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Insurtech: The Year in Review

As we reach the end of 2017, the first full 12 months where insurtech has been recognized as a standalone investment segment, we wanted to reflect on what has been an incredible year.

From the start, we at Eos believed that insurtech would be driven globally, and that has certainly played out. This year, we’ve visited: Hong Kong, Amsterdam, New York, Las Vegas, Nigeria, Dubai, India, Singapore, Bermuda, Milan, St. Louis, Munich, Vienna, Paris, Zurich, Cologne, Chicago, San Francisco, Silicon Valley, Seattle and Toronto. We’ve expanded our geographic footprint to include the East and West coasts of the U.S. and India and have seen fantastic progress across our expanding portfolio. We’ve welcomed a number of new strategic partners, including Clickfox, ConVista and Dillon Kane Group, and launched our innovation center, EoSphere, with a focus on developing markets

At the start of the year, we published a series of articles looking at the key trends that we believed would influence insurtech and have incorporated these in our review of the year.

We hope you enjoy it! Comments, challenges and other perspectives, as always, would be greatly received.

2017: The year innovation became integral to the insurance sector

How are incumbents responding?

We are seeing a mixed response, but the direction of travel is hugely positive. A small number of top-tier players are embracing the opportunity and investing hundreds of millions, and many smaller incumbents with more modest budgets are opening up to innovation and driving an active agenda. The number sitting on the side lines, with a “wait and see” strategy is diminishing.

“If 2016 was the year when ‘some’ insurers started innovating, 2017 will be remembered as the year when ‘all’ insurers jumped on the bandwagon. And not a minute too soon! When I joined 3,800 insurance innovators in Las Vegas, we all realized that the industry is now moving forward at light speed, and the few remaining insurers who stay in the offline world risk falling behind.” Erik Abrahamson, CEO of Digital Fineprint

We are more convinced than ever that the insurance industry is at the start of an unprecedented period of change driven by technology that will result in a $1 trillion shift in value between those that embrace innovation and those that don’t.

Has anyone cracked the code yet? We don’t think so, but there are a small number of very impressive programs that will deliver huge benefits over the next two to three years to their organizations.

“We were pleased to see some of the hype surrounding insurtech die down in 2017. We’re now seeing a more considered reaction from (re)insurers. For example, there is less talk about the ‘Uber moment’ and more analysis of how technology can support execution of the corporate strategy. We have long argued that this is the right approach.” Chris Sandilands, partner at Oxbow Partners

Have insurers worked out how to work with startups? We think more work may be needed in this area….

See also: Insurtech: An Adventure or a Quest?  

The role of the tech giants

“Investors are scrambling for a piece of China’s largest online-only insurer… the hype could be explained by the ‘stars’ behind ZhongAn and its offering. Its major shareholders — Ping An Insurance (Group) Co., Alibaba Group Holding Ltd., Tencent Holdings Ltd.” – ChinaGoAbroad.com

“Tencent Establishes Insurance Platform WeSure Through WeChat and QQ” – YiCai Global

“Amazon is coming for the insurance industry — should we be worried?” – Insurance Business Magazine

“Aviva turns digital in Hong Kong with Tencent deal” – Financial Times

“Quarter of customers willing to trust Facebook for insurance” – Insurance Business Magazine

“Chinese Tech Giant Baidu Is Launching a $1 Billion Fund with China Life” – Fortune 

We are already well past the point of wondering whether tech giants like Google, Amazon, Facebook, Apple (GAFA) and Baidu, Alibaba, Tencent (BAT) are going to enter insurance. They are already here.

Notice the amount of activity being driven by the Chinese tech giants. Baidu, Alibaba and Tencent are transforming the market, and don’t expect them to stop at China.

The tech giants bring money, customer relationships, huge amounts of data and ability to interact with people at moments of truth and have distribution power that incumbents can only dream about. Is insurance a distraction to their core businesses? Perhaps — but they realize the potential in the assets that they have built. Regulatory complexity may drive a partnership approach, but we expect to see increasing levels of involvement from these players.

Role of developing markets

It’s been exciting to play an active role in the development of insurtech in developing markets. These markets are going to play a pivotal role in driving innovation in insurance and in many instances, will move ahead of more mature markets as a less constraining legacy environment allows companies to leapfrog to the most innovation solutions.

Importantly, new technologies will encourage financial inclusion and reduce under-insurance by lowering the cost of insurance, allowing more affordable coverage, extending distribution to reach those most at need (particularly through mobiles, where penetration rates are high) and launching tailored product solutions.

Interesting examples include unemployment insurance in Nigeria, policies for migrant workers in the Middle East, micro credit and health insurance in Kenya, a blockchain platform for markets in Asia and a mobile health platform in India.

Protection to prevention

At the heart of much of the technology-driven change and potential is the shift of insurance from a purely protection-based product to one that can help predict, mitigate or prevent negative events. This is possible with the ever-increasing amount of internal and external data being created and captured, but, more crucially, sophisticated artificial intelligence and machine learning tools that drive actionable insights from the data. In fact, insurers already own a vast amount of historical unstructured data, and we are seeing more companies unlocking value from this data through collaboration and partnerships with technology companies. Insurers are now starting to see data as a valuable asset.

The ability to understand specific risk characteristics in real time and monitor how they change over time rather than rely on historic and proxy information is now a reality in many areas, and this allows a proactive rather than reactive approach.

During 2017, we’ve been involved in this area in two very different product lines, life and health and marine insurance.

The convergence of life and health insurance and application of artificial intelligence combined with health tech and genomics is creating an opportunity to transform the life and health insurance market. We hope to see survival rates improving, tailored insurance solutions, an inclusion-based approach and reduced costs for insurers.

Marine insurance is also experiencing a shift due to technology

In the marine space, the ability to use available information from a multitude of sources to enhance underwriting, risk selection and pricing and drive active claims management practices is reshaping one of the oldest insurance lines. Concirrus, a U.K.-based startup, launched a marine analytics solution platform to spearhead this opportunity.

The emergence of the full stack digital insurer

Perhaps reflecting the challenges of working with incumbents, several companies have decided to launch a full-stack digital insurer.

We believe that this model can be successful if executed in the right way but remain convinced that a partnership-driven approach will generate the most impact in the sector in the short to medium term.

“A surprise for us has been the emergence of full-stack digital insurers. When Lemonade launched in 2016, the big story was that it had its own balance sheet. In 2017, we’ve seen a number of other digital insurers launch — Coya, One, Element, Ottonova in Germany, Alan in France, for example. Given the structure of U.K. distribution, we’re both surprised and not surprised that no full-stack digital insurers have launched in the U.K. (Gryphon appears to have branded itself a startup insurer, but we’ve not had confirmation of its business model).” – Chris Sandilands, partner, Oxbow Partners

Long term, what will a “full stack” insurer look like? We are already seeing players within the value chain striving to stay relevant, and startups challenging existing business models. Will the influence of tech giants and corporates in adjacent sectors change the insurance sector as we know it today?

Role of MGAs and intermediaries

Insurtech is threatening the role of the traditional broker in the value chain. Customers are able to connect directly, and the technology supports the gathering, analysis and exchange of high-quality information. Standard covers are increasingly data-driven, and the large reinsurers are taking advantage by going direct.

We expected to see disintermediation for simple covers, and this has started to happen. In addition, blockchain initiatives have been announced by companies like Maersk, Prudential and Allianz that will enable direct interaction between customers and insurers.

However, insurtech is not just bad news for brokers. In fact, we believe significant opportunities are being created by the emergence of technology and the associated volatility in the market place.

New risks, new products and new markets are being created, and the brokers are ideally placed to capitalize given their skills and capabilities. Furthermore, the rising rate environment represents an opportunity for leading brokers to demonstrate the value they can bring for more complex risks.

MGAs have always been a key part of the value chain, and we are now seeing the emergence of digital MGAs.

Digital MGAs are carving out new customer segments, channels and products. Traditional MGAs are digitizing their business models, while several new startups are testing new grounds. Four elements are coming together to create a perfect storm:

  1. Continuing excess underwriting capacity, especially in the P&C markets, is galvanizing reinsurers to test direct models. Direct distribution of personal lines covers in motor and household is already pervasive in many markets. A recent example is Sywfft direct Home MGA with partnerships with six brokers. Direct MGA models for commercial lines risks in aviation, marine, construction and energy are also being tested and taking root.
  2. Insurers and reinsurers are using balance sheet capital to provide back-stop to MGA startups. Startups like Laka are creating new models using excess of loss structures for personal lines products.
  3. Digital platforms are permitting MGAs to go direct to customers.
  4. New sources of data and machine learning are permitting MGAs to test new underwriting and claims capabilities and take on more balance sheet risk. Underwriting, and not distribution, is emerging as the core competency of MGAs.

Customer-driven approach

Three of the trends driving innovation that we highlighted at the start of the year centered on the customer and how technology will allow insurers to connect with customers at the “moment of truth”:

  • Insurance will be bought, sold, underwritten and serviced in fundamentally different ways.
  • External data and contextual information will become increasingly important.
  • Just-in-time, need- and exposure-based protection through mobile will be available.

Over time, we expect the traditional approach to be replaced with a customer-centric view that will drive convergence of traditional product lines and a breakdown of silo organization structures. We’ve been working with Clickfox on bringing journey sciences to insurance, and significant benefits are being realized by those insurers supporting this fundamental change in approach.

Interesting ideas that were launched or gained traction this year include Kasko, which provides insurance at point of sale; Cytora, which enables analysis of internal and external data both structured and unstructured to support underwriting; and Neosurance, providing insurance coverage through push notifications at time of need.

See also: Core Systems and Insurtech (Part 3)  

Partnerships and alliances critical for success

As discussed above, we believe partnerships and alliances will be key to driving success. Relying purely on internal capabilities will not be enough.

“The fascinating element for me to witness is the genuine surprise by insurance companies that tech firms are interested in ‘their’ market. The positive element for me is the evolving discovery of pockets of value that can be addressed and the initial engagement that is received from insurers. It’s still also a surprise that insurers measure progress in years, not quarters, months or weeks.” – Andrew Yeoman, CEO of Concirrus

We highlighted three key drivers at the start of the year:

  • Ability to dynamically innovate will become the most important competitive advantage.
  • Optionality and degrees of freedom will be key.
  • Economies of skill and digital capabilities will matter more than economies of scale.

The move toward partnership built on the use of open platforms and APIs seen in fintech is now prevalent in insurance.

“We are getting, through our partnerships, access to the latest technology, a deeper understanding of the end customers and a closer engagement with them, and this enables us to continue to be able to better design insurance products to meet the evolving needs and expectations of the public.” Munich Re Digital Partners

Where next?

Key trends to look out for in 2018

  • Established tech players in the insurance space becoming more active in acquiring or partnering with emerging solutions to augment their business models
  • Tech giants accelerating pace of innovation, with Chinese taking a particularly active role in AI applications
  • Acceleration of the trend from analogue to digital and digital to AI
  • Shift in focus to results rather than hype and to later-stage business models that can drive real impact
  • Valuation corrections with down rounds, consolidation and failures becoming more common as the sector matures
  • Continued growth of the digital MGA
  • Emergence of developing-market champions
  • Increasing focus on how innovation can be driven across all parts of the value chain and across product lines, including commercial lines
  • Insurers continuing to adapt their business models to improve their ability to partner effectively with startups — winners will start to emerge

“As we enter 2018, I think that we’ll see a compression of the value chain as the capital markets move ever closer to the risk itself and business models that syndicate the risk with the customer — active risk management is the new buzzword.” – Andrew Yeoman, CEO Concirrus

We’re excited to be at the heart of what will be an unprecedented period of change for the insurance industry.

A quick thank you to our partners and all those who have helped and supported us during 2017. We look forward to working and collaborating with you in 2018.

Startups as Partners: A Failed Experiment?

I was in New York City recently and found myself talking to the founder of a fintech. His company had recently raised several million dollars from a large investment bank. It raised some questions about how insurers go about partnering with startups.

Things were going really well.

I asked him about progress engaging with the bank as a “supplier.” I guessed that a bank that had invested such a sizable sum would be eager to get its hands on the startup’s technology. I wanted to hear how banks had solved some of the problems around partnering with startups experienced by insurers.

It turns out they have the same challenges.

The founder told me that the first thing he had to do post-investment was to sign a policy confirming that he does not use child labor. His team was currently in the process of filling in a 60-page questionnaire on data security. It was months before he expected to be live with any kind of even limited pilot.

The startup was one of the first to be accepted by the bank’s incubator. Recognizing the process challenges, a technical employee had been seconded from the bank to help the team four days a week. The employee was advising on how to build technology to be compliant with the bank’s requirements. This was helpful – but rather than shortening the timeline had merely made its requirements achievable.

All this oversight “red tape” despite the fact that most of the founding team are former employees of the bank and that one of bank’s senior managing directors was a director (through the investment).

See also: Startups Take a Seat at the Table  

I was surprised by this. On some dimensions, fintech is ahead of insurtech, notably on investment volumes (see page 3 of our presentation to the Slovenian Insurance Association). But it seems that banks suffer from the same challenges engaging with startups.

This made me wonder: Is the startup-as-a-supplier model a failed experiment? How can it be that a bank is willing to invest millions in a startup but then finds it so hard to use its product?

It is too early to know for sure if the model is a failed experiment.

However, it is fair to say that the model is not currently working for most insurers. This blog proposes two changes in the way that insurers could partner with startups – one pragmatic, the other radical.

Design a “startup-grade” governance framework (or “sandbox”)

It is very easy to produce slideware that tells management teams to be more “agile” and launch “innovation pods.” The problem is that an innovation strategy needs to be rooted in detailed operational analysis to be effective.

A vital component is a “startup-grade” governance framework – in other words an onboarding and oversight process that is commensurate with a startup’s resources and the scale and likely risk of any early implementation. For example: What are reasonable information security requirements for a small-scale trial; how does procurement get comfortable with a pre-revenue business?

These are questions that companies tend to tackle in an ad hoc way at the moment. There are two consequences: First, engagement processes are slow, and, second, solutions are bespoke. In other words, companies are not “formalizing” their learnings to speed up future engagement processes.

We believe that insurers with ambitions to engage with startups should design these governance frameworks – sometimes referred to as “sandboxes” – soon after settling on their innovation “vision.” Avoiding this operational detail will slow or kill the startup partnership.

Critical in all of this is differentiating between genuine “red lines” and “nice to haves.” An insurer must, for example, be satisfied that its startup partnership is not contravening the rules imposed by the GDPR; on the other hand, the procurement process could probably be shorn of company-imposed requirements like the need for suppliers to show three years of audited financials.

At Oxbow Partners, we are currently helping several clients develop startup-grade frameworks and the processes that sit underneath.

A new startup partnership model: “buy in-spin out”

A startup-grade governance framework may, however, not work for all companies. Some will simply find it too hard to find an acceptable compromise between their standard compliance processes and the needs of a startup. There is some legitimacy to this outcome: As we have pointed out, the penalties of non-compliance with legislation will mean a “sandbox” is not to every organization’s taste.

This would mean that for some companies the startup-as-a-supplier model will not work. So how do these companies get access to the best ideas, technology and talent?

It seems to me that the point of failure in the current model is that a startup is an outside partner. This is beneficial in some ways – a management team that has incentives to build a business; separation from a corporation to allow for creative and rapid development. But where there are advantages there are disadvantages: Alarm bells might ring in a corporate risk team when they see the words “creative” and “rapid.”

We therefore suggest more attention should be paid to an alternative model, which we call the “buy in – spin out” model. (Some companies are already offering elements of our model, but not, as far as we know, in the form we are proposing.)

In this model, corporations would buy a controlling stake in startups early in their lifecycle and run them as internal development teams. The startup’s objective is to make the technology work for the “host” organization. This simplifies the startup’s objectives, makes the governance framework clearer and also gives the startup access to internal resources to comply with these requirements.

See also: Will Startups Win 20% of Business?  

At a certain point, each side has the opportunity to buy the other out. Either the startup believes that its idea is broadly marketable and buys out the “host” with a consortium of investors (“spin out”). Alternatively, the corporation thinks that the business gives it competitive advantage, in which case it might offer a higher price than the consortium.

Clearly, there are many issues to test before implementing the “buy in – spin out” structure. The most obvious is startup appetite: The startup will have a deep fear of either being crushed by a corporate owner or being tarnished by the host when trying to distribute to competitors.

The solution may not yet be clear, but the problem is well-defined. While there is a lot of activity around partnering with startups, we are yet to see many implementations beyond limited POCs. Insurers need to ensure they are not just defining their “vision” but building an effective operating framework to make it happen.

This article was first published on the Oxbow Partners Blog.