Tag Archives: coverhound

Be Afraid of These 4 Startups

The 1926 Model A is a far cry from the self-driving Tesla we see on the road today. The automotive industry has progressed light years since Henry Ford first paved the way for automobiles. From refrigerators to cars, technology is moving at warp speed. There’s just one industry that hasn’t quite kept up with the Joneses: the insurance industry. For over one hundred years, the $1 trillion industry has stayed pretty constant — consumers purchase a policy from an agent, pay their premiums and really don’t think twice about it. These four startups from Silicon Valley, New York City, etc. are about to turn the insurance world upside down. And, if you ask us, it’s about time.

Mojio

Mojio— Some may remember Mojio as a “connected car” hard- and software company, but the brand recently went through a major overhaul.  With a seasoned startup CEO on their hands, Mojio looked at industry trends and discovered a major hole and an opportunity for change. They plan to roll out their new business model in North America sometime this fall, in conjunction with the revamped AutoMobility LA, the first smart car technology trade show of its kind.  With their new model, Mojio hopes to create an automotive ecosystem where the automotive industry, insurance industry and telecom services thrive together. While staying mum about their North American partnerships, Kyle MacDonald, head of marketing had this to say:

“This open approach enables the owner of the car to become the owner of his or her data. Novel? Yes, but we believe this is simply the logical evolution of car ownership. As software continues to eat the world, startups like Mojio are poised to take a big bite out of the connected car market.”

Needless to say, your connected car is about to get a whole lot better. Mojio has been experimenting with their new model oversees with wild success. In an article posted on the Mojio blog, CEO Kyle Hawk said, “Deutsche Telekom and ZTE are turning to partners like Mojio to provide the platform for global, scalable connected car offerings, signaling an exciting time for not only the automotive and mobile industries, but ultimately for end users who’ll soon be able to enjoy a new era of car ownership and driving experiences.”

See also: InsurTech: Golden Opportunity to Innovate  

Cover

CoverHound— CoverHound is built for one-stop shoppers. With the wild success of things like Amazon’s 1-click ordering, consumers are used to comparing and purchasing things in one place. Why not apply this philosophy to the insurance world? The brilliant minds behind CoverHound are doing just that. With $33.3 million in their series C round seed funding, this San Francisco startup is everything you would imagine. With urban chic offices and a mass of young professionals with immense potential, this start up is poised to rocket to even more success. They’ve already clobbered over similar sites like the now-defunct Leaky, and they’ve just secured a new round of investors. With this, they plan to take on business insurance coverage for small startups. CoverHound board member James D. Robinson III said, “The industry is ripe for change, CoverHound paves the way into the next generation of insurance.” They’re not just relying on a great user experience website; CoverHound allows potential customers to tweet at them for quotes, capitalizing on high traffic social media. With these innovative business practices, CoverHound will be the new way to get insurance as technology continues to push on.

trov

Trov— Insurance isn’t just about cars.; what about your house and all your belongings? There is nothing worse than coming home to a ransacked home and discovering that all your valuables have been stolen. Panic sets in. Did I pay my premiums this month? Will my renter’s insurance cover the cost of my bike? Do I even have proof of all my valuables? Trov solves all of these in one glorious mobile app. The brilliant minds behind Trov thought pretty critically about the behaviors of millennials before designing the platform Trov is built on. Insurance companies of the past have two fatal errors. The first is they don’t account for the fact that today’s consumer is far from stagnant and that moving every two years is commonplace. Home insurance policies for 30-plus years just aren’t happening anymore. The second, and perhaps the more frustrating, is claims. Insurance giants intentionally make the claims process difficult to discourage you from filing them. Trov solves it all with its cloud-based insurance app that — with a few swipes, photos and texts — you can catalog, insure and file a claim right from your phone. It’s a dream come true when it comes to insuring your valuables without the hassle. Right now, Trov is only available in Australia, but this Bay Area-based company plans to launch in the U.S. by 2017.

Lemon

Lemonade— For a company that has yet to launch after receiving one of the highest amounts in first-round seed funding, Lemonade is getting a lot of press. Claims like, “We aim to be the Facebook of insurance” are pretty bold, but we would be lying if we said we weren’t intrigued. Lemonade is a peer-to-peer insurance company. To put it simply, a group of small policyholders pay their premiums into a pool to pay claims. If there is still money left in the pool at the end of the period, the group gets money back. The company is backed by notable investors Sequoia and Aleph Capital and has brought on AIG and ACE veterans execs. A simple search of “Lemonade insurance” and you’ll find article after article of its “plans” to launch. As the end of 2016 creeps closer and closer, we can’t help but wonder what’s going on behind the hot pink doors. With a concept that’s yet to be tested in the American market, Lemonade has potential — but, then again, good press doesn’t last forever.

See also: The Start-Ups That Are Innovating in Life

Fast forward to 2017, and this list could be entirely different. That’s the beauty of startups: they’re constantly pushing boundaries. All of it is good news for the customer, who desires a better experience when it comes to their insurance policies. Giants such as State Farm and Progressive will have to rely on more than just clever marketing spokespeople to keep up with the tech trends. These four startups are already causing some mayhem of their own in the industry. With a piece of a $1 trillion pie at stake, it’s surprising it has taken this long for the shakeup.

This article first appeared on obrella.com.

InsurTech Start-Ups: Friends or Foes?

This is the second of two parts. The first was, “The InsurTech Boom Is Reshaping the Market.”

What is your strategy to respond to Insurtech? Yes, InsurTech start-ups may be rivals and disruptors….but savvy insurers are starting to recognize that InsurTech start-ups can also be partners. The benefits of InsurTech collaboration are substantial.

While some carriers view the rise of insurance technology start-ups with trepidation, others have been quick to seize on the InsurTech trend as an opportunity. Major insurers are some of the biggest investors in fledgling InsurIech firms. Far from seeing these new companies as rivals, they’re embracing them as partners.

The venture investment funds of prominent insurers such as AXA, Aviva, Allianz, American Family, MassMutual, TransAmerica and Ping An, have made significant investments in insurtech start-ups. Recipients include PolicyGenius, NextCapital, CoverHound and Limelight Health.

Funding of emerging technology firms by big insurers looks set to climb this year. CB Insights reports that insurers completed 20 investment deals in the first quarter of this year. The same group of insurers concluded only eight deals in the first three months of 2015.

See also: A Mental Framework for InsurTech

The shift to collaborate, rather than compete, with technology start-ups is gathering pace throughout the financial services industry. Investment in start-ups aiming to collaborate with established financial services providers jumped 138% last year. It accounted for 44% of the total funding for financial services technology, FinTech, in 2015 – up from 29% in 2014.

Start-ups looking to compete with financial services companies still attract the bulk of investment. However, there’s growing enthusiasm for cooperation among investors and start-ups. The extent of this support varies across geographic markets. In New York, investment in collaborative start-ups accounted for 83% of total FinTech funding, while in London and the rest of the U.K., where the regulatory environment is more conducive to new competitors, the proportion was only 10%.

The illustration below shows the growing interest in cooperation across the financial services industry. Investors are increasingly supporting firms that can help established service providers reduce costs and risk and capitalize on new markets.

Friend or foe. Big insurers shift stance on insurtech start-ups_Cusano (Figure 1)

This trend is only beginning to affect the insurance industry. But as the InsurTech sector grows it will become much stronger.

Increasing cooperation between insurers and new technology firms is a sure sign of the growing maturity of the InsurTech sector. Many major carriers no longer worry that InsurTech firms might erode their business. Instead, they’re eager to benefit from the new insights, attitudes and technology they bring to the industry.

See also: Blockchain Technology and Insurance  

The benefits of collaborating with InsurTech firms can be compelling and include:

  • Insurers can get early access, first mover advantage on disruptive technologies.
  • Big insurers’ decisions to use new technologies often decide whether a new company will be successful….so combining use of a new InsurTech with an investment is a double win.
  • Insurers will get the ability to influence the strategy of the new start-up.

In my next blog post, I’ll discuss the shift in FinTech funding to developing economies and explain why this is good for insurers.

This article originally appeared on Accenture.

 

Transparent Reinsurance for Health

Transparent reinsurance programs could emerge as significant opportunities for healthcare providers, issuers, reinsurers, technology innovators and regulators to address health insurance.

The message is clear. Having to factor in higher costs associated with new entrants to the healthcare system gives insurance firms license to charge higher rates. If these new people were put into a reinsurance pot for three to five years with costs spread over all insurers, no one insurer would be unnecessarily burdened. After this period, costs for these entrants could be reexamined and a decision could be made on how to proceed with them, depending upon the deviation from the remaining population.

Several factors are coming into play. 

United Health Group indicates it will be leaving all but a few of the 34 states where it is offering health insurance under Obamacare.

A fresh Blue Cross Blue Shield study finds recent Obamacare entrants have higher rates of specific illnesses and used more medical services than early entrants. “Medical costs of care for the new individual market members were, on average, 19% higher than employer-based group members in 2014 and 22% higher in 2015. For example, the average monthly medical spending per member was $559 for individual enrollees versus $457 for group members in 2015,” the study found.

What emerges in conversations with economists, regulators and healthcare actuaries is a sense that properly designed, fair and transparent reinsurance could—and would—advance industry and public policy goals to continue insurance for all at affordable prices. This approach would represent tangible improvements over inefficient, incumbent systems. Information would be used by insurers and reinsurers, providers and regulators and, crucially, insureds to establish best performances for healthcare outcomes and expenses. Virtually everyone knows that state or regional reinsurance would have to be mandated, as voluntary systems could be gamed.

“The implementation of new policies, the availability of research funding, payment reform and consumer- and patient-led efforts to improve healthcare together have created an environment suitable for the successful implementation of patient-reported outcome measures in clinical practice,” fresh research in Health Affairs also indicates.

Risk analysis technologies could help issuers, reinsurers, healthcare institutions and citizens rein in the healthcare system’s enormous costs. Earlier this year, the Congressional Budget Office and Joint Committee on Taxation projected that, “in 2016, the federal subsidies, taxes and penalties associated with health insurance coverage will result in a net subsidy from the federal government of $660 billion, or 3.6% of gross domestic product (GDP). That amount is projected to rise at an average annual rate of 5.4%, reaching $1.1 trillion (or 4.1% of GDP) in 2026. For the entire 2017–2026 period, the projected net subsidy is $8.9 trillion.”

CBO/JCT published this stunning projection amid consensus that $750 billion to $1 trillion of wasted spending occurs in healthcare in the U.S. “Approximately one in three health care dollars is waste,” Consumer Reports says.

Key metrics should focus on estimates of risk using demographics and diagnoses; risk model descriptions; calculation of plan average actuarial risk; user-specified risk revealing and detailing information; drill-down capabilities clarifying research; monitoring and control; and calculation and comparison measures to address reinsurance validation.

Several major refinements yielding and relying upon granular, risk-revealing data and metrics would support more efficient reinsurance. All would, and could, update reinsurance information and address customer experience, trust and privacy concerns.

As the industry has noted, ledger technologies could play fundamental roles as blockchains. Indeed, blockchain technologies are just now being introduced in the U.K. to confirm counter party obligations for homeowners’ insurance.

“Advanced analytics are the key,” remarked John Wisniewski, associate vice president of actuary services at UPMC Health Plan. “Predictive capability that looks at the likelihood a patient admission may be coming is the information that we can give to doctors to deal with the matter. … Whoever develops algorithms for people who will be at risk—so providers can develop plans to mitigate risk—will create value for issuers, providers and members alike.”

Available technologies support the connecting of risk assessments with incentives for risk information.

Michael Erlanger, the founder and managing principal of Marketcore, said, “We cannot know what we cannot see. We cannot see what we cannot measure. These available technologies provide clarity for more efficient health insurance and reinsurance.”

Context: Three Rs: Reinsurance, Risk Corridors and Risk Adjustment

When Congress enacted the ACA, the legislation created reinsurance and risk corridors through 2016 and established risk adjustment transfer as a permanent element of health insurance. These three Rs—reinsurance, risk corridors and risk adjustment—were designed to moderate insurance industry risks, making the transition to ACA coverage and responsibilities. The Centers for Medicare and Medicaid Services (CMS) within the Department of Health and Human Services (HHS) administers the programs. All address adverse selection—that is, instances when insurers experience higher probabilities of losses due to risks not factored in at the times policies are issued. All also address risk selection, or industry preferences to insure healthier individuals and to avoid less healthy ones.

With the expiration of ACA reinsurance and risk corridors, along with mandatory reporting requirements this December, healthcare providers, issuers, reinsurers, technology innovators and regulators can now evaluate their futures, separate from CMS reporting.

Virtually all sources commend reinsurance and risk adjustment transfer as consistently as they deride risk corridors. Reinsurance has paid out well, while risk corridors have not. Risk adjustment transfer remains squarely with CMS. 

ACA numbers

While House Republican initiatives try and fail to repeal the ACA, and some news programs and pundits say it is unsustainable, approximately 20 million subscribers are enrolled in Obamacare: with 12.7 million as marketplace insureds, with others through Medicaid and as young adults on parent plans. President Obama, in March, remarked: “Last summer we learned that, for the first time ever, America’s uninsured rate has fallen below 10%. This is the lowest rate of uninsured that we’ve seen since we started keeping these records.” Subscription ratios are off the charts. Premium increases have been modest, approximately 6% for 2016, experts find. “I see no risk to the fundamental stability of the exchanges,” MIT economist Jonathan Gruber observed, noting “a big enough market for many insurers to remain in the fold.”

Transitional Reinsurance 2014-16: Vehicle for Innovation 

One of the great benefits of the ACA is eliminating pre-existing conditions and premium or coverage variables based on individual underwriting across the board. Citizens are no longer excluded from receiving adequate healthcare, whether directly or indirectly through high premiums. Prices for various plan designs go up as coverage benefits increase and as co-pays and deductibles decrease, but the relative prices of the various plans are calculated to be actuarially equivalent.

To help issuers make the transition from an era when they prided themselves on reducing or eliminating less healthy lives from the insureds they covered, to an era where all insureds are offered similar ratings, the ACA introduced reinsurance and risk corridors to cover the first three years (2014 through 2016), in addition to risk adjustment transfer, which will remain in force.

The concept is relatively simple: Require all issuers to charge a flat per-dollar, per-month, per-“qualified” insured and create a pot of money with these “reinsurance premiums” that reimburses issuers for excess claims on unhealthy lives. Issuers would be reimbursed based on established terms outlined in the ACA.

Reinsurance reimburses issuers for individual claims in excess of the attachment point, up to a limit where existing reinsurance coverage would kick in. Individuals involved with these large claims may or may not be identified in advance as high-risk. The reimbursed claim may be an acute (non-chronic) condition or an accident. The individual may otherwise be low-risk.

The important aspect is that all health insurance issuers and self-insured plans contribute. By spreading the cost over a large number of individuals, the cost per individual of this reinsurance program is small to negligible. Non-grandfathered individual market plans are eligible for payments. A state can operate a reinsurance program, or CMS does on its behalf through this year.

As a backstop, the federal government put some money in the pot through 2016—just in case the pot proved inadequate to provide full reimbursement to the issuers. In a worst-case scenario, the sum of the reinsurance premiums and the federal contribution could still be inadequate, in which case the coinsurance refund rate would be set at less than 100%.

As it turned out, 2014 reinsurance premiums proved to be more than adequate, so the refund rate was 100%, and the excess funds in the pot after reimbursement were set aside and added to the pot for 2015, just in case that proves inadequate.

Reinsurance functions on this timetable through this year:

Screen Shot 2016-04-11 at 1.41.01 PM

CMS transferred approximately $7.9 billion among 437 issuers—or 100% of filed claims for 2014, as claims were lower than expected— and it has yet to release 2015 payments. The results for 2015 are coming this summer.

From the outset, states could, and would, elect to continue reinsurance, the CMS contemplated. In 2012, the CMS indicated that “states are not prohibited from continuing a reinsurance program but may not use reinsurance contribution funds collected under the reinsurance program in calendar years 2014 through 2016 to fund the program in years after 2018.”

Subsequent clarification in 2013 did not disturb state discretion. Current regulation specifies that “a state must ensure that the applicable reinsurance entity completes all reinsurance-related activities for benefit years 2014 through 2016 and any activities required to be undertaken in subsequent periods.”

One course of action going forward from 2017 and varying from state-to-state could be mandatory reinsurance enacted through state laws. Healthcare providers, issuers, reinsurers, regulators and legislators could define the health reinsurance best suited to each state’s citizens.

Reinsurers could design and manage administration of these programs possibly at a percentage of premium cost that is less than what is charged by the federal government today. While these reinsurance programs would be mandated, they could include a component of private reinsurance. For example, reinsurers could guarantee the adequacy of per-month reinsurance premiums with provisos that if these actuarially calculated rates turned out to be inadequate in any given year or month, there will be an adjustment to account for the loss in the following year. Conversely, if those rates turn out to be too high, 90% or more is set aside in an account for use in the following year. This way, reinsurers could participate by providing a private sourced solution to adverse claims.

Risk Corridors

Risk corridors apply to issuers with Qualified Health Plans (exchange certified plans) and facilitate transfer payments. The CMS noted: “Issuers whose premiums exceed claims and other costs by more than a certain amount pay into the program, and insurers whose claims exceed premiums by a certain amount receive payments for their shortfall.” Technically, “risk corridors mean any payment adjustment system based on the ratio of allowable costs of a plan to the plan’s target amount,” as the CMS designated.

Issuer claims of $2.87 billion exceeded contributions, so the CMS transferred $362 million among issuers; that is, a 12.6% proration or a $2.5 billion shortfall in 2014.

Risk corridors are politically contentious. Sen. Marco Rubio (R-Florida) likened risk corridors to bailouts. The HHS acknowledged it will “explore other sources of funding for risk corridors payments, subject to the availability of appropriations… includ[ing] working with Congress on the necessary funding for outstanding risk corridors payments.” And, a knowledgeable analyst, Dr. David Blumenthal, noted that risk corridors are not bailouts.

Going forward, evaluations of risk corridors will demand due diligence. Several health exchanges failed from any number of factors—from too little capital for growth experienced, inadequate pricing, mismanagement or risk corridor payments.

Whether innovation can yield effective risk corridors or whether risk corridors will simply fade out as transitional 2014-2016 regulation will depend on institutional and industry participants. Risk corridors did not score unalloyed approbation among sources.

Risk Adjustment: Permanent Element of ACA

Risk adjustment remains in force and impels issuers with healthier enrollees to offset some costs of issuers with sicker ones in specific states and markets and of markets as a means toward promoting affordable health care choices by discouraging cherry picking healthier enrollees.

The HHS transferred approximately $4.6 billion for risk adjustment among issuers for 2014.

At first blush, one might postulate that risk adjustment does the job and that reinsurance and risk corridors could just as reasonably fade out. There is some logic to that argument.

On the other hand, state or regional level reinsurance could make up for risk adjustment shortfalls. In some instances, risk adjustment seems to be less friendly to issuers that take on higher-risk individuals, rather than rewarding high tech issuers and providers with back office capabilities coding claims in such a way as to tactically game risk adjustment.

Evaluating and cultivating these opportunities are timely amid the uncertainties of the presidential and congressional elections that may yield executive and legislative lawmakers intent on undoing ACA provisions, starting with risk corridors. Such legislation could produce losses for issuers and reinsurers.

Nelson A. Rockefeller Precedent

In 1954, then-Undersecretary of Health Education and Welfare Nelson A. Rockefeller proposed reinsurance as an incentive for insurers to offer more health insurance. S 3114, A Bill to Improve the Public Health by Encouraging More Extensive Use of the Voluntary Prepayment Method in the Provision of Personal Health Services, emerged in the first Eisenhower administration to enact a federally funded health reinsurance pool. Rockefeller intended the reinsurance as a means toward an end, what would eventually be dubbed a “third way” among proponents of national health insurance. President Truman and organized labor championed the approach into the mid-’50s. So did the Chamber of Commerce and congressional Republican adversaries of the New Deal and Fair Deal, who were chaffing to undo Social Security as quickly as they could. The American Medical Association also supported this third way because it opposed federal healthcare reinsurance as an opening wedge for socialized medicine. Despite limiting risk and offering new products, insurers demurred because of comfort zones with state regulators and trepidation about a federal role.

pic1

Nelson A. Rockefeller, then-undersecretary of the Department of Health, Education and Welfare, presenting a federally funded health reinsurance plan, 1954.
Source: Department of Health Education and Welfare—now Health and Human Services

Rockefeller’s health reinsurance plan would “achieve a better understanding of the nation’s medical care problem, of the techniques for meeting it through voluntary means, and of the actuarial risks involved,” HEW Secretary Oveta Culp Hobby testified to a Senate subcommittee in 1954.

Rockefeller’s health reinsurance plan did not make it through the House. Organized labor decried it as too little, the AMA said it was too intrusive. Upon hearing news of the House vote, a frustrated Dwight Eisenhower blistered to reporters, “The people that voted against this bill just don’t understand what are the facts of American life,” according to Cary Reich in The Life of Nelson A. Rockefeller 1908-1958. “Ingenuity was no match for inertia,” Rockefeller biographer Richard Norton Smith remarked of industry and labor interests in those hard-wired, central-switched, mainframe times.

pic2

“’It’s déjà vu all over again’ like Yogi Berra,” said one insurance commissioner immersed in the ACA on hearing Ike’s quote.

Source: Yogi Berra Museum & Learning Center

The idea of national health insurance went nowhere despite initiatives by Sen. Edward M. Kennedy (D-Massachusetts) in the late ’70s and President Bill and First Lady Hillary Clinton roughly 20 years ago, until Congress legislated Obamacare.

Innovative, Transparent Technologies Can Deliver Results

Nowadays, more than 60 years after Rockefeller’s attempt, innovative information technologies can get beyond these legislative and regulatory hurdles. Much of the data and networking is at hand. Enrollee actuarial risks, coverage actuarial values, utilization, local area costs of business and cost-sharing impacts on utilization are knowable in current systems. Broadband deployment and information technology innovations drive customer acquisition and information management costs ever lower each succeeding day. Long-term efficiencies for reinsurers, insurers, carriers, regulators, technology innovators and state regulators await evaluation and development.

Reinsurance Going Forward From 2017

So, if state reinsurance programs can provide benefits, what should they look like, and how should they be delivered?

For technology innovators—such as GoogleMicrosoftOverstockZebra or CoverHound—these opportunities with reinsurance would apply their expertise in search, processing and matching technologies to crucial billion-dollar markets and functions. The innovators hope to achieve successes more readily than has occurred through retail beachheads in motor vehicle and travel insurance and credit cards and mortgages. One observer noted that some of those retail initiatives faltered due to customer experience shortfalls and trust and privacy concerns. Another points out that insurers view Amazon, Apple and Netflix as setting new standards for customer experiences and expectations that insurers will increasingly have to match or supersede. A news report indicated that Nationwide already pairs customer management data with predictive analytics to enhance retention.

Reinsurers including Berkshire Hathaway, Munich Reinsurance Company, Swiss Reinsurance Company Limited and Maiden Holdings could rationalize risks and boost earnings while providing a wealth of risk management information, perhaps on a proprietary basis.

For issuers, state-of-the-art transparent solutions improve the current system by enabling issuers to offer more products and services and becalm more ferocious industry adversaries while lowering risks and extending markets. Smaller, nimbler issuers may provide more innovative solutions and gain market share by providing the dual objectives of better health outcomes with lower costs.

For regulators, innovative, timely information sustains the indispensability of state regulators ensuring financial soundness and legal compliance—while allowing innovators to upgrade marketplace and regulatory systems, key regulatory goals that Iowa’s insurance commissioner, Nick Gerhart, pointed out recently. Commissioner Gerhart envisions regulators as orchestra conductors, acknowledging that most insurance regulatory entities are woefully understaffed to design or operate such reinsurance programs themselves, but they will, and they can lead if the participants can provide turnkey capabilities.

Think of health insurance and reinsurance as generational opportunities for significant innovation rather like the Internet and email. When the Department of Defense permitted the Internet and email to evolve to civilian markets from military capabilities in the 1980s, the DOD initially approached the U.S. Postal Service. Senior Post Office management said it welcomed the opportunity to support email: All users need do is email correspondence to recipients’ local post offices by nine p.m. for printing, enveloping, sorting and letter-carrier delivery the following day.

Similarly, considerable opportunities chart innovative pathways for state and regional health reinsurance for 2017 and beyond.

One path, emulating the post office in the ’80s, keeps on coding and bemoans a zero sum; it would allow the existing programs to fade away and will respond to whatever the president and Congress might do.

Another path lumps issuer health reinsurance as an incumbent reinsurer service without addressing the sustainability of state health exchanges or, indeed, any private health insurers in the absences of risk spreading with readily available information technologies.

The approach suggested here—mandated state health reinsurance—innovates to build sustainable futures. Enabling technologies empower all stakeholders to advance private and public interests through industry solutions advancing affordable healthcare.

Insurance in the Age of the 12th Man

Brian Duperreault, chairman and CEO of Hamilton Insurance Group, told attendees at A.M. Best’s 23rd annual conference in Scottsdale, AZ, that the insurance industry has been an analog laggard rather than a digital leader, and that the clock is ticking on responding to the needs of a digital world. The address follows:

Thank you, Matt, and thanks for that wise review of the forces that have shaped the industry over the years.

Hearing that history line makes me feel pretty old. I lived through a lot of those highlights.

You’ve heard where we’ve been as an industry, and I’ve been asked to give you some thoughts on where we’re going.

The title I’m using is Insurance in the Age of the 12th Man. I’m sure most of you know what I’m referring to by the 12th man – any Seahawks fans with us today? – but in case you don’t:

The reference to a 12th man was first used more than 100 years ago to describe a really dedicated football fan.

It gained some significant traction at Texas A&M, and the Aggies still claim it’s theirs – in spite of what the Seahawks say.

The point is this: Fans can be so fanatically loyal to their team, it’s like having a 12th man on the field. Fans can shape the game and often affect a win or loss.

I’ve heard they can even make the earth move.

Last month, fans at a soccer game in the U.K. celebrated a last-minute goal so “enthusiastically” that it was recorded as a minor earthquake.

Why am I referring to the 12th man in a talk about the future of insurance?

Because we’re doing business in an age that’s profoundly different from anything we’ve ever experienced, and I believe it’s driven by what I’m going to call the 12th man phenomenon.

Virtually every industry has been redefined by an increasingly demanding customer, and it’s doing the same to ours. It’s the fan base – the collective 12th man – that’s driving how we develop, market and distribute our product.

And for many companies, there’s not much time left to figure out how to stay in the game.

PwC just released its annual CEO report and noted that access to digital technologies means that we’re more connected, better-informed and, in PwC’s words, “increasingly empowered and emboldened.”

This isn’t just a shift in market forces. The market has always been changing, and we’re used to that. This is something entirely different.

Given the digital world we’re living in and the impact of real-time communication through social media, the market’s voice is much more crystallized. There’s an immediacy, an intimacy that we’ve never had to deal with before. This is a voice that’s loud, clear and specific.

One of the best examples of the effect of the 12th man is Uber.

You probably know Uber’s story.

Its founders were so fed up with how hard it was to get a cab when they wanted one that they developed an app that puts a taxi at your fingertips. They didn’t just enhance the taxi industry; they blew the existing model apart.

They didn’t care what the regulations were. They just made it work – and it continues to work, because Uber gave customers what they wanted. AirBnB did the same thing to the hotel industry.

  • If you’re used to downloading apps to watch a movie, do your banking or order your groceries;
  • If you customize how, when and where you listen to the radio or watch TV;
  • And if this uncluttered, efficient, highly personalized way of living is what you’ve been used to since you could walk, then

There’s no reason that you’re going to expect anything less when you’re buying insurance.

Maybe this sounds like background noise to those of us who’ve been in the business for a while. After all, our industry has been resilient over the centuries. It’s been a safe bet for decent returns on investment.

But people my age see the world through an analog prism. This is our Achilles heel – because there’s a generation of 80 million Americans who see the world through a digital lens.

This is the workforce that Matt referred to earlier.

They’re going to be the buyers and sellers of our products. They’re going to run our companies. As the largest voting bloc in the U.S., they’re going to elect our governments.

They’re going to be a noisy and demanding 12th man. They already are.

This expectation for a streamlined and efficient buying experience is one of the main drivers behind my company, Hamilton Insurance Group. We believe that insurance has been an analog laggard, not a digital leader. We think we can do something about that.

As I give you thoughts on what will shape our industry over the next decade, I’m going to keep coming back to the 12th man.

I’ve seen lots of lists of future industry trends – some of them are mine – but I think it comes down to:

  • How to build a sustainable company
  • How to be smart about data and
  • How to strip waste out of our industry.

Let’s look at sustainability.

Traditionally, creating shareholder value in an insurance company has had two main components: investments and underwriting.

Right now, we’re between a rock and a hard place on both counts.

We’re in a prolonged zero-lower-bound period where interest rates dip in and out of negative territory.

In a traditional insurance company, there is no money to be made on the fixed instruments that most companies are required to invest in.

Having low-yield assets on a balance sheet for regulatory purposes virtually ensures little investment income.

What’s a CEO or CFO to do?

Well, you can shift your investment philosophy and invest in equities or alternative instruments with a higher yield. But you have to prove you can handle the additional risks that come with a different mix of asset allocations.

You also need an expert asset manager who’s well-versed in current regulations, as well as the commitment of your executives and board, to move to a riskier investment strategy.

You can bank on profitable underwriting – but in a market like this, that’s a grueling experience. Terms and conditions are tough, and margins on most lines of business are razor thin. You have to stay disciplined and resist the siren call to write discounted business. And it seems the days of large reserve takedowns are over.

You can look for M&A opportunities, which in many cases may delay the inevitable and add the stress and cost of effectively integrating what are likely to be legacy systems and cultures.

And while you’re grappling with investments, underwriting and M&A, you have to keep an eye on the rapidly changing digital world, which could render your company obsolete.

So what’s a sustainable business model look like in the age of the 12th man?

I think part of the answer lies in a flexible regulatory environment.

If you’re a company in Bermuda, where your regulator is the Bermuda Monetary Authority, you can establish an alternative investment strategy, as my company has done, in return for putting up additional capital, and work with a data-driven investment manager like Two Sigma, which manages Hamilton’s investments.

Almost a decade ago, the BMA embraced the Solvency II framework and then fought to get Solvency II Equivalency for Bermuda. Their persistence will be rewarded when official recognition of Bermuda’s equivalency takes legal effect on March 24.

I don’t think it’s a coincidence that virtually the day after Bermuda’s Solvency II Equivalency was announced, XL Catlin announced it was moving its company registration to Bermuda. I think others will follow.

Bermuda has reacted well — better than most — in recognizing that flexibility is key to staying solvent.

In the States, things are more complicated. Deloitte released a report last month that said one of the biggest challenges for today’s insurance companies is trying to comply with new capital regulations that were originally designed for banks and don’t provide much flexibility in modifying an investment strategy.

It’s an accepted tenet that regulation works best when it addresses market failures and protects insurance buyers. But regulation can over-correct: In some cases, states have been too slow to rewrite laws, some of which have been in place for almost 100 years.

Today’s regulator has to confront the effect that the digital dynamic is having on both the insurer and the insured. This creates the need for a delicate balancing act: defining the right regulatory regime in a market that’s morphing in front of our eyes.

A word about rating agencies – sometimes referred to as de facto regulators:

Some agencies, like A.M. Best, have been forward-thinking in broadening the factors they consider when assigning ratings. I applaud Best’s for undertaking the survey on predictive analytics that Matt discussed. This is a meaningful contribution to the dialogue. We need more of that from our regulators and rating agencies.

Best’s has also done the work to understand alternative assets. For example, at Hamilton, Best’s spent time onsite with our investment manager, recognizing that these complex strategies require some effort to understand.

Having said that, I’d like to urge rating agencies to put more weight on the 12th man’s voice. How you’re accepted by the market matters. The quality of the relationships you establish, the panels you’re on, the submissions you receive – that all matters.

I said investments and underwriting were traditional aspects of building sustainability. M&A can play a role, and technology definitely does.

However, in this second decade of the 21st century, there’s so much more to running an insurance company.

In addition to a vocal, demanding 12th man, we’re living in a world of extreme political polarization, exchange-rate volatility and social instability.

And against that fragmented, disrupted backdrop, there’s the expectation that a company’s commitment to purpose should be as important as its commitment to profit.

Almost half of the 1,400 CEOs surveyed by PwC feel that, in five years, customers will put a premium on the way companies conduct themselves in global society.

Building a sustainable company is one of most complex issues we’re going to face over the next decade.

Now let’s look at data.

A few years ago, we were all talking about Big Data. It was THE buzz word.

Looking back, I think it’s safe to say that most of us didn’t know what we were talking about.

But living with the effect of disruptive technology, we’ve been on a steep learning curve. We’ve begun to wrap our heads around what we can do with the massive streams of data available to us.

EY just released a study on sensor data. It’s worth a read if you haven’t seen it.

As lead director at Tyco, I have to declare my interest in the subject. We’re spending a lot of time looking at how streaming data can help us develop better products.

We’re taking a holistic, data-driven look at behavior across multiple channels to give our clients the insight that helps them optimize their performance.

EY says top-performing insurance companies are already innovating with telematics, wearable technology and sensor data. EY lists the competitive advantages of being smart about data this way:

  • You can assess risk more precisely
  • You can design products faster
  • You can connect with customers more directly
  • You can revolutionize claims handling
  • And – you can maximize profitability because of better targeting

The implications for what sensor data can do for our industry are remarkable.

We’re talking about sensors on people, on cars, on ships and planes, in offices and homes, on GIS systems that provide data about climate – pretty much anything on the earth, or in the sea and sky.

Understanding this voluminous amount of data, finding correlations and eliminating bias can help us develop policies that are better-written, more comprehensive and more relevant.

Being smart about data also helps us come to grips with emerging risks, particularly a risk like cyber.

At Hamilton, we’re taking a cautious position on cyber. We’re not writing it as a class until we’ve identified an approach that gives us comfort. We haven’t found one yet, mainly because there’s been a tendency to underestimate the interconnectedness of cyber risk.

Too often, discussion about cyber revolves around hacking. But if you put any credence in what I just said about the impact of sensor data, you have to believe that there’s data-based risk in everything we do nowadays. If that’s true, what are the implications for cyber?

Getting back to sensor data –

Access to this type of intelligence has some significant implications for our distribution partners. The role of the broker and agent has been evolving for years, but data analytics is one of the greatest threats – or opportunities – for the partners who help us develop and distribute our products.

Who owns the data? Who interprets it? Does the insurer or the insured need anyone to do that any more?

Then there’s the duality of the role that brokers and agents play. They represent the insurer’s interest as well as the insured or reinsurer. Serving two masters is never easy. How well can you do that in an age of colliding data sets?

I think the answer to whether there’s still value in an intermediary is a qualified yes – IF the broker or agent brings a level of expertise and counsel that far surpasses what the carrier offers or the client can determine by himself. This means setting the gold standard for manipulating and interpreting data.

A last comment on data –

One of my own learnings over the last year or so is that if a company is going to embrace data and technology, it has to be a company-wide initiative. It can’t be done in silos.

I don’t think it works to have an incubation or innovation lab where a dedicated team is exploring a new risk management frontier and the rest of the organization is conducting business as usual. You’ll have constant dissonance between the analog and the digital.

At Hamilton, one of the advantages of being a start-up is that we’ve been able to make technology a focus of our strategic plan from the beginning.

Last year, we bought a Lloyd’s syndicate that we’ve completely rebuilt. The benefit of not having any legacy has allowed us to create an end-to-end, integrated system with all reports coming from one centralized data warehouse.

We’ve already demonstrated the value of this model. When Lloyd’s moved to require its syndicates to report pricing data for gross rather than net performance, a lot of managing agencies struggled. We didn’t.

Finally, I’ll look at the last issue I listed in my opening comments – getting rid of the waste in our industry.

By waste, I mean the massive cost of doing business. I’ve been beating this drum since Hamilton was established a couple of years ago, and I’ll keep at it because, if anything puts our industry at risk, it’s the inefficient way we acquire business.

Thirty to 40% of every premium dollar goes to acquisition and managing the business. At Lloyd’s, it’s even higher, largely because analog data-gathering weighs on the market like an albatross.

The quest to make buying insurance easier and more efficient through data analytics is the DNA of our U.S. operations, where our focus is small commercial business.

We want to remove the pain of the rate/quote/bind experience and sharpen the underwriting. We’re blessed with employees who believe in our mission and who have moved mountains to make it real.

They’ve spent the last year stripping unnecessary questions from the forms used in the acquisition process. We know a lot of that data suffers from human bias or error, and much of it is available from public sources that are more reliable.  We use data that comes from dozens of different sources as part of our risk scoring and underwriting process.

Our long-term goal at Hamilton USA is to get the questions that an agent or broker asks an insured down to two: name and address. Smart data analytics, as well as more informed underwriting, will do the rest.

We’ve also created streamlined portals for quotes and are just weeks away from launching mobile-based technology that rates, quotes and binds business owners policies.

The small commercial segment that we’re working in has an average policy size of under $25,000. This is business with small margins and high transactions. Efficiency is critical if you want to make any money.

And there’s ample room for doing just that. In the U.S., this is a $60 billion market. It’s almost $90 billion when specialty risks are included.

You can see why speed to market can make a huge difference in profitability.

Speed to market doesn’t mean we’re cutting out the middleman.

There’s plenty of room at the table for brokers, agents and MGAs – as long as they want to align their systems and practices with our cutting-edge analytics.

We’re working with partners who are as excited as we are about the potential that data analytics represents. We’re being approached by many others who are interested in taking this journey together with Hamilton.

And there’s a generational component to all of this. Some older clients want to do business with a broker or an agent. It’s a relationship they recognize and feel comfortable with.

But remember that 12th man. There are 80 million of them for whom a middleman just gets in the way.

In closing –

I know that Matt was a keynote speaker at a conference earlier this month organized by Valen Analytics. I understand there was lots of good discussion and some fascinating stats underscoring the imperative to embrace data analytics.

Apparently, 82% of companies surveyed last year by Valen say that underwriters are resisting analytics. 30% worry about a loss of jobs. 30% don’t trust the data.

77% of underwriters and actuaries argue about pricing. The No. 1 reason? Underwriters dismiss data in favor of their own judgment.

While we continue to resist change, venture capital companies are looking at our industry and seeing dollar signs.

In 2015, VCs invested $2.65 billion in start-up insurance companies like Oscar, Gusto and PolicyGenius. Ten years ago, that figure was $85 million.

So the clock is ticking. There’s not a lot of time left to figure out how to build sustainable companies, be smart about data and be more efficient.

Above all else, we need to get over our inherent resistance to change. If insurance as we’ve known it was an ecosystem, large sections of it would be on the endangered species list.

But I’m an eternal optimist. I know we have bold people working in insurance and reinsurance. I know a lot of us get what needs to be done.

So let’s just do it – before that 12th man comes down from the bleachers and does it for us.

distribution

Insurance 2.0: How Distribution Evolves

At American Family Ventures, we believe changes to insurance will happen in three ways: incrementally, discontinuously over the near term and discontinuously over the long term. We refer to each of these changes in the context of a “version’ of insurance,” respectively, “Insurance 1.1,” “Insurance 2.0” and “Insurance 3.0.”

The incremental changes of “Insurance 1.1” will improve the effectiveness or efficiency of existing workflows or will create workflows that are substantially similar to existing ones. In contrast, the long-term discontinuous changes of “Insurance 3.0” will happen in response to changes one sees coming when peering far into the future, i.e. risk management in the age of commercial space travel, human genetic modification and general artificial intelligence (AI). Between those two is “Insurance 2.0,” which represents near-term, step-function advances and significant departures from existing insurance processes and workflows. These changes are a re-imagination or reinvention of some aspect of insurance as we know it.

We believe there are three broad categories of innovation driving the movement toward “Insurance 2.0”: distribution, structure and product. While each category leverages unique tactics to deliver value to the insurance customer, they are best understood in a Venn diagram, because many tactics within the categories overlap or are used in coordination.

venn

 

In this post, we’ll look into at the first of these categories—distribution—in more detail.

Distribution

A.M. Best, the insurance rating agency, organizes insurance into two main distribution channels: agency writers and direct writers. Put simply, agency writers distribute products through third parties, and direct writers distribute through their own sales capabilities. For agency writers, these third-party channels include independent agencies/brokerages (terms we will use interchangeably for the purposes of this article) and a variety of hybrid structures. In contrast, direct writer sales capabilities include company websites, in-house sales teams and exclusive agents. This distinction is based on corporate strategy rather than customer preference.

We believe a segment of customers will continue to prefer traditional channels, such as local agents valued for their accessibility, personal attention and expertise. However, we also believe there is an opportunity to redefine distribution strategies to better align with the needs of two developing states of the insurance customer:those who are intent-driven and those who are opportunity-driven. Intent-driven customers seek insurance because they know or have become aware they need it or want it. In contrast, opportunity-driven customers consider purchasing insurance because, in the course of other activities, they have completed some action or provided some information that allows a timely and unique offer of insurance to be presented to them.

There are two specific distribution trends we predict will have a large impact over the coming years, one for each state of the customer described above. These are: 1) the continuing development of online agencies, including “mobile-first” channels and 2) incidental sales platforms.

Online Agencies and Mobile-First Products

Intent-driven customers will continue to be served by a number of response-focused channels, including online/digital agencies. Online insurance agencies operate much like traditional agencies, except they primarily leverage the Internet (instead of brick-and-mortar locations) for operations and customer engagement. Some, like our portfolio company CoverHound, integrate directly with carrier partners to acquire customers and bind policies entirely online.

In addition to moving more of the purchasing process online, we’ve observed a push toward “mobile-first” agencies. By using a mobile device/OS as the primary mode of engagement, the distributor and carrier are able to meet potential customers where they are increasingly likely to be found. Further, mobile-first agencies leverage the smartphone as a platform to enable novel and valuable user experiences. These experiences could be in the application process, notice of loss, servicing of claims, payment and renewal or a variety of other interactions. There are a number of start-up companies, some of which we are partnered with, working on this mobile-first approach to agency.

To illustrate the power of a mobile-first platform, imagine a personal auto insurance mobile app that uses the smartphone camera for policy issuance; authorizes payments via a payment API; processes driving behavior via the phone’s GPS, accelerometer and a connection to the insured vehicle to influence or create an incentive for safe driving behavior; notifies the carrier of a driving signature indicative of an accident; and integrates third-party software into their own app that allows for emergency response and rapid payment of claims.

Incidental Channels

In the latter of the two customer states, we believe “incidental channels” will increasingly serve opportunity-driven customers. In this approach, the customer acquisition engine (often a brokerage or agency) creates a product or service that delivers value independently of insurance/risk management but that uses the resulting relationship with the customer and data about the customer’s needs to make a timely and relevant offer of insurance.

We spend quite a bit of our time thinking about incidental sales channels and find three things about them particularly interesting:

  1. Reduced transactional friction—In many cases, customers using these third-party products/services are providing (or granting API access to) much of the information required to digitally quote or bind insurance. Even if these services were to monetize via lead generation referral fees rather than directly brokering policies, they could still remove purchase friction by plugging directly into other aggregators or online agencies.
  2. Dramatically lower customer acquisition costs—Insurance customers are expensive to acquire. Average per-customer acquisition costs for the industry are estimated to be between $500 and $800, and insurance keywords are among the top keywords by paid search ad spend, often priced between $30 and $50 per click. Customer acquisition costs for carriers or brokers using an incidental model can be much lower, given naturally lower costs to acquire a customer with free/low cost SaaS and consumer apps. Network effects and virality, both difficult to create in the direct insurance business but often present in “consumerized” apps, enhance this delta in acquisition costs. Moreover, a commercial SaaS-focused incidental channel can acquire many insurance customers through one sale to an organization.
  3. Improved customer engagement—Insurance can be a low-touch and poorly rated business. However, because most customers choose to use third-party products and services of their own volition (given the independent value they provide), incidental channels create opportunities to support risk management without making the customer actively think about insurance—for example, an eye care checkup that happens while shopping for a new pair of glasses. In addition, the use of third-party apps creates more frequent opportunities to engage with customers, which improves customer retention.

Additional Considerations and Questions

The digital-customer-acquisition diagram below shows how customers move through intent-driven and opportunity-driven states. Notice that the boundary between customer states is permeable. Opportunity-driven customers often turn into intent-driven customers once they are exposed to an offer to purchase. However, as these channels continue developing, strategists must recognize where the customer begins the purchase process—with intent or opportunistically. Recognizing this starting point creates clarity around the whole product and for the user experience required for success on each path.

intent

Despite our confidence in the growth of mobile-first and incidental strategies, we are curious to see how numerous uncertainties around these approaches evolve. For example, how does a mobile-first brokerage create defensibility? How will carriers and their systems/APIs need to grow to work with mobile-first customers? With regard to incidental channels, which factors most influence success—the frequency of user engagement with the third-party app, the ability of data collected through the service to influence pricing, the extensibility of the incidental platform/service to multiple insurance products, some combination of these or something else entirely?

Innovation in how insurance is distributed is an area of significant opportunity. We’re optimistic that both insurers and start-ups will employ the strategies above with great success and will also find other, equally interesting, approaches to deliver insurance products to customers.