

 

Founded in 2015, Fabric was acquired by Western and Southern Financial Group in 2022 and rebranded to Fabric By Gerber Life. Co-founders Adam Erlebacher and Steven Surgnier (formerly COO and director of data respectively at digital bank Simple Finance) found, as new parents, there was no modern, convenient way for them to protect their families’ financial futures. The insurtech was born out of those frustrations.

Erlebacher recalls his experience: “The process of getting a will turned out to be very expensive and required meeting with a lawyer. It was so hard to find time that it literally took us three years to write a simple two-page document. And when I went to buy life insurance, it took ten weeks, a health exam, and three meetings with an agent who was pushing me to buy a more expensive product that would have earned him a bigger commission.“As dads, we realised that there was no modern way for parents to confidently check these otherwise daunting tasks off their lists, and that’s why we started Fabric.”

Its products and services include: life insurance policies, college savings and rainy-day savings funds that are tailored to younger families; free wills for parents – regardless of whether they are a policyholder or not, Fabric offers its Will Kit to make estate planning a simple matter; a modern iOS and Android compatible app with easy navigation that offers simple accessibility and extra tools for spouses to share; added security features that protects personal information with bank-level security that incorporates adaptive risk-assessment security, 256-bit encryption, two-factor authentication, automatic lockout, and biometrics; and support features such as a personalised checklist of financial tools to help families grow.

“What we did from the beginning was to focus on making life insurance a quick and easy digital experience. Something that used to take 10 weeks, we’ve distilled down to a 10-minute application where you get an instant offer. That was revolutionary,” says Erlebacher. “On top of that, we’ve taken a very different approach to the market, which is the one-stop shop. We began with building a full-stack digital will service that’s proprietary to Fabric and we’ve continued to invest in that. Beyond that, we’ve also rolled out tools to organise your family’s finances. Now we are building full-stack versions of some of these key products and are much more deeply integrating them into the experience across products.

“What gets us really excited in 2023 is that we want to offer families the power of compound interest in a tax-advantaged way. We want to make it very easy for parents to take whatever savings they’re able to invest and give them a simple way to do it. That’s a key product launch area that we’re focussing on in 2023. “Parents often chat at the playground about the challenges and struggles of being a parent. What’s really exciting to me and what drives us is that we want to be the go-to place for parents at the playground who ask each other ‘what do you do for life insurance or a will?’.

We would love the answer to be, ‘just get Fabric and you will have everything figured out. Get that app and you’ll be good.’ That’s really the North Star that we’re moving towards.”

 

This article was originally published in The Insurtech Magazine Issue 09, Page 14-16.

 

Sponsored by ITL Partner: JobsOhio

To get a different perspective on agents and brokers, ITL Editor-in-Chief Paul Carroll sat down with Jeffrey Lipsius, director of the Inner Game of Sales Leadership and author of “Selling to the Point: Because the Information Age Demands a New Way to Sell.” Drawing on his longtime collaboration with Inner Game guru Tim Gallwey, on his own experience running a major sales organization and on his decades training salespeople, Lipsius explains how the Inner Game can get agents and brokers beyond the Outer Game that almost all of us play at work.

At a very simple level, the Inner Game concept, which Gallwey first articulated in his book on tennis in the early 1970s, says we all have two selves. Self 2 operates at a subconscious level and is the part of the brain that is actually learning things, like how to swing a tennis racquet. Self 2 is playing the Inner Game. Self 1 plays the Outer Game. It kibitzes. It's what's telling you you have a bad backhand and generally making you feel inadequate.

While Gallwey began his work as a tennis instructor thinking he needed to TEACH his pupils, he soon decided that the goal was for the student to LEARN, which isn’t the same thing. He reconceived of himself as a coach, who offers no traditional instruction but who helps people distract Self 1 and steers Self 2 to focus on key variables. That way, Self 2, on its own, can learn as effectively as possible, without the normal pestering from Self 1.

That concept, which is explained in more detail in the introduction to this newsletter, may sound a bit strange for the moment, but it should provide a starting point for what follows, and Lipsius explains in depth.

ITL:

How did you connect with Tim?

Jeffrey Lipsius:

I connected with Tim back in 1974. I was an aspiring tennis pro, and we got to be friends. I didn't make it in the pros, and I had to get a real job, so I went into sales. Over the course of years, I became vice president of the company, so now I had over 100 salespeople under me. I got back with Tim, and I said, Hey, look, we can use my salesforce as a laboratory to practice applying Inner Game techniques. That's how the Inner Game of Selling incubated. Tim and I were going back and forth, looking to see what worked there and what didn't. Eventually, sales increased 10 times using Inner Game principles.

ITL:

To get us going, would you summarize a bit about how you think about the Inner Game, and then how you apply the concept to selling?

Lipsius:

I watched Tim give a tennis lesson to someone who said he had a bad backhand. Tim said, “We’ll worry about that later. For now, just watch the seams of the ball.” He’d have gotten nowhere if he had said, “Your problem is yourself. If you don’t think about your backhand so much, you’ll do much better.” Instead, he steered the person to focus on a key variable, tracking the flight of the ball carefully.

But what is the ball for a salesperson? It’s the customer. And what are the seams of the ball for the salesperson? The customer’s decision process.

The Inner Game of Selling is about coaching customers to make better decisions. The first thing I tell a class is that I’m not going to be their teacher. I’m going to be your coach. I’m going to help you learn how to learn from your customer. Your customer is your teacher.

ITL:

The thinking has long been that insurance is sold, not bought. What sorts of things would you coach a salesperson to observe about me so they can start coaching me to understand my needs better and have me wind up buying insurance?

Lipsius:

The salesperson has to be the learner, not the teacher, and find out what is your definition of value. What is your level of confidence about buying financial products? What are your beliefs and values? What are your priorities?

There's an assumption that you just find out the customer's needs. Well, not every customer knows their needs. Sometimes, the salesperson has to do a little coaching to help the customer get more internally clear about themselves.

ITL:

Are there specific things that you coach the sales folks to do or not do so that they don't get in the way of that discovery process?

Lipsius:

One big thing is helping the customer make the best decision no matter what that decision would be. If the salesperson is thinking that they need to get the sale, then, right away, they’re going to be thinking, “Well, is this going my way, or is this not going my way?” And they’re going to be distracted from what the customer could be teaching them.

All sorts of different sales training systems primarily focus on the conversation between the salesperson and the customer. They say they’ll help you have a better interaction with your customer. That's why a lot of sales conversations look more like an intervention than a sale. Those systems ignore the fact that there’s another conversation going on: the customer's internal decision process.

We get salespeople to realize that your commission check is the result of the customer's buying performance, not your selling performance. If you want to take credit for what you did, you’ll focus on the selling conversation. But if you’re trying to get the customer to buy, which conversation are you focused on? The one inside the customer’s head.

You find out what the customer's situation is and then, in a nonjudgmental way, help them make the best decision for their situation.

ITL:

What you’re saying cuts against some of the attitudes I see. I hear people in the industry talk about how consumers just don’t understand their need for insurance and have to be educated. How much pushback do you get?

Lipsius:

Well, insurance salespeople won’t try something unless they think it would increase their sales. But from an Inner Game perspective, a buying decision is a higher-quality decision, and it’s more sustainable, which is important for keeping policies in force. When the salesperson actually learns the customer’s beliefs and values and priorities and objectives and challenges and can integrate those with the internal environment of the customer, the customer takes a higher degree of ownership for the decision. That’s necessary if they’re going to pay for the policy for years and years, even after the salesperson leaves.

What I’m talking about is kind of the difference between advising and coaching.

ITL:

Insurance agents and brokers often say they want to be a client’s trusted adviser. You’re saying they should really aim to be the client’s coach.

Lipsius:

When the salesperson is trying to advise the customer, the gears are turning in the customer’s head as they advise themselves about whether to take the salesperson’s advice. Most people don’t see that part. They think, I gave the person advice, and they took it, so I must be their adviser. The situation is more complicated than that.

Part of the trouble for salespeople is that many trainers want to be able to take credit for what the salesperson did. After a sales call, the question is: “Did you tell them what I said?” A great salesperson is really good at thinking on their feet, but that’s not a teachable skill. Many trainers try to teach the skill anyway by anticipating all the objections. “This is how you handle this one. This is how you handle that one. This is what you say here. This is how you respond there.” But that can be counterproductive. If the salesperson’s mind is so cluttered with all that material, how can they be watching the seams of the ball?

ITL:

This is great insight. Any final thoughts?

Lipsius:

There is certainly value in much of the training that people get, and they’re selling a lot of insurance. But I hope people can ease into the Inner Game approach, maybe see it as a new tool in their arsenal. You don’t drop your traditional way of selling, but you try an Inner Game approach in certain situations. You’ll see it’s quite powerful.

ITL:

Thanks. I’ve been sold on the Inner Game concept for decades. I hope our readers give it a try.

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About Jeffrey Lipsius

Jeffrey Lipsius is the President and Founder of Selling To The Point®, LLC Sales Training and Consulting.  He developed the Selling To The Point® sales training method during his 30-years of sales training experience.  In the late 1970's Jeffrey pioneered inside selling for the Natural Foods Industry, and trained the first sales force of this type in that Industry.  As a result of the success, his selling model is being utilized by many Natural Foods Industry brands.

Jeffrey has trained over 100 salespeople, both inside and outside, as well as sales trainers throughout his career.  The salespeople trained by Jeffrey are some of the highest commission earners in their respective industries.  Salespeople trained by Jeffrey also cultivate great customer relationships and enjoy their careers as salespeople.

The salespeople Jeffrey trained have cumulatively sold over a Billion dollars worth of products.

 

When I played tennis in high school, my bible was "The Inner Game of Tennis," by Tim Gallwey—a book that I see Bill Gates recently listed as one of his five all-time favorites. Many years later, I had the distinct pleasure of working with Tim for several years when I was a partner at Diamond Management & Technology Consultants and he was a fellow. He had already extended his Inner Game thinking to golf and skiing and, drawing on his work with Diamond, published "The Inner Game of Work" in 2001. So, I was intrigued when I recently met a longtime associate of Tim's, Jeffrey Lipsius, who has been developing the Inner Game of Sales for many years and who has some insights for agents and brokers.

The Inner Game has lots of subtleties, but my simplified version goes like this:

We all have two brains (what Tim calls "selves"). Brain 2 operates at a subconscious level and is the brain that is actually learning stuff, like how to swing a tennis racquet, how to get the timing right, how to adjust for wind and so on. Brain 2 is playing the Inner Game. Brain 1 plays the Outer Game. It provides the conscious structure for, say, tennis lessons and processes information from books and videos. It also kibitzes. It's what's telling you that you'll never learn, that there sure is a lot riding on this service game, that you're looking silly, that you really need to get your hips turned on your backhand, that your dad really wants your match to end so he can get on with his day and so on and on and on. 

I happen to have a very well-developed Brain 2

So, I was fascinated to watch how Tim would help people learn by basically giving Brain 1 a job to do to distract it so it wouldn't get in the way of Brain 2 as it did the serious job of the actual improvement. For instance, he once addressed an all hands meeting at Diamond and began by gently tossing an apple to people in the front row as he took the stage, then having them throw it back. When a woman nervously bobbled the apple three or four times, before dropping it on the floor, Tim said, "You'll do," and invited her up on stage. 

She wasn't too excited about whatever was about to happen in front of 1,000 people, but she was a good sport, and Tim quickly began to calm her Brain 1 by telling her he wasn't going to try to teach her how to catch an apple or anything else. Instead, he was just going to ask her some questions. He tossed the apple to her, and she dropped it. He said, "Okay, this time, I just want you to tell me whether I'm tossing the ball higher or lower than I did the first time." She dropped the apple again but correctly told him he'd tossed it higher. Tim repeated the exercise 10 or 15 times, giving Brain 1 a conscious task while Brain 2 got a sense of how to measure speed based on whether the arc of the apple was higher or lower and started to track location. Without even seeming to realize it, she began catching the apple, and with increasing confidence. Tim switched to a new question: "Is the apple spinning more or less than the previous time?" Brain 1 stayed distracted while Brain 2 learned about another key variable. In less than two minutes, she had learned so much and gained so much confidence that Tim started tossing the apple harder, then switched to throwing it overhand, with increasing pace, and she caught it every time.

Tim didn't TEACH her anything about catching that apple -- but she LEARNED how to do it, in an environment he created. He says that's the key distinction, and it's the main one that his colleague Jeffrey Lipsius offers for agents and brokers. They often see themselves as TEACHING clients and prospects about insurance, while looking for openings to make a pitch, which is the Outer Game approach. He suggests that agents and brokers employ the Inner Game, focusing clients and prospects on key variables (as Tim did with the height and spin of the apple) and giving them the opportunity to LEARN, first, what their needs are, and then how insurance can address those needs.

But I've oversimplified and likely garbled the thinking a bit, so I'll let Jeffrey explain at length in this month's interview.

---

P.S. Here are the six articles I'd like to highlight this month for agents and brokers:

HAS INSURANCE BECOME TOO ON-DEMAND?

The "customer-centric" concept isn't wrong, but anything “centric” requires a balance. Has the pendulum swung past the point of effectiveness? 

YOUR AGENCY NEEDS A TECH LEADER

An effective tech leader has experience in insurance systems and processes but also understands organizations and the need to focus on efficiencies.

CHANGING THE RAP ABOUT INSURANCE

The industry should come together to conduct a wide-scale campaign to improve its reputation. The campaign would work. It has truth on its side. 

A LITTLE EMPATHY GOES A LONG WAY

In developing technology solutions, one of the most overlooked and critical elements of delivering value to end users is empathy -- truly understanding their pain points. 

CUSTOMER EXPERIENCE 2.0

The next generation of insurers must look beyond traditional attributes and embrace new forms of data and analytics, including contextual, behavioral and motivational data.

DIGITAL SELF-SERVICE IS TRANSFORMING INSURANCE

Self-service automation is the next step in the insurance industry. The right solution can be a win-win for insurers and customers, while the wrong solution can irritate customers and ruin a carrier’s reputation.

The title of this article brings to mind two famous quotes from American culture. Mark Twain is reputed to have said, “The reports of my death are greatly exaggerated.” The saying could also apply to the frequent statements by insurtech detractors who have recently pronounced its death, following an incredible eight-year run, give or take a year. To appropriate another famous line, Dorothy, in "The Wizard of Oz," said, “Toto, I’ve a feeling we’re not in Kansas anymore.” The phrase has come to mean that we have stepped outside normality; we have entered a place or circumstance that is unfamiliar and uncomfortable—as we most certainly have over the past three years.

Conflicting Evidence

To be sure, there are several good reasons one might suspect the death of insurtech, including the recent collapse in share prices and unsustainable underwriting ratios of public insutechs such as Root, Lemonade and Hippo. Private insurtech valuations have slid along with those in the tech sector overall. Many insurtechs have laid off staff to conserve cash. Some have merged with others in response to adverse market conditions as inflation concerns and spiking interest rates have altered the investment and economic landscape. All combined, it is understandable that insurtech has at least been declared unhealthy.

In fact, 2022 was the first year to see an overall year-on-year drop in insurtech investment since 2016. Globally, annual funding halved between 2021 ($15.8 billion) and 2022 ($7.98 billion). Quarterly insurtech funding for Q4 2022 fell to the lowest level since Q1 of 2020, decreasing 57% quarter over quarter from $2.35 billion in Q3 to $1.01 billion in Q4, according to a recent Gallagher Re report.

However, there are a number of private insurtech businesses reaching real scale, including Zego, ManyPets, Next Insurance, Ethos Life, Alan, At-Bay and Coalition, to name just a few. Their loss ratios are good, their unit economics are sensible and they are growing. An impartial review of the marketplace reveals that there are numerous insurtechs that are succeeding, even if operating under very different business conditions than before. And just days ago, Equisoft, which provides digital solutions to the financial services industry, including life insurers, announced a sizeable $125 million in funding to fuel international expansion and R&D.

Funding vs. Results

It’s ironic that a common perception of insurtech success was most recently and mainly based on the amount of funding raised and accompanying valuations, characterized by our fascination with “unicorns” (private companies with valuations of  $1 billion or more) and even a few “decacorns” ($10 billion).

Revenue and EBITDA were rarely addressed, if they even existed. But customer acquisition costs for these insurtechs were too high, retention not high enough. Investment experts are quick to point out now that easy (cheap) money and inflated and unrealistic valuations were a big part of the “bubble” that burst starting in 2021. The erroneous theory at the time was that the more capital these startups could attract, the faster they could scale to profitability. In today’s world, revenue, growth, traction, margin and EBITDA are now the most meaningful measures of success in a return to business fundamentals, particularly for new-entrant insurers.

See also: Is Insurtech a Superpower?

“Insurtech” Confusion

Further confusing this discussion is the interchangeable use of the term “insurtech” to describe two very different categories of companies:

• start-ups and early-stage companies that incorporate technology and develop solutions for use within the insurance ecosystem, and
• “pure play” insurance companies that have developed partial or “full stack” businesses from scratch employing digital and other new technologies, selling and servicing insurance

Although the relatively small latter group has had less market success than the former, too many industry pundits have lumped them all under the same banner of insurtechs, of which there are thousands.

It’s important to describe what’s in the scope in the definition of insurtech.  Although many simply consider new insurance entrants, such as digital-first native companies, as “insurtechs,” the vast majority fall into the category of solution providers or enablers. In other words, companies that partner and therefore are dependent on existing carriers are the broader picture. They may be less flashy compared with a new digital insurer boasting that it will change the insurance world, but they are smarter, faster and nimble. In retrospect, the over-played disruptor moniker did a disservice to the vast insurtech movement.

The “full stack” insurtechs have failed to capture the level of meaningful market share their founders and investors envisioned because they have run headlong into the reality that selling insurance profitably is hard and that no amount of exciting technology alone can overcome that. Factor in the extreme inflation, and it is evident that most are ill-equipped to ride the storm.

Some of the other “insurtechs”—let’s call them technology solution providers—have succeeded or are on the road to success because they have developed valuable solutions and learned how to sell them to legacy insurers, which is an extremely nuanced act itself. 

Insurtech Success Stories

Many insurtech technology providers are thriving. Among the most successful categories: cyber risk/insurance, distribution, embedded insurance, connected devices including telematics, virtual claims inspection, automated damage estimating, digital customer communications, aerial and geospatial underwriting and claims solutions, e-payments for billing and claims and predictive analytics including fraud detection and claims workflow management.

And there is another wave of insurtechs that are nearing success with innovative solutions leveraging blockchain and virtual and augmented reality.

Partnerships, Platforms and Marketplaces

The market downturn has caused insurtechs to become even more creative in their search for traction and growth. Partnerships, platforms and insurance technology marketplaces are three beneficiaries of this strategic shift.

A few selected examples of insurtechs that have partnered with other insurtechs, information providers or insurers:

• Tractable has teamed up with Verisk to offer AI-powered estimates for property damage. Leveraging AI, the identification, classification, and measurement of property damage will be possible. And both Tractable and Verisk customers will now have access to end-to-end, automated property claims.
• Zendrive and Sfara have partnered with CCC Intelligent Solutions to deepen and broaden their telematics capabilities, including connected car data to drive better insights and claims experiences for auto insurers and drivers.

Several insurtechs are creating purpose-built platforms (vendor hubs) that enhance the value they deliver to their insurance clients by quickly adding relevant technology capabilities while avoiding the cost and time of developing these capabilities internally. One of the better examples of this strategy is Betterview, a property intelligence and risk management insurtech platform that P&C insurers use to identify and mitigate property risks of many kinds, including wildfire, hurricane, hail and catastrophe.

Over the past year or so dozens of insurtechs have joined one or more so-called marketplaces, basically core systems provider platforms used by insurance carriers to access a wide variety of point solutions and services:

• Guidewire, Duck Creek, Majesco and EIS have all seen tflock to their electronic platforms or “marketplaces,” through which insurance clients of their cloud-based core systems can access these point solutions on an as-needed basis without leaving their core system environment through relatively simple API connections
• Guidewire Marketplace alone now has 140 “partners,” and Duck Creek Content Exchange has almost as many; some providers reside on both platforms.

Follow the Money

Boston Consulting Group research shows that it took seven years, from 2012 to 2018, for $15 billion in equity funding to be invested in insurtech. In 2019 alone, $15 billion was plowed into insurtech, only to increase again in 2020 and 2021.

Even though the success of an insurtech is no longer measured in funds raised alone, VCs are still considered as savvy a breed of investors as may exist—especially so in today’s economic environment—so we still value their opinion when they vote with their checkbooks.

There were more than 20 funding events in the insurtech sector during each of January and February 2023, according to a review by Digital Insurance, including Ushur ($50M), Wefox ($455M), OpenEyes ($18M),  Floodbase ($12M), Flock($38M), EvolutionIQ ($33.1M), Goose ($4M), Joyn ($17M) and BOXX ($14.4M), as well as the earlier-referenced Equisoft ($125M). 

Consolidation and M&A

Consolidation is one effective business strategy for insurtechs that have developed valuable technology but are running out of cash and unable to attract more capital. While this typically results in dilution for founders and investors, it ensures that management and employees remain employed and able to see their vision realized while still participating in the overall success of the combined business. One of the better-known examples of this is the acquisition of Metromile by Lemonade.

See also: Outsourcing 2.0 to the Rescue

Looking Ahead

One of the most important and valuable contributions of the insurtech movement has been the stimulation of greater innovation and the acceleration of much-needed transformation in the insurance industry. Indeed, several large carriers have recognized and embraced this value by creating separate corporate venture capital investment funds to encourage the growth of these companies and the further development of these insurance technology solutions.

In addition to these significant investments in insurtechs, insurers have incorporated their underlying technologies into their own strategic planning around automation, digitization and modernization. Often labeled as slow to change and encumbered by legacy technology, insurers have come to recognize these realities and have embraced the opportunities to address them as embodied in insurtechs. Going it alone is no longer viable for any forward-thinking business.

We should not confuse the relatively slow adoption and implementation cycles often displayed by insurers with any lack of interest or enthusiasm for change. Insurance corporate culture will simply take time to correct as change management initiatives take hold. But make no mistake: Insurtechs and the insurance industry at large are co-dependent and will become increasingly so.

2023 will likely also present opportunities for legacy insurance carriers to acquire some of the technology-enabled solutions and talent they are interested in, and at a reasonable cost.

Dave Wechsler, a principal with OMERS Ventures and lead insurtech investor, recently shared with us his prediction that “those who can optimize their businesses and drive revenue around slower adoption rates will do fine.” In January 2023, OMERS led a $17.7M investment in Joyn, which integrates insurance, data and technology expertise to underwrite and bind E&S policies.

It is generally recognized by insurers and investors that insurtechs, and the broader tech-enabled startup community, is a highly valued contributor to innovation, employment and the economy overall. Friday’s federal government intervention in the Silicon Valley Bank to make the SVB depositors whole, including startups, VCs and investors, is strong and encouraging evidence of that recognition. Despite this unnerving development, numerous insurtechs have assured investors, employees and customers that the demise of SVB will have no direct impact. 

To be clear, some insurtechs will struggle, and there will even be some fatalities, but the majority of insurtechs are making the necessary adjustments and operating successfully while basically sheltering in place and preparing for the next exciting phase in the evolution of this critical “movement,” which is very much alive yet quite different.

Listen Now:

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ITL:

Hi, I'm Paul Carroll, the editor in chief at Insurance Thought Leadership. I am joined by Dr. Michel Leonard, who, among the many hats he wears, is the chief economist and data scientist at the Triple-I, the Insurance Information Institute. We're having our quarterly chat about all things economics, in particular where inflation goes from here, the economic growth rate and, of course, what it all means for insurance. Michel, I thought, as long as you have done a report that you kindly shared with me on your latest thinking, maybe I'd start just by asking you to lay out what you think the basic legitimate targets are for economic growth, inflation and then P&C economics this year.

Michel Leonard:

Hi there. Nice to talk with you, as we do regularly. In terms of thinking first of our overall expectations, growth overall for the economy, as most of us know, has decelerated significantly from 2021 to 2022. Let's remind ourselves that we were at almost 6% in ’21;  that was the post-COVID bump. Then, coming out of last year, the figure was 2.6%. So, a significant decrease. But let's remember that 2.6% for 2022 is still very good compared with the last years we've had. Going into this year, 2023, a consensus among economists is that we'll probably see an increase to a little bit above 3% growth; the Fed is a bit more optimistic, at around 3% to 4%. Our view is that there are some risks, especially on the geopolitical side, that could prevent us from getting as much growth as the most optimistic folks at the Fed and other central banks think.

ITL:

Okay, and then inflation.

Leonard:

When it comes to inflation, we kind of have a view that we have a base inflation that we should expect to be around 2% to 3%. However, again, here we have the geopolitical risk drivers. And to try to make sense of this, we're looking at two drivers.

Let's look at the base of 2% for inflation. That's what the Fed has been talking about for a long time. But then we have the dislocations of COVID. So, there was a supply issue that pushed prices up. And that really brought us about 2% more. So, we went from that “basis” of 2% to 4% or 5%. Then, on top of that, we had the war. That disruption was mostly for food, and some considerations of oil and energy. That added another 3%. So, you're basically in this range of 8%, where we were last year when we came to December. Looking to 2023, we're taking that roughly 2% base and looking at what happens to that dislocation due to COVID and the war, and we're really around 4%.

ITL:

One more question, and then we'll dive into some of the specifics. What do you see as the basic outlook for the P&C industry this year?

Leonard:

It's been such a tough environment. I hate to say that we have light at the end of the tunnel, because the challenges remain. But there are improvements. Things aren't getting as bad as rapidly, especially around growth and especially around replacement costs.

Now, on the growth side, traditionally we recover more slowly than the rest of the economy. But the economy has been recovering, and growth is accelerating, so we should see improvements in the P&C industry. In 2021, we were a fraction in terms of the growth of the rest of the economy. We were at 1%, while the overall economy was at 6%. Basically, this year, we can expect the growth rates will be about the same. So, the overall economy goes up 3%, and, all things being equal, P&C should be growing at a comfortable pace.

On the replacement cost side, that's where there's even more of a silver lining. A lot of those items that were significantly driving replacement costs, such as prices for autos and construction materials, those rose faster than the general rate of inflation -- double the rate – and now their growth is slowing much faster. Looking into this year, we're still going to have replacement costs rising a bit above overall inflation, but nothing like the twice as much that we had last year. At one point in the last couple of years, we had replacement costs for P&C at 16% inflation, with overall inflation at 6%.

ITL:

Thanks. So where should we dive in first? I know one thing you said in your report is that the growth will be lumpy, right? You're expecting problems more in the first half year of the year than in the second half of the year. Is that right?

Leonard:

We're still gathering data from Q3. Economists want to see if the actual numbers really improved after Q2. There is a lot of caution, but we could find that Q3 was indeed much better. Forecasts could ease if we see that growth wasn’t as challenged going into Q4 last year. And I'd say to our listeners and our readers, you really could see significant changes here, with whiplash.

ITL:

Makes sense. I want to talk a little bit about how the Fed is, obviously, the 800-pound gorilla here, throwing its weight around. I know you're not a fan of some of the things they're doing. That issue starts to bleed a little bit into the inflation discussion, but, anyway, I thought I'd ask you to comment on what the Fed is doing, and how it may or may not help.

Leonard:

I like it when you say this makes sense. It makes me feel good. [Chuckles]

What I'm trying to say is that, when it comes to the Fed, it's an issue of the underlying stance that the Fed took: that inflation was transitory, whether caused by the dislocation from COVID or from the war. But those events, of course, lasted quite a long time and, certainly on the war issue, are still there. The Fed’s position was very much in agreement with some politics that came into this, about the need to push inflation down. As soon as that happened, the Fed probably overreacted, and the medicine didn’t fit the disease.

The Fed’s monetary policy is increasing rates somewhat aggressively, and that coincides with a reduction in inflation, but that’s a coincidence. The Fed did kill demand. It did kill confidence. But it didn't address the underlying source of inflation. By not addressing the underlying source of inflation, by going directly after confidence and so forth, the Fed really overcorrected and brought us into this area where we're concerned about a recession. And the concern is quite real if one looks at corporate investments and corporate expenditures. They dropped significantly between Q1 and Q4 of last year, and that brings an economy to a halt.

ITL:

I'm probably parroting back to you something that you said to me once before, which is why it sounds smart in my head. I hope it's recognizable to you.

In general, the idea of raising interest rates is to make it more expensive to consume something. I'm less likely to buy a house with a higher mortgage rate. I'm less likely to buy a car if I'm financing it, if it has a higher rate associated with the loan. But a lot of what we're going through now relates to unreliable supplies of oil and gas. And raising interest rates isn’t going to produce more energy by making Russia stop screwing with international markets. With food inflation, you have another supply chain disruption that higher interest rates won't fix. Ukraine has long been the breadbasket of Europe and big parts of Asia and isn't able to supply that kind of food now.

Leonard:

That's exactly it. Traditionally, inflation is demand-driven. It's very rare in the last 50 years that prices have risen because we've had competition over the goods themselves. But cars aren't available, new cars in particular; there's a six-month delay for some models. I went on Amazon a couple of days ago because I needed a new microwave, and I was quite annoyed, frankly, to see that I couldn't get my microwave. What is that about?

Interest rates match well as a medication when we're trying to decrease demand-driven inflation, but that's not what we're seeing.

ITL:

Another issue that intrigues me about inflation is how long this will go on. We've talked about how it's steadily coming down, and that’s great. But, as you said, the Fed has traditionally had this 2% inflation target. Is that now done? Are we ever going to get back to it? If not, what's the longer-term outlook for inflation?

Leonard:

I think it's done. I’m not hedging, like traditional economists.

ITL:

That's right. You’re being a one-handed economist.

Leonard:

We were able to have increased demand for decades because supply of goods was being increased, also. Global labor was being supplied by rural China, other parts of Asia and so forth. But that environment is falling apart – the global supply chains, entry of new workforce, cheap labor, and so forth, that allowed for two or three computers a house because the computers were getting cheaper. There's not much cheap labor left around the world.

And that's a fantastic thing. Let's remember that it's great that people actually are paid for their labor. But that means that we are getting an environment where, regardless of the COVID dislocation in supply chains, we may actually see more often that things are missing on Amazon, so you have to wait a week or two. That's going to remove some of the controlling forces on labor and other costs.

Then think about global trade wars, such as with China, and the “reshoring” that is happening, which will affect capacity.

And we have a large, new generation coming in that will soon achieve a place where they can fully consume in terms of their income potential. That will further drive prices up.

So we probably end up with a new equilibrium that’s above 2% annual inflation.

ITL:

That makes total sense to me. And I think that's worth considering because inflation isn't just a 2023 problem. It's something that insurers have to crank into their long-term calculations.

Leonard:

We’re approaching what is almost the definition of stagflation. I started using the term very carefully a couple of years ago, and started using it in writing about a year ago. It’s where we're heading if the inflation is structural and at a higher level.

Without getting into a whole snowballing explanation here, what about immigration? Does immigration continue on the same scale? One of the ways we've been able to grow in the U.S. is because of immigration. But traditionally when there's tension over supply chains and reshoring, those produce political tensions, which also extend to immigration. The U.S. has had a period of historical immigration in terms of the number of Americans like me, who are foreign-born. But what happens now?

And does that point to a different growth story and a different inflation story. We could head back toward the attitude of the Great Depression generation, that things aren't going to get better. We haven't really learned to live with that attitude as a society.

ITL:

Those are profound topics. I've long thought that what you say about immigration is getting lost in the discussion. Because while people are talking about the border, and they're upset, and there are all kinds of political issues, we are robbing ourselves of a workforce that traditionally has helped the economy grow and has helped manage inflation.

Leonard:

If you have a reduction in growth and then we have structural inflationary pressures, that suddenly brings us into a position where, at a minimum, the improvement in quality of life and standards of living and so forth is decelerating. That's what we're really talking about. We're in an environment where the accumulation of wealth above and beyond inflation becomes more and more challenging.

ITL:

Yep. I wish we could be cheerier.

Well, I could go on all day, but to bring this around to a close in sort of the normal time we ask people to spend with us, maybe I'll ask you to come back to insurance and explain the scenario you lay out in your report that would lead to more homes and cars being bought and, thus, more insurance being bought.

Leonard:

You're seeing significant recoveries in those areas that have been worst-hit for the insurance industry. Costs for construction materials went through the roof. Prices for cars went through the roof. Replacement costs went through the roof. And those prices are coming down. As they're coming down, demand is coming back, as well, for cars and homes.

It’s happening first on the homeowner side, a little less on the commercial side, but we're in a position where our growth will pick up in homeowners and commercial property. It is picking up right now.

And then our costs will go down. We have several steps to get there, but we do see a light at the end of the tunnel there.

ITL:

As always, I appreciate your time and insights. I found the conversation kind of bracing, but in a way that I think certainly will help me think about things and that I hope will help our listeners and readers think about things. So, I'll just encourage people to check out you, Michel Leonard, and iii.org, the Insurance Information Institute. And, of course, I hope people sign up for the Six Things newsletter I do every Tuesday and check out the good work that people do for us with the articles we post at insurancethoughtleadership.com.

Michel, thanks.

That whoosh you felt coming out of Silicon Valley on Friday and then out of Washington, DC, on Monday was the wind shifting on regulation. And you can expect the wind to keep blowing in the direction of stricter regulation for quite some time, likely years.

The collapse of Silicon Valley Bank could also cause the Fed to slow its aggressive raising of interest rates, which would complicate life for insurers. Their investment portfolios have been benefiting from the higher rates, and they've seen the increases in costs, such as for replacement parts, moderate as the Fed attacked inflation. Any change in interest rate policy could slow or even reverse those recent gains. 

I should note up front that the regulatory backlash to the banking crisis may not affect insurers directly. Sean Kevelighan, CEO of the Insurance Information Institute, told me: "I doubt insurance will get wrapped into any of this. The insurance industry has worked hard since the crisis of '08/'09 to help better inform policy makers about the different model that is insurance, and why, because it’s built more on long-term capital trajectories, there is little to no likelihood of 'runs.' Nonetheless, we will be keeping a close eye on things to ensure there are no misperceptions."

I hope he's right, but I still wanted to call attention to the change in regulatory climate, because history suggests that, when one occurs, it's profound and long-lasting. 

The stock market crash in 1929 led to the Glass-Steagall Act and decades of strict regulation of banks. The Enron and WorldCom scandals in the early 2000s led to Sarbanes-Oxley and much tighter reporting requirements for businesses. The Great Recession of 2008 and 2009 led to stricter controls on financial institutions, including insurers, via Dodd-Frank. 

We seemed to be headed toward a tougher regulatory environment even before banks started failing. The derailment in East Palestine, Ohio, raised all sorts of calls for heightened regulation of trains, even from some members of the Republican party, which has for so long been pro-business and anti-regulation but which has headed in a more populist direction in recent years.

Newly elected Sen. J.D. Vance (R-Ohio) criticized “people who seem to think that any public safety enhancements for the rail industry is somehow a violation of the free market. Well, if you look at this industry and what's happened the last 30 years, that argument is a farce. This is an industry that enjoys special subsidies that almost no industry enjoys.”

Now, we not only have banks failing but have what looks like a total mess at SVB. During the Trump administration, it lobbied hard for and won exemption from the sort of regulatory scrutiny that Dodd-Frank established for the biggest banks and that looks like it could have prevented the bank's collapse. Democrats are already pouncing--for example, here is Sen. Elizabeth Warren (D-Mass.) writing an "I told you so" column in the New York Times. For good measure, SVB executives were paying themselves and their employees bonuses on Friday, just hours before the FDIC took over the bank.

While, as Sean says, insurers have a different business model than banks, the mess that is the homeowners insurance market in Florida has been getting national attention. And the Washington Post just led the paper with a major investigation into what it says is insurers cheating customers in the aftermath of Hurricane Ian. That's the sort of story that has prize potential written all over it, and we're still early in the year, so I'd expect the Post to lean into that story several more times as 2023 progresses. (Major prizes are awarded based on work during a calendar year.)

Because insurers are regulated primarily by states, even a major shift in attitude in Washington wouldn't necessarily affect our industry. But I still think it's worth being aware that, while the pendulum swung hard away from regulation during the Trump administration, it seems likely to swing just as hard in the other direction now. 

In any case, the bank failures may cause the Fed to at least slow its increases in interest rates, given that SVB collapsed because management somehow missed all the signals that interest rates were going to rise quickly. The worry is that continuing the rapid increases could expose other vulnerabilities in the U.S. financial system, as this Washington Post article explains in detail. 

It's not clear, at least to me, how much slowing the increases would diminish the attack on inflation. In a conversation I had recently with Michel Leonard, the chief economist at the Triple-I, he made an interesting point on the topic. He said that raising interest rates diminishes demand, which is why higher rates are the typical means for attacking inflation--but said today's inflation is driven by lack of supply, which high interest rates do nothing to address.

He cited supply chain disruptions, mostly because of COVID but also because the Russian invasion of Ukraine and broad geopolitical tensions are leading to "reshoring" and forcing supply chains to be reimagined. He also cited the disruption to oil and gas supplies and the lack of access to Ukraine's normally bountiful grain harvests for creating key shortages that raising interest rates won't ameliorate. (I'll share the transcript of our conversation here when it becomes available, likely in the next day or two.)

But the Fed certainly thinks that the fight against inflation would suffer if it has to slow interest rate increases. In any case, lower rates would decrease returns on insurers' massive investment portfolios. 

Just when it seemed inflation might be settling down, with job creation still robust, we seem to be back in that old Ray Charles song: "If it wasn't for bad luck, I wouldn't have no luck at all...."

Cheers,

Paul

 

Many new entrepreneurs or those in the gig economy consider on-demand insurance the greatest invention since sliced bread. And insurtech companies couldn’t be happier. Here’s why: In the wake of society relying more on smartphones, apps or other popular technologies, consumers now expect buying insurance to involve a similar user experience as when shopping on Amazon. 

Thus, on-demand insurance was born when technology and insurance merged. Consumers can shop and purchase policies online without the help of an insurance broker or agent. For example, with only a few clicks on their smartphone, a new founder can acquire a general liability or an errors and omissions policy lickety-split.

Many insurtechs provide on-demand insurance in some form, like Thimble with its short-term policies for freelancers. Others, like Pie Insurance, narrow the scope by focusing on pay-as-you-go workers’ compensation coverage, while Metromile provides pay-as-you-go auto insurance.

Commercial insurance brokers are also modernizing with on-demand insurance, using mobile apps to connect with clients. In fact, here at Founder Shield, clients can submit vital documents for renewals or claims, make payments or even invite collaborators to the policy. Although insurance is usually pegged as an antiquated industry, it’s transforming quickly — maybe too quickly.

How AI and Machine Learning Affect Insurance 

Before picking apart the industry for embracing change, it’s worth reviewing how the shift unfolds. And underwriting has played a significant role. It’s old news that artificial intelligence (AI) and machine learning have influenced the job of underwriting. That said, innovative technologies like AI and machine learning hope to shift the insurance industry from its current state of “detect and repair” to “predict and prevent” — a concept that merits a closer look.

Historically, traditional underwriting required real humans to evaluate business risks, methodically combing through them, threat by threat. Now, automated underwriting is a tech-enabled process using algorithms to make more accurate decisions. This approach streamlines risk management for thriving 21st-century businesses.  

Still, we would do well to remember the not-so-distant past. Here’s why:

Insurance could qualify as being “too on-demand.” We’ve witnessed some of insurtech’s efficiencies, namely automated underwriting, cause complications regarding coverage and scalability. While these streamlined solutions are ideal for more vanilla risk or smaller companies, the accessibility of securing on-demand coverage has bled into more complicated risk profiles that require a professional touch (i.e., fintech, crypto, etc.). 

See also: The Rise of AI: a Double-Edged Sword

Why On-Demand Presents Unique (and Overlooked) Risks

Very few would argue that on-demand insurance is a step in the wrong direction; it’s not. It’s been a game-changer for plenty of folks. However, we must consider that such innovative processes come with their own set of risks. 

Let’s look at the primary and two-fold risk: adequate coverage. For one, tech-dependent brokers don’t consistently provide proper guidance to clients regarding what to apply for. Next, these brokers leave clients guessing how to structure their coverage or classify the business. 

We’ve heard about consumers making important insurance decisions alone, with little to no guidance from their broker, often resulting in significant coverage gaps. As you may have guessed, this approach usually leads to claim denials or gray areas in coverage applicability. Of course it does! Clients can now change vital coverages, including limits and deductibles — all details that an insurance-savvy individual should tackle.   

Furthermore, automated underwriting can create additional scalability issues as more significant risks are underwritten in line with lower-risk businesses. Once a human underwriter sees what slipped through the system, they quickly non-renew or increase rates exponentially to match the actual risk.  

Viable On-Demand Insurance Solutions

The insurance industry understands that clients want differing levels of attention from their brokers, redefining the role of a commercial insurance broker to an extent. Some require one-on-one attention, while others would handle insurance tasks using an app instead. Still, most clients have come to expect quick responses from their insurance carriers. Plus, some underwriting data is quantitative, so most carriers rely partially on the automated version.  

We should expect continued advancement of automated underwriting among legacy players and insurtech companies. That said, most life insurance companies have relied on these digital processes. Commercial lines will also likely grow more heavily reliant on automated underwriting, supporting the notion of “predict and prevent.” 

At the end of the day, on-demand or automated insurance solutions have a place in this industry. Still, we must recognize limitations where clients, brokers and underwriters acknowledge the need for professional attention and expertise. Teaming the human experience with technology is doable — but only when the two forces accept the other’s strengths and weaknesses for what they are.

We are continuing to face a very uncertain environment — war in Europe, higher inflation, the lingering effects of the pandemic, increased likelihood of recession, questions on the right direction and speed of movement on climate/ESG, evolving market pricing cycles, and moderating rates. We suggest 10 ways CEOs should be positioning their organizations in 2023 to make the most of the Age of Acceleration.

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Sponsored by ITL Partner: Oliver Wyman