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InsurTech: Golden Opportunity to Innovate

The insurance industry has remained much the same for more than 100 years, but over the past decade it has seen a number of exciting innovations and new business models.

As part of PwC’s Future of Insurance initiative, we’ve interviewed numerous industry executives and have identified six key business opportunities (illustrated below) that incumbents need to take advantage of as they try to meet customer needs while improving core insurance functions.

See Also: Key to understanding InsurTech

Because FinTech offers substantial promise to take advantage of emerging opportunities, funding for start-ups is surging. Increased funding activity not only demonstrates venture capitalist investors’ interest but also indicates how incumbents may leverage FinTech to address their specific business challenges.

The insurance-specific branch of FinTech, InsurTech, is emerging as a game-changing opportunity for insurers to innovate, improve the relevance of their offerings and grow. InsurTech, has seen funding in line with FinTech investment overall, and we expect investments to increase as new players and investors enter the space.

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As Figures 2 and 3 show, activity around early-stage InsurTech companies has generated considerable buzz. Moreover, experienced insurance executives have joined start-ups, including Insureon and Lemonade, to help them develop new types of products and services, like small business aggregators and peer-to-peer insurance models. All of this indicates that investors and the industry are eager to get on board with early stage start-ups to meet the six areas of opportunity we illustrate above and describe in detail as follows:

1) Meet changing customer needs with new offerings – Customer now expect personalized insurance solutions. One size simply does not fit all any more. Usage-based models are partially addressing these expectations, but the sharing economy also is challenging existing, more traditional insurance products. New players are able work from a clean slate and leverage a variety of available resources to fill market gaps. For example:

  • Metromile, a start-up, has developed a customer- (rather than risk-) centric value proposition for occasional drivers. It offers a low base rate and then charges a few cents per mile driven. Metromile also offers an app that provides personalized driving, navigation and diagnostic tips, and can even remind drivers where they parked. Furthermore, the company has entered into a partnership with Uber that allows drivers to switch from personal to Uber insurance.
  • USAA has invested $24 million in Automatic Labs, a telematics platform that claims it will “connect your car to your life” and provides a full suite of integrated apps (including wearables).
  • In the life sector, Sureify has developed a platform that allows insurers to underwrite life insurance based on lifestyle data inputs they obtain from wearables.
  • In the peer-to-peer space, Lemonade claims to be the world’s first peer-to-peer carrier, but other companies like Guevara and InsPeer have been exploring variations of the same model. Bought by Many, a start-up that uses social platforms in its go-to-market strategy, helps individuals join or even create affinity groups, as well as find insurance solutions for their specific needs across different product lines. Of note, leading Chinese insurer Ping An has partnered with Bought by Many to create personalized travel insurance by leveraging social media data.

Some large insurers have decided to develop start-ups in-house. For example:

  • MassMutual is using internal resources to build Haven, a new, stand-alone, direct-to-consumer business.

2) Enhance interaction and build trusted relationships – Established carriers have to manage increasing customer expectations and provide seamless service despite their large and complex organizations. In contrast, new market entrants are not burdened with large, entrenched bureaucracies and typically can more easily provide a seamless customer experience – often using not just new technology but new service concepts.

For example, self-directed robo-advisers are convenient, 24/7 advisers that provide ready access to information that can empower consumer decisions about financial planning and investment management. And investors have taken notice:

  • Northwestern Mutual acquired Learnvest, a leading robo-adviser with an estimated value of more than $250 million.
  • Other robo-advisers, such as FutureAdvisor, have been part of important deals, while others (including Betterment, Personal Capital and Wealthfront) have raised funds above $100 million.

Moreover, disintermediation and the emergence of new online channels is occurring in all lines of business:

  • The Chicago-based start-up Insureon has created an aggregator that specializes in micro and small businesses. It taps into existing profit pools that personal and commercial carriers are trying to reach.
  • To become a B2C player in the digital small business market, ACE Group has recently taken a 24% ($57.5 million) stake in Coverhound, which enables customers to directly compare coverage options and pricing from various carriers.

3) Augment existing capabilities and reach with strategic relationships – The insurance industry historically has included intermediaries, service providers and reinsurers. In most cases, the carrier has led the business relationship because of its retail market position and scale. However, companies increasingly are peers. Accordingly, joint ventures and partnerships are a good way to augment existing capabilities and establish symbiotic relationships. For example:

  • BIMA Mobile has partnered with mobile telecom companies to provide life insurance solutions to uninsured segments in less developed countries. It offers simple life, personal accident and hospitalization insurance products on a pay-as-you-go (PAYG) basis for a set time period (usually just a few months). Policyholders can obtain a pre-paid card and activate and manage their policy from a mobile phone.
  • AXA has acquired an 8% stake in Africa Internet Group for EUR75 million, opening opportunities for the company in unpenetrated markets.

New B2B2C entrants also are helping forge mutually beneficial relationships:

  • Zenefits was one of the first to create channels to connect insurers, brokers, employers and employees.
  • Flock, which features broker managed benefits where plans can be designed to cover a range of options from enrollment to life events, offers what it says are “absolutely free” HR and benefits solutions.

4) Leverage existing data and analytics to generate risk insights – Established insurers traditionally have had the advantage over prospective newcomers of being able to leverage many years of detailed risk data. However, data – and new types of it – now can be captured in real-time and is available from external sources. As a result, there are new market entrants that have the ability to generate meaningful risk insights in very specific areas.

  • Several Internet of Things (IoT) companies, including Mnubo, provide analytics that generate insights from sensor-based data and additional external data sources like telematics and real-time weather observation. The promise of the better risk assessment and management resulting from this model is likely to appeal to personal and commercial carriers.
  • Facilitating this real-time data collection are drone start-ups, including Airphrame and Airware. Drones provide the ability to analyze risk with embedded sensors and image analytics. They also can operate in remote areas where it has traditionally been difficult for humans to tread, thereby saving time and increasing efficiency. In fact, American Family’s venture capital arm is investing in drone technology to explore new approaches to access and capture risk data.
  • In the life space, P4 Medicine (Predictive Preventive, Personalized and Participatory) offers insurers better insights that they can apply to life and disability underwriting. Lumiata is offering the potential for better predictive health capabilities, while Neurosky is developing next-generation wearable sensors that can detect ECGs, stress levels and even brain waves.

5) Use new approaches to underwriting risk and predicting loss – Protection-based models are shifting to more sophisticated preventive models that facilitate loss mitigation in all insurance segments. Sensors and related data analytics can identify unsafe driving, industrial equipment failure, impending health problems and more. More deterministic models, like the ones that now exist for crop insurance, are starting to emerge, and new entrants are offering both risk prevention (not just loss protection) and a more service-oriented delivery model. For example:

  • The South Africa-based company Discovery has a partnership with Human Longevity. They are teaming to offer whole Exome, whole genome and cancer genome sequencing, to clients in South Africa and the UK. Gene sequencing can identify risks before they manifest themselves as problems, but also raises ethical questions. It has the potential to completely disrupt life underwriting and places certain responsibility on the company to help customers manage genetic risks (while being careful about actually mandating lifestyle choices). But, on the whole, managing genetic risks in advance can benefit both the end-consumer and the insurer because, if they work together, they can better manage or even avoid long-term health problems and associated expenses.
  • On the automotive side, Nauto, a San Francisco- based company, offers a system that provides visual context and telematics with actionable information about driving behavior, including distracted driving. The company claims that its system can help insurers design new pricing strategies and pinpoint areas of premium leakage that they otherwise may not notice.

See Also: InsurTech Trends to Watch For in 2016

6) Enable the business with sophisticated operational capabilities – Effective core systems enable insurers to operate at a large scale. Because of cost, establishing these systems has traditionally been a barrier to market entry. However, access to cloud-based core solutions has facilitated scalability and flexibility. Developments like this, combined with new developments like robotics and automation, have provided new market entrants compelling differentiators.

As just one example, underwriting automation is now available in life and commercial lines (notably for small and medium businesses). Some carriers have adopted simplified processes and “Jet” underwriting, in which they leverage external data sources to expedite approval. This has resulted from the availability of risk insights that support new underwriting approaches. Several companies are offering to optimize and augment processes via improved collaboration, artificial intelligence and more. For instance:

  • OutsideIQ offers artificial intelligence solutions via an as-a-service underwriting and claims workbench that uses big data to address complex risk-based problems.
  • In addition, automating claims can improve efficiency and also effectively assess losses. Tyche offers a solution that uses analytics to help clients estimate the value of legal claims.

Implications: Think like a disruptor, act like a startup

In a time when societal changes, technological developments and empowered customers are changing the nature of the insurance business, established insurers need to determine how InsurTech fits in their strategies. The table shows the various approaches insurers are taking.

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More specifically, insurers are:

  • Exploring and discovering – Savvy incumbents are actively monitoring new trends and innovations. Some of them are even establishing a presence in innovation hotspots (e.g., Silicon Valley) where they can learn about the latest developments directly and in real time.

Action Item: Plan an InsurTech immersion session for senior management. This should be an effective eye opener and facilitate sharing of relevant insights on desired InsurTech solutions. Subsequently, FinTech analyst platforms can keep management up to date on the latest developments and market entrants.

  • Partnering to develop solutions – Exploration should lead to the development of potential use cases that address specific business challenges. Incumbents can partner with start-ups to build pilots to test in the market.

Action Item: Select a few key business challenges, identify possible solutions and find potential partners. A design environment (“sandbox”) will help boost creativity and also provide tools and resources for designing and fast prototyping potential solutions. This approach also can help establish the baseline and approach to building future InsurTech solutions.

  • Contributing to InsurTech’s growth and development – Venture capital and incubator programs play an important role strategically directing key innovation efforts. Established insurers can play an active role by clearly identifying areas of need and opportunity and encouraging/working with start-ups to develop appropriate solutions.

Action Item: Define a strategy to direct startups’ focus on specific problems, especially those that otherwise might not be addressed in the short term. Incumbents should consider start-up programs such as incubators, mechanisms to fund companies and strategic acquisitions. (N.B.: It is vitally important to protect intellectual capital when imparting industry knowledge to start-ups.)

  • Developing new products and services – Being active in InsurTech can help incumbents discover emerging coverage needs and risks that require new insurance products and services. Accordingly, they can refine – and even redefine – product portfolio strategy. This will result in the design of new risk models tailored to underserved and emerging markets.

Action Item: Take a close look at emerging technologies and social trends that could be business opportunities to define product strategy, determine required capabilities and develop a plan to build a portfolio and seize market opportunities. FinTech has become a buzzword, but whichever way the FinTech/InsurTech market itself goes, the reality underpinning it is not a passing fad. Insurers that are actively involved with InsurTech in any of the ways we describe above stand to gain, whichever way the market moves. They can use their capital and understanding of customers and the market to both inspire and exploit innovative technologies and correspondingly grow their business.

Waves of Change in Digital Expectations

In the first of this three-part blog series, titled “Bringing Insurance Distribution Back Into Sync Part 1: What Happened to Insurance Distribution?”, we talked about the seismic shifts that have rocked traditional insurance distribution and about how insurance companies need to adopt a 2D strategy to thrive in this new environment.

There are four fundamental drivers of the seismic changes:

  • New expectations are being set by other industries—the “Amazon effect”;
  • New products are needed to meet new needs, and risks are distributed in new channels;
  • Channel options are expanding;
  • Lines are blurring between insurance and other industries.

In this blog post, we’ll discuss how the final three fundamental drivers have contributed to an environment of challenges and great opportunities. Those who adopt a 2D strategy will be better-prepared to seize the opportunities:

  • First, by optimizing the front end with a digital platform that orchestrates customer engagement across multiple channels
  • Second, by creating an optimized back end that effectively manages the growing array and complexity of multiple distribution channels beyond the traditional agent channel

New Products

Customer expectations, behaviors and risk profiles are evolving thanks to technology, social trends and other changes happening around us. These are driving the need for new insurance solutions and, consequently, new distribution methods, such as:

  • We all know about autonomous cars and increasing car safety technology. Autonomous cars have created questions about where liability lies in the event of an accident involving one of these vehicles. Volvo has laid down a challenge to the auto and insurance industries with its recent announcement that it will assume liability for crashes of its Intellisafe Autopilot cars.
  • The sharing economy—whether it’s for transportation, lodging, labor or “stuff”—has created a multitude of questions regarding coverages. People have realized they don’t need to buy and own cars or pay for hotel rooms when they can use someone else’s stuff for a cheaper price. People who own these items can monetize them when they’re not being used.
  • Cyber risk has been around for a long time, but numerous high-profile hacks have made it a hot topic again.
  • And, finally, the Internet of Things: Connected cars, homes and personal fitness trackers are generating lots of data with tremendous potential to improve pricing and create products and services, while at the same time reducing or eliminating risk.

The seismic impact has resulted in companies developing and offering new products to meet the changing needs, preferences and risks being driven by consumers. There are several relatively new peer-to-peer companies that have entered the market, such as Friendsurance, insPeer, Bought by Many and the recently announced start-up Lemonade. Metromile addresses the sharing economy trend with its product for Uber drivers, and addresses the niche market of low-mileage drivers.

Google Compare, with its focus of “being there when the customer wants it,” has rapidly expanded from credit cards (2013) to auto insurance (early 2015) and now to mortgages (December 2015), all the while expanding to new states and adding product providers to its platform with a new model that leverages customer feedback.

John Hancock is using Fitbits as part of the company’s Vitality program, which started in South Africa and which uses gamification to increase customer engagement and lead to potential discounts. Tokio Marine Nichido is using mobile (in an alliance with NTT Docomo) to distribute “one-time insurance” for auto, travel, golf and sports and leisure. HCC, which was recently acquired by Tokio Marine, has a new online portal for its agents to write artisan ontractors coverage for small artisan contractor customers.

The overarching theme in all these examples is that each company is pioneering ways of distribution, not just new products or coverages. Many companies are direct e-commerce because they are low premium, quick turnaround/short duration and potentially high volume; they are not well-suited for agent distribution.

Expanding Channel Options

Channel options and capabilities for accessing insurance are expanding rapidly. New brands are entering the market, giving customers new ways to shop for, compare and buy insurance.

Comparison sites, online agencies and brokers—such as Bolt Insurance Agency, Insureon, PolicyGenius, CoverHound, Compare.com and the Zebra—are relatively new to the market and are gaining significant market interest and penetration. There are also new brands in the U.S. selling life and commercial direct online, like Haven Life, Assurestart and Hiscox. Berkshire Hathaway will jump into the direct-to-business small commercial market in 2016, a potential game-changing move for the industry.

Finally, there are some intriguing new players that are focusing on specific parts of the insurance value chain.

  • Social Intelligence uses data from social media to develop risk scores that can be used for pricing and underwriting.
  • TROV is a “digital locker” with plans to use the detailed valuation data it collects to create more precise coverage and pricing for personal property.
  • Snapsheet is the technology platform behind many carriers’ mobile claims apps, including USAA, MetLife, National General and Country Financial.

Blurring Lines

The insurance industry is so valuable that outside companies are trying to capture a share. This has created a blurring of industry lines. Companies like Google, Costco and Wal-Mart are familiar brands that have not traditionally been associated with insurance, but they have offered insurance to their customers. The first time most people heard about these companies’ expansions into insurance, it probably struck them as unusual, but now the idea of cross-industry insurance penetration has become normal.

In addition, insurance products are blurring and blending into other products. For example, Zenefits and Intuit are considering bundling workers’ compensation with payroll offerings.

So, what does all of this mean?  There are two key implications from all of this for insurance companies.

First, multiple channels are now available to and are expected by customers. There are many ways for customers to research, shop, buy, pay for and use insurance (as well as almost all other types of products and services). Most customers demand and use multiple channels depending on what they want or need at the time. They are more ends-driven than means-driven and will pick the best channel for the task at hand.

Second, multiple channel options give customers the freedom to interact with companies anywhere, anytime, in just about any way.  But this only works if these channels are aligned and integrated. An organization can’t just add channels as new silos; they must be aligned, or they will do more harm than good.

So, while distribution transformation and digital capabilities promise an easier, better experience for customers, they actually result in increased complexity for insurers. Orchestrating all these channel options is hard work and can’t be done with legacy thinking, processes or systems. This expansion of channels requires insurers to optimize both the front end and the back end of the channel ecosystem.  In my next blog post, we’ll discuss these in more detail.

A Misguided Decision on Driverless Cars

On first glance, the California Department of Motor Vehicles’ recent proposal to ban the testing and deployment of driverless cars seems to err on the side of caution.

On closer inspection, however, the DMV’s draft rules on autonomous vehicles rest on flawed assumptions and threaten to slow innovation that might otherwise bring enormous, time-critical societal benefits.

At issue is the requirement that DMV-certified “autonomous vehicle operators” are “required to be present inside the vehicle and be capable of taking control in the event of a technology failure or other emergency.” In other words, driverless cars will not be allowed on California roads for the foreseeable future.

One problem with the human operator requirement is that it mandates a faulty design constraint. As Donald Norman, the technology usability design expert, has noted, decades of scientific research and experience demonstrate “people are incapable of monitoring something for long periods and then taking control when an emergency arises.”

This has been Google’s direct experience with its self-driving car prototypes, too. As Astro Teller, head of Google[x], told a SXSW audience in early 2015: “Even though people had sworn up and down, ‘I”m going to pay so much attention,’ people do really stupid stuff when they’re driving. The assumption that humans could be a reliable back up for the system was a total fallacy!”

The ramifications are more than just theoretical or technical. The lives and quality of life of millions hang in the balance.

Americans were in more than six million car crashes last year, injuring 2.3 million people and killing 32,675. Worldwide, more than 50 million people were injured, and more than one million were killed. Human error caused more than 90% of those crashes.

It remains unclear whether semi-autonomous or driverless cars would better reduce human error and lower this carnage. Thus, it is important to encourage multiple approaches toward safer cars — as quickly as possible. Instead, California has slammed the brakes on the driverless approach.

Another major problem with the human-operator mandate is that it slows testing and development of systems aimed at providing affordable transportation to the elderly, handicapped or economically disadvantaged. Millions of Americans either cannot drive or cannot afford a car. This hurts their quality of life and livelihood.

Driverless cars could enable Uber-like, door-to-door mobility-on-demand services at a fraction of today’s transportation cost. This will require, however, efficient, low-cost vehicles that do not need (nor need to accommodate) relatively expensive human drivers. It also requires empty driverless cars to shuttle between passengers. The California DMV rules, as proposed, would not allow the testing or deployment of such vehicles or fleet services.

The immediate victim of California’s proposed rules is Google. Google’s self-driving car program is the furthest along in the driverless design approach that the new rules would rein in, and its current efforts are located around its headquarters in Mountain View, CA. Google’s attempt to field a fleet of prototype driverless cars (without steering wheels) would certainly be dashed.

Other companies’ efforts might be affected, too. Will Tesla owners, for example, need to get separate DMV certification to use enhanced versions of Tesla’s autopilot feature? How about GM owners with Super Cruise-equipped cars? How will these rules affect Apple’s car aspirations?

The longer-term victim is California.

Silicon Valley is becoming the epicenter of autonomous vehicle research. Not only are native companies like Google, Tesla and, reportedly, Apple investing heavily in this arena, but the race to develop the technology has compelled numerous traditional automakers to build their own Silicon Valley research centers.

If California regulators limit on-road testing and deployment, companies stretching the boundaries of driverless technology will inevitably shift their investments to more innovation-friendly states (or countries).

The proposed rules must now go through several months of public comment and review before they are finalized. California needs to take that opportunity to reconsider its course on driverless cars.

No, Insurance Will Not Be Disrupted

I recently had the pleasure of attending the Insurance Disrupted conference in Palo Alto (put on by the Silicon Valley Innovation Center in partnership with Insurance Thought Leadership). This was the single best insurance conference I have ever attended. I was surrounded by hundreds of hopeful, smart, problem-solving professionals from disparate backgrounds and industries all trying to make a difference in insurance without money being the prime motivator.

I was so encouraged by what transpired at the conference, the connections that I made and what I believe would be the promise of a new future that I began to pen this article on my flight home. But something just did not sit right with me as I wrote. Three weeks have gone by, and I am beginning to understand why I felt the way I did; at the end of the day, insurance will NOT be disrupted.

For all the promise of big data, the Internet of Things, autonomous vehicles and peer-to-peer insurance, there was nothing presented at this conference that struck me as disruptive in the way the tech industry is generally thinking of the term today. When technologists think of disruption, they immediately point to Uber and Airbnb, which disrupted the taxi/livery and travel accommodations industries. The taxi industry is literally fighting for its survival. No, that will not be the fate of insurance. Insurance will be a lot more difficult to shake up or disrupt.

Here’s why:

  1. At the core, insurance customers are leasing the potential to access capital. That capital is sitting in predominantly liquid assets. Not real estate, not taxi medallions. How do you make a big pile of money irrelevant?
  2. The modern form of the industry is 300 years old, and the math is pretty solid (that’s why they call it actuarial science). We sell a product whose costs are unknown at the time of purchase. That means scale and immense capital is required to cover worst-case scenarios, which rules out any new business model not having that potential. Peer-to-peer providers just won’t be able to get sufficient scale to efficiently use capital to cover risk. And if they aggressively get scale, then they just become another insurance company, so what’s the point?
  3. Getting a better glimpse into those unknown expenses can create massive competitive advantages. This is where big data and the IoT creators are looking to disrupt, as big data and IoT will generate incredibly large data sets to be used to accurately predict, avoid and mitigate future losses. I have no doubt that these new technologies will make an impact on the industry, but I am less convinced of their disruptive nature. Insurers have already established non-actuarial, big data departments where fraud detections and credit scoring are just a couple of many predictive models being created. IoT devices will slowly be adopted by most insurers as they look to get competitive edges, but the follow-the-leader paradigm of the industry will mean that any edge will disappear quickly, and we will all be running hard just to stay in place. These technologies are impressive. I would classify them as a solid innovations to the industry, but not disruptive. (Disclaimer: I bought a smart battery from Roost.)
  4. Autonomous vehicles represent the one area where some chaos can occur. But notice I use the word “chaos” and not “disruption.” If autonomous vehicles can live up to expectations, then they will be a great service to society, reducing deaths and increasing efficiency. Risk will transfer from a personal lines business to commercial lines, and that could be chaotic for heavy personal lines auto writers such as State Farm and Progressive. But will this be disruptive? Will State Farm or Progressive be fighting for their survival the way that medallion owners in the New York City taxi system are? Again, I doubt it. State Farm is sitting on about $70 billion in surplus capital, and it generally writes at a 100 combined ratio, working the float and cash flow model. I think State Farm and large auto insurers like them will be just fine, and technologies such as autonomous vehicles will be more of an annoyance than an existential threat. And like others, I don’t think autonomous cars are nearly as ready to take over our roads as many seem to think.
  5. For better or worse, state-by-state regulation of insurance is intense and nebulous. Ask Zenefits. The battlefield is already uncertain, and scrutiny by a regulator with political ambitions can kill your disruptive product quickly. Any technology that you think you can create that could potentially benefit the majority of buyers while subsequently raising the price for some other group, alone, would be grounds for a regulator to squash you, as that vocal minority raises their collective voices. In Florida, the state may even create a company to compete against you, writing business at a loss. Insurance regulation might be the ultimate disruption killer.
  6. There was not one presentation on natural catastrophes, which happen to be my area of expertise. How we underwrite, manage and think about natural catastrophe risk has changed quite a bit over the past 20 years. In fact, CAT models have been and may continue to be the most disruptive force in insurance, and yet there is little technology can do to disrupt that area of the industry. I would have been very excited if we had discussions about new business models to help customers with the problems the industry is currently facing with getting adequate flood or earthquake cover to homeowners. If someone had proposed a new product that removed the exclusions of flood and earthquake from the homeowners policy, now, THAT would be disruptive! Alas, nothing on NatCat, and so we will continue to have thousands of homeless families following big storms and earthquakes.

I don’t think insurance will be disrupted, not in the way folks from Silicon Valley are used to doing it. But the future of insurance will look very different than today. Very digital. Streamlined. Less clunky, more efficient. If “disruption” comes to insurance, it is likely going to require the replacement of the current set of leaders with new ones cultured in this digital age and influenced by the successes of technology to make change happen to their business models.

Paul Vandermarck from RMS (a CAT modeling vendor) perhaps summed it up best when he said that no matter how all of this change to the industry plays out, we know of one sure winner: the customer. And that’s how it should be.