Tag Archives: exposure

A Simple Model to Assess Insurtechs

“The paradox of teaching entrepreneurship is that such a formula necessarily cannot exist; because every innovation is new and unique, no authority can prescribe in concrete terms how to be innovative.”

― Peter Thiel, Zero to One

Whether we’re talking about telematics, artificial intelligence (AI), digital distribution or peer-to-peer, investing in insurance-related technology (commonly termed “insuretech” or “insurtech”) is no longer considered boring. In fact, insurtech is one of the hottest investable segments in the market. As a 20-plus-year veteran in insurance, I find it surreal that insurance has become this hip. Twenty years ago, I gulped as I sent an email to the CFO of my company, where I proposed that there was a unique opportunity in renters insurance. That particular email was ignored. Today, that idea is worth millions of dollars.

What changed?

Insurance seems to be the latest in a string of industries caught in the crosshairs on venture capital. With the success of Uber and AirBnB, VCs are now looking for the next stale industry to disrupt, and the insurance industry carries the reputation of being about as stale as they come. The VCs view the needless paperwork, cumbersome purchasing processes, dramatic claims settlement and overall old-school look and feel of the industry and think they can siphon those trillions of dollars of premium over to Silicon Valley. It seems like a reasonable thesis.

The problem is, it’s not going to happen that way. Insurance will NOT be disrupted. While insurance looks old and antiquated on the exterior, it is actually quite modern and vibrant on the interior. The insurance industry is actually the Uncle Drew of businesses; it’s just getting warmed up!

The Model

Much of the reason I think VCs are unaware of their doomed quest for insurance disruption is that they are looking at the market from a premium standpoint and envisioning being able to capture large chunks of it. $5 trillion is a lot of money. Without an appropriate model, an outsider coming into insurance can naively think they can capture even a fraction of this. But premium is strongly tied to losses. Those premium dollars are accounted for in future claims.

I once had a VC ask me what the fastest way to $100 million in revenue was. The answer is easy, “slash the premium.” I had to quickly follow up with, “and be prepared to be go insolvent, as there is no digging yourself out of that hole.” He didn’t quite get it, until I walked him through what happens to a dollar of premium as it enters the system. And it was this that became the basis of the model I use to assess new product formation and insurtech startups.

There are four basic components to my model. Regardless of new entrants, new products or new sources of capital, these four components remain everpresent in any insurance business model. Even if a disruptive force was able to penetrate the industry veil, that force would still need to reflect its value proposition within my four components.

Component 1 – EXPOSURE

This is the component that deals with insurance claims: past, present and future. Companies or products looking to capture value here must be able to reduce, prevent, quantify or economically transfer current or new risks or losses. Subcomponents in this category include expenses arising from fraud and the adjustment of claims, both of which can add substantially to overall losses.

See also: Insurance Coverage Porn  

Startups such as Nest are building products that increase home security by decreasing the likelihood of burglary (or increasing the likelihood of capturing the criminals on video) and thus reduce claims associated with burglary or theft. Part of assessing the value proposition of Nest is to first understand the magnitude of the claims associated with burglary and theft and then quantify what relief this product could provide (along with how that relief should be shared among stakeholders).

Another company that is doing some interesting things in this model component is Livegenic (disclaimer: I have become friends with the team). Livegenic allows insurers to adjust claims and capture video and imagery using the mobile phone of the insured. This reduces the expenses associated with having to send an adjuster out to each and every claim. Loss adjustment expenses can be in excess of 10% of all claims, so technology that reduces that by a few basis points can be quite valuable to an insurer’s bottom line and ultimately its prices and competitiveness.

Component 2 – DISTRIBUTION

This component focuses on the expenses associated with getting insurance product into the hands of a customer. Insurtech companies in this space are typically focused on driving down commissions. This can be done by eliminating brokers and going directly to customers. Savings can also be achieved by creating efficient marketplace portals that allow customers to easily buy coverage.

Embroker is one of many companies trying to do just that in the small commercial space by creating a fully digital business insurance experience. Companies such as Denim Labs are providing social and mobile marketing services to companies in insurance. And then there is Lemonade, which is developing AI technology that it hopes will reduce the friction of digitally purchasing (its) insurance and making the buying process “delightful.”  Peer-to-peer (P2P) insurance is a fairly new insurtech distribution model that attempts to use the strength of close ties via social methods for friends and close associates to come together to make their own insurance pools.

Distribution expenses in insurance are some of the highest in any industry. As with the risk component, reducing expenses in this component by even a few basis points is incredibly valuable.

Component 3 – CAPITAL

This component focuses on the expenses associated with providing capital or the reinsurance backstop to a risk or portfolio. For many insurers, reinsurance is the largest expense component in the P&L. Capital is such an important component to the business model that the ramifications of it almost always leak into the other components. This was one of my criticisms of  Lemonade recently. Lemonade will have a lot of difficulty executing some of the aspects of its business model simply because it cedes 100% of its business to reinsurers. So, when it comes to pricing or its general underwriting guidelines, its reinsurance expenses will overwhelm other initiatives. Lemonade can’t be the low-cost provider AND a peer-to-peer distributor because its reinsurance expenses will force it to choose one or the other. This is a nuance that many VCs will miss in their evaluation of insurtechs!

For those seeking disruption in insurance, we have historical precedent of what that might look like based on the last 20 years of alternative capital flooding into the insurance space. I will devote space to this in future articles, but, in brief, this alternative capital has made reinsurance so inexpensive that smaller reinsurers are facing an existential crisis.

Companies such as Nephila Capital and Fermat Capital are the Ubers of insurance. Their ability to connect investors closer to the insurance customer along with their ability to package and securitize tranches of risk have shrunk capital expenses tremendously. Profit margins for reinsurers are collapsing, and new business models are shrinking the insurance stack. It is even possible today to bypass BOTH veritable insurers and reinsurers and put the capital markets in closer contact with customers. (If you are a fan of Michael Lewis and insurance, you will enjoy this article, which ties nicely into this section of the article).

In the insurtech space, VCs are actually behind the game. Alternative capital has already disrupted the space, and many of the investments that VCs are making are in the other components I have highlighted. Because of the size of this component, VCs may have already missed most of the huge returns.

Component 4 – OPERATIONS

The final component is often the one overlooked. Operations includes all of the other expenses not associated with the actual risk, backing the risk or transferring the risk from customer to capital. This component includes regulatory compliance, overhead, IT operations, real estate, product development and staff, just to name a few.

It is often overlooked because it is the least connected to actually insuring a risk, but it is vitally important to the health and viability of an insurer. Mistakes here can have major ramifications. Errors in compliance can lead to regulatory problems; errors in IT infrastructure can lead to legacy issues that become very expensive to resolve. I don’t know a single mainstream insurer that does not have a legacy infrastructure that is impinging on its ability to execute its business plan. Companies such as Majesco are building cloud-based insurance platforms seeking to solve that problem.

See also: Why AI Will Transform Insurance  

It is this component of the business model that allows an insurer to be nimble, to get products to market faster, to outpace its competitors. It’s not a component that necessarily drives financial statements in the short term, but in the long run it can be the friction that grinds everything down to a halt or not.

SUMMARY

I have presented a simple model that I use when I assess not just new insurtech companies but also new insurance products coming into the market. By breaking the insurance chain into these immutable components, I can estimate what impact the solution proposed will provide. In general, the bigger the impact and the more components a solution touches the more valuable it will be.

In future articles, I will use this model to assess the insurtech landscape. I will also use this model to assess how VCs are investing their capital and whether they are scrutinizing the opportunities as well as they should, or just falling prey to the fear of missing out.

Originally published at www.insnerds.com,

The Power, Portability of Thought Leadership

In the book Trust Agents, authors Chris Brogan and Julien Smith chronicle the emerging power of employees who become the manifestation of brands, especially in the online and social media worlds. Scott Monty, who until recently was the global head of social media for Ford, is one example of an employee whose social media aptitude and thought leadership created a halo effect for his employer.

I am living proof of the impact of this concept, as I purchased a Ford Flex in 2011 only after being given a ride in one by Monty at the SXSW interactive festival two years prior. The car (and, frankly, the brand) weren’t even in my consideration set before then. I recently traded in the Flex for a Lincoln MKT, so Scott Monty indirectly and unofficially has sold me two cars on behalf of Ford.

The same dynamics exist in the insurance industry.

Dynamic professionals who publish on InsuranceThoughtLeadership.com and elsewhere, who are active in social media and at conferences, who are associated with specific expertise, become (at least in part) the flesh and blood embodiment of their employers’ brands.

Despite some notions to the contrary, this is nothing but good news for those brands.

Here’s why:

1. Thought Leadership Is Owned by People, Not Logos
Brands are not “thought leaders,” because brands are solely a collection of the attitudes human beings have about a company. That’s why I cringe when consulting clients sometimes tell me they “want the company to be known as a thought leader.” In reality, the company can only be known as an organization that attracts and retains thought leaders. The actual expertise and leadership is possessed by the individuals and loaned to the company during the period of employment.

2. All Exposure Is Good Exposure
I sometimes feel like companies are jealous of their thought leaders, believing that notoriety for their individual experts somehow comes at the EXPENSE of notoriety for the brand. In reality, it works in the opposite direction: Individual thought leadership provides awareness and credibility to the employer of the expert…always. 100% of the people who know Scott Monty know he worked for Ford, and it markedly changed how some of those people (including me) thought about that company and its products.

3. You Can Build a Bench
I often hear from companies that they are concerned about encouraging their employees to grow personal brands and become thought leaders because at some point (the companies fear) the expert will depart, and all that work will have been for naught.

At some level, companies are right to think this way. Very few employees are in it for life these days. However, thought leaders benefit from the power of the brands they represent the same way those brands benefit from the thought leaders’ activities, and I believe this symbiosis causes many thought leaders to stay in their roles for a longer (not shorter) time than average.

But, assuming that the thought leader will depart at some point, brands would be wise to not put all their expertise eggs in a single basket, and instead work actively to build multiple thought leaders in each division of the company. (This is why I encourage companies to have multiple/many contributors to ITL.) If you have several thought leaders representing your division or your brand, the departure of one becomes a mere wobble.

4. It Works for LeBron James
Lastly, companies must think about this as the LeBron James effect. James went to Miami and became the best (and best-known) basketball player on the planet. His personal brand grew, and simultaneously shined a spotlight on the Miami Heat organization.

Harmony.

Then he left and took his hoops thought leadership back to Cleveland. Does Miami take a temporary step back in notoriety? They do, but they are still relevant, still in the playoffs, and are building new stars. But the most important questions are these: Does Miami wish they still had LeBron? Of course. But did they benefit from having him temporarily, and would they do it all again the same way? 100% yes.

Find the LeBrons in your company and use ITL and other opportunities to build their expertise, notoriety and thought leadership. You may not benefit forever, but you’ll definitely benefit.