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Second Quarter in Insurtech Financials

Summary

  1. Growth rates remain robust but may be slowing a bit – are there issues on customer acquisition, or are carriers focusing more on underwriting profitability?
  2. Gross loss ratios are generally stable or improving slightly but still unsustainable
  3. Industry veterans are outperforming the newbies on loss ratio but not premium growth.
  4. It will still take several years to become scale insurers
  5. Reinsurers continue to subsidize losses
  6. Executive compensation appears to be as expected – probably mostly in stock

Context

The networking tips from the great Spanish swordsman Inigo Montoya got us thinking about the insurtech startups climbing the Cliffs of Insanity. While the lumbering incumbents are indeed powerful giants and have a head start on the climb, they are also carrying lots of weight. Violà, startup vs. incumbent.

The venture-backed, full-stack U.S. insurtech startups continued to gain in the second quarter through rapid premium growth and moderately lower underwriting losses. But they have yet to show the ability to win at a sword fight, battle of wits or ROUS attack or to generate a sustainable loss ratio under 100%.

This is the third installment of our review of U.S. insurtech startup financials. Here are the 2017 edition and first quarter 2018 edition, which generated many social media discussions. For more information on where our data come from and important disclaimers and limitations, see the 2017 edition. Our scope is only property & casualty companies, so we don’t cover life, health (sorry, Mario), mortgage and title (sorry, Daniel). As before, we respect the management teams highly and admire these companies for earning the right to call themselves an “insurance company” — more on that below.

To date, we have tracked the three independent P&C startups most commonly associated with the label “insurtech”: Lemonade, Metromile and Root. This quarter we’ve looked at newly licensed Next Insurance (which wrote no premium) plus four subsidiaries of larger companies with a direct or insurtech focus.

Overall results

For the real insurance nerds, here is a summary of the 2Q18 statutory financials of three venture-backed insurance companies. Only “insurance companies” have to file statutory results, not agents and brokers (i.e., most insurtech underwriters), which are not “insurance companies.” We present the summary here and quarterly details on each of the venture-backed companies at the very bottom.

And here are the four subsidiaries of big companies that are selling direct or have a claim on being an insurtech. These companies often depend on parents for reinsurance and infrastructure, so we show mainly the gross figures.

Growth rates remain robust but may be slowing a bit – are there issues on customer acquisition, or are carriers focusing more on underwriting profitability?

Absolute growth was led by Root, which nearly doubled its quarterly gross premium written in three months. Our composite grew at 37% quarter over quarter, but most of the companies had their slowest or second-slowest quarter in the last six.

Is this a slight slowing trend? Maybe. Some of the carriers may be seeing seasonal effects. If the pace of growth is really showing the first signs of slowing and not just a blip, the question is whether the slower growth is despite insurers’ efforts to grow or if they are deliberately focusing on profitability. The CEOs of Root and Lemonade have hinted that they are focusing more on underwriting (here, here), so is this affecting growth rates? Here is a point/counter-point. Decide for yourself and add your thoughts in the comments.

See also: The First Quarter in Insurtech Financials  

Point: Insurtechs are finding growth more difficult

  • Early adopters of direct insurance may already have been won; consumers with a high propensity to buy online may be located in the states that carriers chose first, and future customers may be harder to win.
  • It may be harder to sell the value proposition than expected, particularly if underwriting is being tightened and differentiation is narrowing (e.g. Lemonade’s giveback declined from 10% of premium in 2017 to a less-compelling 1.6% this year.)
  • Retention rates may be less than expected – either because customers defect or the carrier non-renews unprofitable customers.
  • Focusing on state expansion, team growth or fundraising distracts management.

Counter-point: Insurtechs could grow faster but are throttling growth to focus on profit

  • It is unlikely that companies with near-zero brand recognition have penetrated even a fraction of potential customers
  • Startups, their investors or their regulators may have realized that early customers were attracted to unsustainably low prices and produced high loss ratios. As they learn more about their customers, startups are being tougher on underwriting or are raising price in new state filings, meaning they turn away more potential customers through price or declining the application. Lemonade has admitted as much – see page 594 of its recent Oregon filling for this nugget:

The LCMF is a Loss Cost Modification Factor, and higher LCMFs may indicate higher pricing. In spot-checking some of Lemonade’s recent filings, we find that it is still filing a $5 minimum rate but is pricing higher than incumbents such as State Farm in certain zones, perils, etc. The company’s frequency being higher than average could be a function of (1) a bot-driven claims system inviting fraud, (2) having shlimazels for customers, (3) problems with the coverage or form or (4) the behavioral economics assumptions not working as intended. Recall Lemonade saying: “If you tried to create a system to bring out the worst in humans, it would look a lot like the insurance of today … We’ve spent recent years deepening our understanding of honesty and trust … Lemonade aims to reverse the adversarial dynamics that plague the industry, transforming both the economics and experience of insurance.”

What do you think? Tell us in the comments.

Status of the climb up the Cliffs of Insanity (direct premium written)

Focusing on the protagonists of our previous analysis Bigger and Redder, Root’s extraordinary growth means it has opened a big gap on Lemonade and is closing the gap with Metromile. This dynamic has helped Root achieve unicorn status, with the last $100 million round of funding at the iconic $1 billion valuation.

Root is not the first insurer to test a “try before you buy” (TBYB) approach based on an app, but it is the first insurer in the world to build a sizeable portfolio that way. Will Root succeed where others have abandoned their efforts or chosen different approaches such as usage-based pricing or discounts at renewal?

We commend Root for hitting the symbolic unicorn status so quickly. It appears to have a few years of runway to prove its model. By the time of an exit for the most recent investors, we believe that Root will be evaluated in greater part on the traditional KPIs that we look at in our analysis. A few weeks ago, Bain Capital – we are Bain & Co. alumni – offered $1.55 billion to buy Esure, a P&C insurer (mainly motor) selling online in the U.K. Esure wrote £880 million (annualized) premium in the first half of 2008 (or about US$1.1 billion) — and did so at a profit. Looking very simply at price-to-sales ratio (though we prefer ROE and price-to-book), Esure sold a bit over 1.4X, which simplistically corresponds to $700 million of premium for a valuation of $1 billion. Investors will need Root’s management to continue to grow rapidly – their 2Q18 run rate is $60 million. Whether they can do so, and achieve profitability along the way, will be a bellwether for demonstrating if current valuations are a bubble or smart bets on a rapidly changing industry.

Root’s $1 billion valuation (looking abroad, Chinese startup carrier Zhong An has a $7 billion valuation despite a 124% combined ratio in the first half) should cause companies in low-margin commodity lines like home/renters and auto that are operating as MGAs to consider becoming a carrier. One of the strongest arguments for being an MGA, not a carrier, is that MGAs are more highly valued because they trade on a multiple of earnings rather than book value. For the time being, the most valuable recent startups in insurance underwriting appear to be carriers, not MGAs.

Gross loss ratios are generally stable or improving slightly but still unsustainable

We prefer to look at gross loss ratio, i.e. before any premiums and losses are ceded to reinsurers, because sticking losses to reinsurers isn’t a sustainable long-term strategy. Eventually, gross loss ratios need to be sustainable. This quarter’s numbers are basically unchanged since last quarter, though Lemonade and Metromile have adverse development in this quarter, which raises the reported loss ratio. If our subject companies are shifting management attention toward profitability, it is not yet obvious in the figures. Improving underwriting results is like steering a slow-moving boat. You can turn the tiller, but the boat may not go the way you want, and it will take some time. Insurance policies last a year, rates are regulated by states and unsettled old losses can get worse if the legal environment changes.

Gross loss ratio evolution

Of the three venture-backed startups, Metromile’s figures have always showed the greatest profitability, and the company shows an improvement on the last quarter, shaving four points off the loss ratio.

Not all startups are experiencing unsustainable loss ratios. Hippo — a homeowner’s MGA — claimed to have produced better-than-market underwriting straight out of the gate, although we have no way to verify this.

Conference chatter is increasingly turning to profit, not just premium. We welcome these signs of maturity in the insurtech market, which were a big reason we started writing these articles and presenting at conferences.

Industry veterans are outperforming the newbies on loss ratio but not premium growth.

Two of the startup carriers sponsored by highly regarded underwriters are performing very well in terms of profit. BiBerk, which ultimately reports to Ajit Jain, recorded a respectable 70% gross Loss & LAE ratio in the quarter. Intrepid, where Rob Berkley sits on the board, turned in a 60% loss ratio (without LAE). Neither company has cracked even $4 million in quarterly premium, compared with Root at nearly $15 million, but is there something that Ajit and Rob know that the newbies don’t? Or are big public companies just less motivated to grow than venture-backed companies? Or is growth first really the right answer?

We’re not showing State Farm’s HiRoad entity because we’re less clear on how it reports and is managed by State Farm’s executives.

It will still take several years to become a scale insurer

All three venture-backed insurers increased expenses in the quarter. Root lost $11.6 million, a burn rate of $129,000 every day. That still gives two years of runway if the burn rate can be maintained. We get details on expenditures only in annual statements, so we cannot know for sure whether Root is spending on headcount, advertising or other overhead. LinkedIn pegs the company’s headcount at 117, with 30 people joining just in the second quarter. The company runs a referral program that has paid $860,000 to date. We speculate that $25 is the average referral bonus (so $50 because both parties get the bonus), which equates to 17,000 referrals. If the average premium is $750 (again, a guess; a bit below the national average), then the referral program has generated more than $13 million of premium at a CAC of $50, which would be an impressive 40% of all the premium in these first 18 months.

As the company expands exponentially to grow into its unicorn valuation, the question for investors is if the company can maintain exponential growth and bring down the loss ratio simultaneously, so growing without raising losses exponentially. It’s a difficult balance. In the meantime, investors added $45 million to the insurance company’s statutory surplus, but — because of losses — surplus stands at $43 million at the end of the quarter.

Root’s CEO says that the company is getting better at pricing and predicting the business, and that “conservativeness” in reserves means prior results were better than they appeared. We agree with Root that there is increasing evidence of conservative reserving, but not based on the figure it cited in the blog. Root says that only 66 cents on the premium dollar was paid as claims in 2017 (net) – which appears to exclude payments expected for open claims and losses incurred but not reported (“IBNR”). The more meaningful number, in our view, is that Root has recorded $344,000 of favorable development this year — meaning it has decided that its estimates of prior-year losses were indeed too high. The company earned $792,000 of premiums in 2017 and stated losses at Dec. 31, 2017, at $1.3 million, for a net loss ratio of 168%. If 2017 actual losses were in fact $986,000, as they are now estimated, then the developed loss ratio would be 124% — which is better but doesn’t greatly change the overall view of the year, which was small and volatile and hence of limited use to understand the company (but the best any outsider had at the time).

Root also deserves credit for being the only one of the three venture-backed companies to have made conservative loss picks. Lemonade continues to see its reserves be inadequate. The company had $2.1 million of reserves at the start of the year and has seen $245,000 of adverse development this year. Even a more experienced underwriter, Metromile, started the year with nearly $14 million of reserves and has recorded nearly $1.5 million of adverse development.

Stepping back from the noise of quarterly reserving, we still believe that the companies have to prove underwriting quality and do so with sustainable overheads and expenses. There’s still a long journey ahead, but the companies have the resources (in the form of cash at the holding company) to work on the challenge for years to come.

Reinsurers continue to subsidize losses

Lemonade continues to hand reinsurers $3.61 of losses for every $1 in premium in the quarter. Root handed reinsurers $1.41 of losses for every $1 in premium. Metromile — as with other metrics — is playing a safer game, and its reinsurers even made a bit of money in the quarter, getting $0.86 of losses for every $1 in premium.

Root disclosed that it changed its reinsurance program, reducing its quota share from 50% to 25% of premium effective June 1 through the remainder of 2018, meaning it will keep more premium (and losses) and possibly get less capital relief. The company retains a $1M xs $100K per-risk excess of loss treaty(*). Terms were not disclosed.

(*) Explanation of reinsurance basics: In quota share reinsurance, an insurer reinsures a percentage of its book – a fixed percentage of every dollar of premium and loss. The reinsurer pays the insurer a ceding commission to cover the insurer’s expenses and may assume unearned premiums (a liability), which may increase the insurer’s statutory capital. In excess-of-loss reinsurance, the reinsurer covers every dollar above a certain amount (the attachment point) up to a pre-defined limit. Excess of loss reinsurance can be written per event (such as a storm) or per risk. In Root’s per-risk reinsurance, the reinsurers appear to take each and every loss of more than $100,000 to the extent that the loss exceeds $100,000, up to $1.1 million. Here is a technical resource on the subject of using reinsurance for capital optimization.

See also: Can Insurtech Rescue Insurance?  

Executive compensation appears to be as expected — likely mostly in stock

Many insurers are required to file an annual Supplemental Compensation Disclosure listing the name, title and compensation of their top 10 executives. The requirement was triggered by an investigation in 1905. (Here’s some trivia for a cocktail party at InsureTech Connect: That’s the same year Las Vegas was founded.)

The state of Nebraska will mail the information for all companies that operate in Nebraska to anyone who sends them $80. The hardest part is finding a computer with a CD-ROM drive. This is a sore point among insurers (the disclosure, not the need for a CD-ROM). Some insurers risk a fine instead of being transparent, such as by putting zeros for their compensation or putting a blank piece of paper over the data before mailing it. We like numbers, and there are reasons for the disclosure in an insurance context. Most insurers are subject to extensive regulation and disclosure of their rates, which need to be reasonable, which means not paying executives excessively and passing costs through in the rate. And, as Lemonade says, insurance is a business of mutual trust, which requires reasonable executive compensation practices, even if not overseen by shareholders. For more on the disclosure, click here.

Lemonade and Metromile are required to complete the disclosure, though Lemonade’s commitment to transparency doesn’t extend to putting the required names on the form. Their disclosures are below. The numbers are not huge — indeed, they are within what one would expect for a startup, where founders and early joiners get big equity grants with salaries that pay the bills but are often dramatically less than what a senior executive at an insurer typically earns. Interestingly, two of Lemonade’s founders sold shares in 2017, which is reflected under “all other compensation.” Metromile seems to have forgotten a few figures in its filing.

Note that both Lemonade and Metromile “allocate” compensation to companies within their holding company system, and in absence of information on how this allocation works, it is possible that these figures are materially understated because of the allocation.

Here is Lemonade Insurance:

Metromile Insurance:

One last note on compensation. Metromile filed its disclosure electronically, while Lemonade apparently walked down to the Post Office. We don’t know how to explain why a high-tech company like Lemonade would use snail mail. It mailed the disclosure on March 1, a Thursday, so it must have been #TBT in Lemonade’s offices.

Next Insurance U.S.

Digital small business insurer Next announced in May a plan to form a new carrier, and it has. The company was formed in September 2017, which indicates that the plan will have been in the works for a year before the carrier writes business. Next’s filing was all zeros except the surplus (or equity) in the company, which is more than $10 million. As of November 2017, the company’s business was described as follows:

“The Company will initially offer Contractors Insurance in three levels of coverage for 190 classes including Handymen, Carpenters, Electricians, HVAC Technicians, Landscapers, Janitors and Plumbers. All Contractor Insurance plans will include general liability ($5 million limit), professional liability ($3 million limit) and inland marine ($3 million limit) coverages. The Company will eventually write other types of small business classes including restaurants, daycares, personal training and photographers. These products are currently produced by licensed producers of Next Parent on other insurance carriers’ paper. … The company will eventually offer the following additional types of commercial insurance to small businesses with $3 million maximum limits, unless indicated otherwise: commercial property, commercial auto, director and officer liability, employment practices liability, business interruption, surety bond ($1 million limit), liquor liability, cyber, data breach ($5 million limit). The Company’s planned net retention for all lines will be 20% of the maximum limits.”

The remaining 80% of limits will be ceded to Munich Re Americas (MRAm).

The company’s directors are Guy Goldstein (the CEO), Nisim Tapiro (co-founder) and Dawn Puro. As of November 2017 (before the most recent $83 million fundraising), the company’s ownership was as follows:

What’s in a name?

A recent startup proclaims: “[Company name] Insurance is a [line of business] insurance company that provides [line of business] coverage to small businesses through a simple online experience. Offering A.M. Best A-rated insurance… direct to customers since 2018…”

That wording makes consumers think they’re dealing “direct” with an insurer, not an agent or broker, which is what this company is. Words matter in insurance, as illustrated in the first section of the California Insurance Code.

  • Insurer: “The person who undertakes to indemnify another by insurance.”
  • Broker: “A person who, for compensation and on behalf of another person transacts [insurance] … with, but not on behalf of, an admitted insurer.”
  • Agent: “A person authorized, by and on behalf of an insurer, to transact [insurance] … on behalf of an admitted insurance company.” [emphasis added].

#themoreyouknow

“Congratulations, you’re innovating in a highly regulated industry”

Still on the subject of regulation, let’s have some fun with deficiency letters. Part of the joy of getting a new insurance program licensed in a new state is the exchanges with regulators. The insured makes a filing of a few hundred pages, the state reviews it and states its objections, and ‘round we go for, potentially, months. If you’re an insurance nerd, you might find these letters interesting. Particularly Lemonade’s, if only because of how the sausage-making of insurance contrasts with public statements about doing better for consumers.

A recent letter from Oregon to Lemonade had language like this: “Please explain why the insurer is choosing such broad exclusionary language; and if possible, provide an example of why this is necessary to have.”

Hmm…

A letter from Virginia last month listed nine pages of objections, even objecting to Lemonade’s definition of “hovercraft.” A sample of the objections:

“The Company will need to withdraw under the Special Limits, items (g), (h), (i), (j), and (k). The limitations the Company has outlined in these sections are more restrictive than the provisions in the minimum standards set forth in the [Virginia Administrative Code]. It is not permissible for the Company to place limitations or impose special limits that are more restrictive than the minimum standards set forth in the VAC. For items h and i, it is acceptable to impose a special limit or to exclude business property but it is not acceptable to impose a special limit or to exclude property used for business purposes. For example, if I take my laptop (business property) home to do some work, the business property can be limited or excluded. However, if I use my personal computer at home to do some Bureau of Insurance work, that is personal property being used for a business purpose and coverage cannot be limited or excluded.”

Score a point for the Virginia Bureau of Insurance for using human language.

All this, and we haven’t even gotten to Policy 2.0.

Maybe dealing with U.S. regulators is why Lemonade is now keen on international expansion?

Meanwhile, the interviewers at Bloomberg TV have been reading our articles.

See also: Startups Take a Seat at the Table  

Looking forward

The third quarter, which includes most of the summer, could be a big one for the companies in our coverage, because insurance often changes when people move. We are gratified by the increasing focus on insurance fundamentals in insurtech, and the lofty valuations recently seen in the sector will require satisfying both venture metrics as well as solid insurance fundamentals. The startups have the time and the resources but a long way to go to climb the Cliffs of Insanity. They are gaining on the incumbents, but will they make it to the top of the cliffs before running out of power? It’s not inconceivable. Tell us what you think in the comments.

This article was written by Matteo Carbone and Adrian Jones.

How to Move to the Post-Digital Age?

We are in the midst of the shift from the information age to the digital age, which is realigning fundamental elements of business that require major adjustments to thrive, let alone survive.

As we noted in our new report, Greenfields, Startups and InsurTech: Accelerating Digital Age Business Modelsnew greenfield and startup competitors are rising from within and outside of every industry, including insurance, to capture the post-digital age business opportunities of the next generation of buyers. By shifting to meet the forces of change, these companies are positioning themselves to be the market leaders in the post-digital age. Those that do not make the shift risk not only the loss of customers but also market share and relevance in the coming new age of insurance.

See also: 6 Charts on Startups, Greenfields, Incubators  

Sometimes, the next big thing isn’t easy to spot. The disruption of the insurance industry is in the early days, so predictions are difficult. Will the new greenfields and startups become the next market leaders? If history is a guide, the answer is yes … some will. Just consider Progressive and how many dismissed it early on. Now it is a top 10 insurer in the U.S. Or consider what has happened in other industries with companies that are defunct because they missed the shift:

  • Streaming video: Blockbuster failed to see this trend. It filed for bankruptcy in 2010 and Netflix is now worth more than $61 billion.
  • Mobile games: In 2011, the president of Nintendo North America suggested that mobile game apps were disposable from a consumer perspective. Today, Pokemon Go has 65 million users. Is that disposable?
  • Apple iPhone: Former Microsoft CEO Steve Ballmer reportedly commented that the first Apple iPhone would not appeal to business customers because it did not have a keyboard and would not be a good email machine. Apple iPhone single-handedly disrupted and redefined multiple industries and continues to do so.
  • Autonomous vehicles: In 2015, Jaguar’s head of R&D stated that autonomous vehicles didn’t consider customers’ cargo. Since then, Jaguar Land Rover has invested $25 million in Lyft to join the autonomous trend.
  • On-premise enterprise software vs. cloud-based SaaS platforms: In 2003, Thomas Siebel of Siebel Systems said Microsoft would roll over Salesforce in the CRM market. In 2005, Oracle acquired Siebel Systems for $5.85 billion. Salesforce’s market cap, in contrast, is more than $60 billion.

Insurance Industry Change and Disruption

At no time in the history of insurance can we find as many game-changing events and a rapid pace of advancement occurring at the same time. At the forefront is the increased momentum for insurtech, and the greenfields and startups within, creating high levels of activity, excitement and concern on the promise and potential of insurance disruption and reinvention.

When you add it all up, the insurance industry has many characteristics that make it an attractive target for aggressive investments in innovation. First, its size is enormous – based on industry data, it is estimated that premiums written are more than $4.7 trillion globally. Second, it faces multiple challenges that offer opportunities for exploitation by nimble, efficient and innovative competitors.

Insurtech advancements and the forces of change see no significant slowdown. The momentum for change that has been building is unstoppable. Industry advancements, cultural trends and IT reactions are gaining speed as they gain strength and a framework for stability and growth. It is pushing a sometimes slow-to-adapt industry by challenging the traditional business assumptions, operations, processes and products, highlighting two distinctively different business models: 1) a pre-digital age model of the past 50-plus years based on the business assumptions, products, processes and channels of the Silent and Baby Boomer generations and 2) a post-digital age model focused on the next generation including the Millennials and Gen Z, as well as many in Gen X.

Greenfields and Startups Make the Boardroom Agenda

The market landscape is rapidly changing. During 2016, Lemonade launched. Metromile decided to become a full-stack insurer, leaving its MGA days behind. New MGAs entered the picture, including Slice, TROV, Quilt, Hippo and Figo Pet Insurance, to name a few.  Existing insurers made market debuts with new startups including Shelter’s Say Insurance with auto insurance for millennials, biBerk from Berkshire Hathaway for direct small commercial lines and Sonnet Insurance as the digital brand from Economical Insurance in Canada, among others.

Add to this the projected shrinking of insurable risk pools due to the emergence of autonomous vehicles, connected homes and wearables and the domino effect of these on other industries, and it’s not hard to imagine a future with traditional carriers fighting over a much smaller pool of customers where only the most efficient, effective and innovative will survive.

As a result, discussion surrounding greenfields, startups and insurtech moved into the board room of every insurer and reinsurer trying to understand how to leverage the shift to the digital age and develop strategies and plans to respond. Yet some insurers have a blind spot in recognizing the competition both from outside and within the industry, and the critical need to begin planning a new post-digital age business model. The result is a growing gap between knowing, planning and doing among leaders and fast followers or laggards, which is rapidly becoming insurmountable due to the pace of change.

Closing the Gap with Greenfield and Startup Business Models

Assuming that most insurers grasp the need for a greenfield and startup mentality to grow, what remains is to aim all efforts toward accomplishing an organizational shift. How do you move your company from the pre-digital age to the post-digital age and close the gap?

It requires leadership to build consensus. It requires vision to aim in the most market-ready direction. And it requires a new business paradigm that will allow for change. We must redefine and re-envision insurance to enable growth and remain competitive.

While many have made progress in replacing legacy systems and traditional business processes, this is not enough. These systems, while modern, were built around pre-digital age business assumptions and models, not to support the range of needs in a post-digital age model driven by a new generation of customers. Like other industries, today’s insurance startups and greenfields need and want options that do not require investment in significant infrastructure or upfront costs and therefore seek a cloud business platform solution to maximize options and minimize costs and capital outlay.

See also: How to Plant in the Greenfields  

A modern cloud business platform provides an advantage for greenfields and startups, breaking down traditional boundaries, IT constraints and age-old business assumptions about doing business, while building up the ability to rapidly develop and launch new products and services. The platform is a robust set of technology, mobile, digital, data and core capabilities in the cloud with an ecosystem of innovative partners (many insurtech technology startups) that provides the ability to launch and grow a business rapidly and cost effectively.

Will established insurers suffer at the hands of tech-savvy, culture-savvy competition? Some may, but only if they allow themselves to. There will be constant pressure from greenfields and startups to outdo each other in the race to better meet the needs and demands of a new generation of buyers in a post-digital age for insurance.

For traditional insurance companies, the need to re-invent and transform the business is no longer a matter of if, but of when.  Insurance leaders should ask themselves: Do we have a strategy that considers transformation of both the legacy business and creation of a new business for the future? Who are our future customers and what will they demand? Who are our emerging new competitors? Where are we focusing our resources…on the business or on the infrastructure?

A new generation of insurance buyers with new needs and expectations creates both a challenge and an opportunity that a greenfield and startup business model can capitalize on to incubate, launch and grow. The time for plans, preparation and execution is now — recognizing that the gap is widening and the timeframe to respond is closing.

New Era of Commercial Insurance

Despite a generally soft market for traditional P&C products, the fact that so many industries and the businesses within them are being reshaped by technology is creating opportunities (and more challenges). Consider insurers with personal and commercial auto. Pundits are predicting a rapid decline in personal auto premiums and questioning the viability of both personal and commercial auto due to the emergence of autonomous technologies and driverless vehicles, as well as the increasing use of alternative options (ride-sharing, public transportation, etc.).

Finding alternative growth strategies is “top of mind” for CEOs.  Opportunities can be captured from the change within commercial and specialty insurance. New risks, new markets, new customers and the demand for new products and services may fill the gaps for those who are prepared.

Our new research, A New Age of Insurance: Growth Opportunities for Commercial and Specialty Insurance at a Time of Market Disruption, highlights how changing trends in demographics, customer behaviors, technology, data and market boundaries are creating a dramatic shift from traditional commercial and specialty products to the new, post-digital age products redefining the market of the future.

See also: Insurtechs Are Pushing for Transparency

Growth Opportunities

New technologies, demographics, behaviors and more will fuel the growth of new businesses and industries over the next 10 years. Commercial and specialty insurance provides a critical role to these businesses and the economy — protecting them from failure by assuming the risks inherent in their transformation.

Industry statistics for the “traditional” commercial marketplace don’t yet reflect the potential growth from these new markets. The Insurance Information Institute expects overall personal and commercial exposures to increase between 4% and 4.5% in 2017 but cautioned that continued soft rates in commercial lines could cause overall P&C premium growth to lag behind economic growth.

But a diverse group of customers will increasingly create narrow segments that will demand niche, personalized products and services. Many do not fit neatly within pre-defined categories of risk and products for insur­ance, creating opportunities for new products and services.

Small and medium businesses are at the forefront of this change and at the center of business creation, business transformation and growth in the economy.

  • By 2020, more than 60% of small businesses in the U.S. will be owned by millennials and Gen Xers — two groups that prefer to do as much as possible digitally. Furthermore, their views, behaviors and expectations are different than those of previous generations and will be influenced by their personal digital experiences.
  • The sharing/gig/on-demand economy is an example of the significant digitally enabled changes in people’s behaviors and expectations that are redefining the nature of work, business models and risk profiles.
  • The rapid emergence of technologies and the explosion of data are combining to create a magnified impact. Technology and data are making it easier and more profitable to reach, underwrite and service commercial and specialty market segments. In particular, insurers can narrow and specialize various segments into new niches. In addition, the combination of technology and data is disrupting other industries, changing existing business models and creating businesses and risks that need new types of insurance.
  • New products can be deployed on demand, and industry boundaries are blurring. Traditional insurance or new forms of insurance may be embedded in the purchase of products and services.

Insurtech is re-shaping this new digital world and disrupting the traditional insurance value chain for commercial and specialty insurance, leading to specialty protection for a new era of business. Consider insurtech startups like Embroker, Next Insurance, Ask Kodiak, CoverWallet, Splice and others. Not being left behind, traditional insurers are creating innovative business models for commercial and specialty insurance, like Berkshire Hathaway with biBERK for direct to small business owners; Hiscox, which offers small business insurance (SBI) products directly from its website; or American Family, which invested in AssureStart, now part of Homesite, a direct writer of SBI.

The Domino Effect

We all likely played with dominoes in our childhood, setting them up in a row and seeing how we could orchestrate a chain reaction. Now, as adults, we are seeing and playing with dominoes at a much higher level. Every business has been or likely will be affected by a domino effect.

What is different in today’s business era, as opposed to even a decade ago, is that disruption in one industry has a much broader ripple effect that disrupts the risk landscape of multiple other industries and creates additional risks. We are compelled to watch the chains created from inside and outside of insurance. Recognizing that this domino effect occurs is critical to developing appropriate new product plans that align to these shifts.

Just consider the following disrupted industries and then think about the disrupters and their casualties: taxis and ridesharing (Lyft, Uber), movie rentals (Blockbuster) and streaming video (NetFlix), traditional retail (Sears and Macy’s) and online retail, enterprise systems (Siebel, Oracle) and cloud platforms (Salesforce and Workday), and book stores (Borders) and Amazon. Consider the continuing impact of Amazon, with the announcement about acquiring Whole Foods and the significant drop in stock prices for traditional grocers. Many analysts noted that this is a game changer with massive innovative opportunities.

The transportation industry is at the front end of a massive domino-toppling event. A report from RethinkX, The Disruption of Transportation and the Collapse of the Internal-Combustion Vehicle and Oil Industries, says that by 2030 (within 10 years of regulatory approval of autonomous vehicles (AVs)), 95% of U.S. passenger miles traveled will be served by on-demand autonomous electric vehicles owned by fleets, not individuals, in a new business model called “transportation-as-a-service” (TaaS). The TaaS disruption will have enormous implications across the automotive industry, but also many other industries, including public transportation, oil, auto repair shops and gas stations. The result is that not just one industry could be disrupted … many could be affected by just one domino … autonomous vehicles. Auto insurance is in this chain of disruption.

See also: Leveraging AI in Commercial Insurance  

And commercial insurance, because it is used by all businesses to provide risk protection, is also in the chain of all those businesses affected – a decline in number of businesses, decline in risk products needed and decline in revenue. The domino effect will decimate traditional business, product and revenue models, while creating growth opportunities for those bold enough to begin preparing for it today with different risk products.

Transformation + Creativity = Opportunity

Opportunity in insurance starts with transformation. New technologies will be enablers on the path to innovative ideas. As the new age of insurance unfolds, insurers must recommit to their business transformation journey and avoid falling into an operational trap or resorting to traditional thinking. In this changing insurance market, new competitors don’t play by the rules of the past. Insurers need to be a part of rewriting the rules for the future, because there is less risk when you write the new rules. One of those rules is diversification. Diversification is about building new products, exploring new markets and taking new risks. The cost of ignoring this can be brutal. Insurers that can see the change and opportunity for commercial and specialty lines will set themselves apart from those that do not.

For a greater in-depth look at the implications of commercial insurance shifts, be sure to downloadA New Age of Insurance: Growth Opportunities for Commercial and Specialty Insurance at a Time of Market Disruption.