Tag Archives: Fintech

2021, We Can’t Wait to Get Going!

In my annual rundown of the year that was, and things to look forward to, I like everyone else have missed far too much of what we love so much but adapted and got on with it, traveling the world from the comfort of my own chair. I also watched our industry go through great highs and horrible lows. Some of that is reflected in this year’s predictions as leading indicators as to what we need to do and will fix through 2021 and beyond. I’ve started recently to use one word to describe 2020 — quite simply, it was relentless.

Before we get into this year’s predictions, as usual here’s my scoring of 2020’s predictions!

See here for the full predictions. My quick report card is below 👇🏻

  1. Insurtechs fade away — We have seen some startups leave us this year, fewer than I thought, to be honest. I do wonder how the funding runway survives through 2021. Marks 1/2
  2. Move innovation externally — I think, given COVID, innovation hasn’t really happened at all. If anything, innovation units changed shape and got shut down. Marks 0
  3. Collaboration slows — I’ve definitely seen this through 2020, mainly because our focus has been on surviving 2020 and ensuring business as usual (BAU), reemphasizing that some insurers are notoriously hard to work with and slow when it comes to decision-making (note, not all of them!). Marks 1
  4. Convergence of fintech, insurtech and wealth — I was hopeful for this, but I don’t feel it’s here yet at scale. We have pockets of examples, when you look to the likes of Revolutl with 10 million customers you can do all three. Marks 1/2
  5. Invisible and embedded — Still plodding on. This feels like my pandemic or cyber risk item on the Annual WEF global risks report. I’m going to keep it on the list until it actually comes true. An encouraging number of partnerships and new capabilities gives me a generous result. Marks 1.
  6. SME, SME, SME — I remain super excited by this, globally. Has anyone cracked it yet? Not really. I remain optimistic, based on what I have seen this year as well as the many legal cases this year. Marks 0
  7. Peak conference — This happened for the wrong reason but still was correct. As we all moved to Zoom, Teams, Meet, etc — only a few of the great conferences survived online, and with that a welcome collaboration between ITC and DIA. I do hope to get back to them in person in 2021. Marks 1
  8. Fewer but larger investing rounds — I was right on the money on this one; our research in Q3 proved it, too – read the full report hereMarks 1
  9. Health — COVID-infused, this trend has just started, and has even more focus going into 2021. Marks 1
  10. e-scooters will work  Darn it, I hate being right sometimes. Another COVID-accelerated outcome, with trials around the U.K. and more to follow, with them expected to be legalized shortly. They are here to stay. Deal with it, Nigel. Marks 1.
  11. The year of the electric vehicle. This was helped by the U.K. government bringing forward the deadline to 2030 to scrap petrol and diesel vehicles. A great read here, but sales of EVs are up on last year and continue to rise. We also expect that the U.S. will rejoin the Paris Climate Accord under a the new administration, which will further accelerate the EV trend in 2021. Marks 1. (Don’t mention the Apple car yet; still a few years off.)

2020 Score: 8/11 – 73% — I’ll happily take that.

2021, Looking ahead – so here goes!

1. Let’s fall in love with insurance

If 2020 taught us anything, it is that insurance matters, really really matters! When it doesn’t do what you expected it to do, you lash out and claim it’s not fit for purpose, it was sold incorrectly or whatever, but you likely didn’t read or (if you did) you didn’t really understand what you was buying.

The U.K. Business Interruption Test Case is a wake-up call to the industry on so many levels, especially for small businesses. Many other cases are going on around the world, too. Add to that event cancellation, travel disruption and wedding insurance, plus many others that have all kicked into action. Back in April, the ABI estimated payouts to be in the region of £1.2bn in the U.K. Motor insurers across the world refunded premiums. I tracked many of them back in April here, which I found super-encouraging, with many thinking and looking to why insurance is not more of a utility? This was a positive move by many global carriers (but very view U.K. ones!).

A large part of this is that policy wordings simply have gone too far for too long. Regardless whether direct carrier or delegated to a broker, we are out of control, and if we are not out of control then we don’t really know in some case what we are signing up to. We need to know what’s included and what’s not; this is clear across all business lines – more importantly, we need to ensure people on all sides of the table understand policy wording if we are ever to fall in love and build (rebuild?) trust. The SARS outbreak in 2003 had us rethink things and tighten up wordings but not in a uniform and consistent way. In many cases, this is no different from silent cyber or solar flares. For every new event/issue that emerges, we can’t keep going back over the same old costly process every time. Wording will come into further scrutiny by regulators in 2021.

2. Education and awareness

To fall in love, we need to talk and engage more. During the pandemic, communication has been consistently poor (see our SME research here). We heard from practically everyone over the last year that we have ever engaged with or given our email address to, other than our insurance company or broker (I appreciate a sweeping generalization, and this is not true in all cases). Net result, we need simplicity and transparency in the industry, and we need to start now.

Communication cant just be about up-sell/cross sell. We also need to look to education and understanding around insurance (and broader financial services, much much earlier). I look at my kids and see they will come out of school knowing about cosines, sines, tangents and many other things, I hope — but won’t know how or why to use a bank account, change a plug or car tire or, importantly in this instance, the purpose and need for insurance, how you mitigate and manage risk.

As an industry, we have improved a lot already, but we have a long way to go, especially if the embedded and invisible nature of insurance takes off as we expect. It’s at risk of being further and further away from the consumer’s or business owner’s mind.

In 2021, we will see people get smarter and wiser when it comes to insurance. As an unintended consequence, we may see a resurgence in agent and broker channels to support some of the demystification.

See also: 3 Trends That Defined 2020

3. Access to talent

By agreeing we need to address #1 above, starting with #2, we will ultimately have a larger talent pool of people who want to and will come into insurance over the next decade. The fix will take a generation or, worse, multiple generations. But there is an intrinsic link among all three of these, a continuous direct correlation. As our industry relies more and more on technology, partnered up with deep insurance domain, we need more people — lots more people — and in today’s digital age, when everyone is remote, competition has never been fiercer. Talent pools are now global, no longer restricted to your local area. Your options and competition may be thousands of miles away.

To attract great talent, we need to change the narrative, rebuild trust, make insurance an inclusive and diverse environment and show that we are tackling problems that really matter, from global climate change to keeping businesses moving and people alive and healthy. As a result, we will see more insurers focus on brand and reputation. This was never more apparent for me than recently when interviewing industrial placement candidates for Deloitte; they knew more about and importantly were inspired more by our values, purpose and actions than by our actual capabilities, practices and the client work we do. Reputation will be a key focus for insurers in 2021, with many, including Aviva, already making moves; see here for their most recent appointment around brand and corporate affairs.

Insurtechs such as Lemonade have long focused on their giveback as well as being a certified B-Corp. Randomly, I first wrote about insurance brand in 2015 here.

4. Acceleration vs disruption — digital indigestion

2020 meant everything was accelerated. The things we thought would take years got completed in months. After all, necessity is the mother of innovation. It was amazing to see the speed of change in an industry that is frankly not known for this.

That said, the change we have seen is acceleration, not true change. We, like many industries, are doing the same things in a digital way. We have not re-imagined, rethought or in many cases challenged what we are doing in the first place or why we are doing it. Zoom, Teams, Google Meet replaced physical, face-to-face meetings. Collaboration tools replaced whiteboards. Online forms replaced paper ones. For many, there is no going back to the old ways of doing things. My point here is that the old and current ways in most cases are the same, just digitized. I truly take my hat off to the many teams that got on with this, worked tirelessly to enable remote working, purchased laptops and remote desktop tools and generally in most cases allowed business as usual.

As we enter 2021, I expect to see an element of digital indigestion. How do we cope with all these things we put in to patch things up? What are the implications? Are these things what the business needs now and in the future? Are they effective and efficient? I expect many of these now to be reevaluated and held up accordingly to see if they will or should survive the test of time. Are they needed still, can they be simplified or changed entirely? Most of this indigestion is purely from a process/technology lens — and doesn’t yet take into account the human element of change needed.

While 2020 was relentless and while we achieved so much, 2021 will in some ways slow this progress down again and force us to re-look, reflect and address the areas where we can truly make an impact.

5. Consolidation

In our funding review last year here, you see that there were zero net new startups in the first half. Add to that that 80% of the funding went to the top 10 insurtechs; that simply means there are a lot of mouths to feed with very little money left, even if funding surpasses, as we expect it to, that of 2019. Hardly surprising: The world is a very different place right now. Insurtech has matured, some markets and lines more than others. We have seen IPOs from Lemonade and Root (congratulations, Daniel, Alex and respective teams!) with an IPO filing from Oscar Health on the health side. Hello, world! WeFox raised $110 million, Series B, and there is a profitable 2021 ahead. Insurtech has firmly landed on the lawns! Lemonade cruised to a market cap of more than $10 billion!

A whole flurry of new deals emerged in the last few weeks, too, across traditional incumbent players consolidating, carriers buying insurtechs and insurtechs buying insurtechs, including:

  • RSA acquired by Intact — here in a megadeal.
  • InsuraMatch acquired by Travelers — here.
  • Brolly acquired by Direct Line earlier in the year — here.
  • Drover acquired by Cazoo — here.
  • Drivit acquired by Zego — here.
  • Juniper Labs acquired by Next Insurance — here.
  • RiskGenius acquired by Bold Penguin — here.

I expect consolidation to accelerate into 2021 for a number of reasons, from funding runways reducing, insurer decision making slowing and bandwidth to focus on innovation and new tech drastically reducing, given the focus on what 2020 delivered us. I also think the digitization push of 2020 COVID enabled many of the traditional carriers to level up with insurtechs that, while they had a strong initial proposition, were still just a feature of a larger play. Insurtech’s dominance for 2021 will focus on those that enable further existing carriers vs full stack competing ones (despite the success of Lemonade, Root, WeFox and soon to be Oscar) or those that have specific communities or niche groups they serve. With the latter, the question will always be — how do we get to scale still?

6. Healthcare is the real winner in 2021

From listening to customers, colleagues and partners over the last 12 months, I think health is the big winner ahead. As with life insurance, while thinking about mortality and what happens if… we have also turned to our own health. I remember, early on, a U.K. national press headline read something like: Coming out of lockdown, you are going to emerge a drunk, chunk or hunk!

While the industry has moved mountains, we ourselves haven’t moved as much, or in some cases at all. This in itself has had a profound impact on our health, physical and mental. Insurers have stepped up and then some in this category, both for our own thousands of employees across the globe, displaced to home, and for customers. I recall listening to Ali Parsa from Babylon Health on Secret Leaders Podcast talk about how pre-pandemic an MD in the U.S. said people would never use telemedicine, and as soon as the lockdown hit there was a gold rush. This to me is the Zoom of our industry.

This year alone, I have done an at-home DNA test with 23andme and a blood test with Thriva, and I keep looking to buy a Whoop Band to give myself more data than I care to imagine (the company raised another $100m in Series E in October). If my healthcare provider could take all this information, I would let them have it in a heartbeat. I’m pretty sure I know more about myself now than they do, which I would love to reverse — they are the experts. Take all this data and tell me how I can be healthier and live longer; don’t wait for my call or claim.

Some proof points for me, beyond the forthcoming Oscar Health IPO, include.

  • Physical health with Peloton — right time, right place, and those who know and follow me already know I’m addicted. The IPO was in September 2019 at $29 per share, now trading at over $150 per share. They just doubled down with a $400 million acquisition of Precor, and now with a market cap of $49 billion. Apple, of course, also launched Apple Fitness as many other gyms, yoga studios and more all turned to Zoom. Those that have vertical integration are still winning, in my mind.
  • Mental health with Calm — now valued at $2 billion, with their latest $75 million investment here showing that mental health is more important than ever and that companies large and small need ways to help individuals manage their mental health.
  • Brain health with Heights, from Dan Murray-Serter and his team, recently raising over £1 million in just 20 minutes through crowdfunding. Heights is a new smart supplement, focused on your brain health — a subscription service that’s packed with goodness and a podcast of health experts and brilliant insights with supporters including Stephen FryJay Shetty and Dr Rangan Chatterjee, to name but a few.
  • Remote dentistry – Instant Dentist from Aalok Shukla and Lucie Marchelot Shukla and how they are bringing remote dentistry here really surprised and impressed me with the level of engagement and capability of things you can evaluate and see, without ever sitting in a dentist’s chair — music to many ears, I’m sure! Add to this, cosmetic care such as Straight Teeth Direct, also from the comfort of your own home, very similar to Invisalign. Super impressive. Excited to see where this goes.

Finally, Swiss Re’s new partnership with Google Verily demonstrates how insurance is further partnering with Big Tech to drive clear benefits for customers — more here on the recent announcement of a Verily patch. Again, the exciting thing for me is the combination of hardware, software and services in one proposition.

There’s actually a great webinar with Bupa led by Mark Allan, chief commercial officer, joined by their new group CEO Inaki ErenoDr. Neil SikkaDr. Luke JamesRichard Norris and James Sherwood, in which some of these issues are discussed. See here for the full replay on digital health insights and where the market may go in 2021.

I’m not sure I should include this in health, but, hey, 2020 and all! — pet insurance is on a roll! With everyone at home, I just need to look at my Facebook feed, immediate friends and the price of pets, and it seems the entire world has bought a dog (except us; Emma won’t let us!). The reason I mention pet insurance here is that I genuinely believe there are a lot of similarities between human healthcare (systems, processes, etc.) and pet healthcare. In the same way that humans have turned to telemedicine, so have our pets with 24×7 video calls to vets and much more. Bought By Many has partnered with FirstVet. Others, including everypaw, have followed suit, offering the same service. I mean, after all, we love our pets more than we love ourselves sometimes!

I should say a huge thanks to the online community for continuing to motivate each other — Bobbie, Sharon, Nick, Pat, Ed, Chris and many others! We truly have kept each other moving, when some days we never really wanted to!

7. Life and protection grow

Much focus and funding will shift from P&C to life, protection and health. We have seen some of this already with the likes of Dead Happy (making life insurance simple), YuLife (rewarding living) and the InsureTech Connect global winner this year, bequest, which is bringing life insurance, wills and family well being all under one roof! (Another push to simplification and composites!)

8. Embedded and invisible finally lands

While I have been banging this drum for years now, from my narrative on value added services to loyalty, the icing on the cake, the prediction still holds true for me, now more than ever. Simon Torrance recently put together a great article on embedded insurance, well worth a read — highlighting the $3 trillion market opportunity.

This year, we have seen huge advances from folks like Swiss Re with iptiQ and IKEA, new motor partnerships with Daimler, partnerships with PingAn, back in the U.K. John Lewis partnering with Munch Re Digital Partners and (another) rumored Tesla partnership or insurance launch. That’s not even starting on the GAFAs (Google, Apple, Facebook and Amazon) of the world. Traditional insurers creating platforms for partnerships: There is a great example from Nationwide in this video here, as well as others such as the Chubb Studio, described as insurance in a box.

From Angela StrangeA16zDo you want insurance with that? relates to ecosystems and much more. I had a ton of fun last year helping non-insurance companies define and build insurance propositions (more on that in 2021!) and can only see this trend growing. I wrote about it earlier this year when Amazon launched its Care Hub. Will the winner in the future be those that own distribution and access to the asset, be it the home, car, truck, fleet, ship or building, rather than layers and layers of additional providers? Sure, we will always want choice, but how much – when does convenience and ease take priority when we are already time-poor?

We just need to look at neobanks like Starling, which recently hit 2 million new customers and which has continued to grow both its personal and SME offerings, both including multiple insurance lines from mobile to motor to health and life, almost in line with what I have highlighted above. It’s making me think, have I been too short-term-focused or is Starling ahead of the curve?

Starling Bank - Personal Market Place
Starling Bank - SME Market Place

And that’s it! What do you think? Do you agree? Have I missed anything obvious? Focused too much on the short term? Come up with ideas that are too far and can’t be true? (I honestly don’t think the latter this year).

See also: Has Pandemic Shifted Arc of Insurtech?

Looking for some additional perspectives? Check these out:

As always, many of of my friends throughout the industry make similar predictions. Here are a few of my favorites:

  • Martha Notaras, managing partner of Brewer Lane Ventures – 11 Predictions for 2021 – here. I’m 100% with Martha on these, especially “Do you want insurance with that?”
  • Matthew Grant and Robin Mertens from InsTech London this year crowd-sourced insurance predictions, with an all-star cast from around the market – a great event to re-watch and look out for the post on soon.
  • My old friend Tony Tarquini from Pega not only is as fit as a fiddle but has a great summary in “3 Trends That Defined Insurance in 2020” here.
  • Chris Frankland, CIO over at Care Bridge. has posted his year in review here.
  • Outside of Insurance, look no further than Kara Swisher and Scott Galloway from Pivot Podcast and their Big Predictions for 2021 here Always good to look outside our own wheelhouse to see how the rest of the world is reacting, and these two are my favorites!

Of course, look out for our own insurtech predictions show in early January with InsurTech Insiders here, which we recorded a few weeks back. Thanks, Hanna, Sarah and Alex.

If one thing has encouraged me in 2020 it is that the community is stronger than the individual and that the global insurtech community brings it by the bucketload — I’m delighted to be a small part.

Look forward to your feedback, challenge and thoughts as always, as well as seeing as many of you in person through 2021!.

Fintech Lessons Applied to Insurtech

Having worked in fintech since 2005, I witnessed the fintech wave forming, cresting and eventually crashing into the financial ecosystem. If there is a fraternal twin to banking, it’s the insurance industry. Both industries are built on managing risk, capital, compliance and distribution. Not everything in fintech will apply to insurtech, but there’s a lot we can learn by assessing the impact of fintech on the banking system.

The insurtech revolution will likely be more of an evolution–a more gradual shift and less of a big bang. The proof is the banking system. While it has clearly been affected by fintech, the tsunami of change has been less violent than what some predicted at the height of the craze.

Technology Is an Arms Race

Technology can be transformative, like the computer, the internet, the iPhone and many other examples. But, oftentimes, technology is iterative: One widget is replaced by a more efficient or lower-cost widget.

Advantages are often short-lived. Look at small dollar lending within fintech. Putting the entire application process into a digital format and with instant funding was incredible, but this has become the industry standard. Billions of dollars have been pumped into that space. In just a few short years, the software was commoditized.

Short of a truly defensible business model with unique intellectual property or network effects, most companies will find themselves in an arms race. No single technology will be the holy grail. Instead, a company’s ability to continually innovate rapidly will become the goal.

A lot of variables dictate how well an institution innovates, but here are some common mistakes that I have seen in fintech and now within insurtech as a potential technology partner:

  1. Carriers cannot always articulate what problems they are trying to solve and what success looks like
  2. Decision makers aren’t involved enough or don’t provide enough support in the innovation process
  3. Failing fast or testing concepts is cumbersome

Over the course of a year, innovation teams probably meet hundreds of startups. At Verikai, we have had the most success with innovation teams that are well-versed in the problems of the business. The challenge for startups is that we don’t know what we don’t know about your business. It’s difficult enough to sell a young technology but almost impossible to sell something to a client that can’t articulate its own problems well. It feels like some innovation teams are browsing instead of shopping; at Verikai, we believe that’s because there isn’t always alignment or support from the decision makers. By contrast, an innovation leader started off our meeting the other day by articulating all the problems he was responsible for solving and how solutions would help the business. He had me at hello.

See also: FinTech: Epicenter of Disruption (Part 1)  

Even if you create alignment, it’s incredibly difficult to push an insurance carrier into simple tests. There are a ton of valid reasons for why on-boarding is slow, but you have to find a way to cut through these barriers. Even the banks eventually found ways to re-engineer their internal processes to accommodate startups. Whether for contracts, audits, compliance, certifications or whatever, I would encourage carriers to find a way to “yes” rather than “no”.

Half the battle is accelerating your discovery process. Obsession over the latest technology craze is understandable, but what teams should really focus on is creating structure, culture and process that allow a company to adopt all of the relevant technologies in the coming years.

Sandboxes: Not Just for Kids

More data has been created this past year than all the previous years combined. There’s no way that any regulator can keep up with the proliferation of data and technology. While fair lending may not exist within insurance, the concept of disparate impact is shared with the industry, as is the concern for safety and soundness. In banking, regulators began creating sandboxes and town halls to encourage dialogue and learning. In addition, the fintechs began pushing regulators and Congress to change regulations to accommodate new business models. As the insurtech movement matures, I’d expect to see a lot more interaction with regulators.

It’s important that each carrier understands the shifting sands. Startups are more likely to lead with regulators, but it’s important that they not be the only voice at the table. Working with regulators is an incredibly important aspect of long-term planning for insurers.

Direct-to-Consumer Is Difficult

There are only so many people looking for financial products at any given time, and they’re not always in the digital channel. Fintech lenders, over time, became incredibly adept at customer acquisition through digital marketing. But even the digital market had an upper limit. The obvious place to then hunt for customers was through the banks themselves.

At first, fintech was the sworn enemy of banks, but now they are often partners. Insurtech, like fintech, will find a pain point that big insurance companies cannot address efficiently. Insurtechs will exploit it for what it’s worth, but will need to broaden their distribution over time through partnership. Certainly, there are MGAs that already write on behalf of their carrier partners, but I suspect an even deeper partnership is possible in many cases. While digital channels are incredibly appealing, brokers/agents are still relevant to many people. The point is that the digital market is a growing pool, but that there’s still a much larger body of water to fish from. Don’t be surprised if competition moves to cooperation over time.

Unbundle to Bundle

Fintechs were incredibly strong at finding niche markets that could be easily exploited under the noses of the banks. The same will hold true within insurance, but the demands of investors and capital will drive insurtechs to go after an even greater share of the consumer wallet.

All companies fear the Amazons and Apples entering the financial services market. However, it’s fintechs like SOFI, Marcus, Chime, Varo, Robinhood and countless others that are beginning to bundle multiple products to create modern, digital banks. The most expensive thing in fintech has been acquiring customers in high volumes. Naturally, companies can justify higher costs if they can increase customer lifetime values through cross-selling. And, there is a potential network effect for the winners. Whether insurtechs do the same thing or possibly some giant fintech player enters insurance, I suspect it’s a matter of time before someone will try to create the Amazon of the insurance space.

See also: What Gig Economy Means for FinTech  

The Early Days

It’s certainly going to take a while for all of these predictions to play out, but it’s important to have a long view. So far, I’m not sensing any panic in the industry. But, at the height of the mortgage crisis in 2008, no one paid too much attention to the peer-to-peer lenders lurking in the background. Somewhere around 2015, the banks went into high alert.

Depending on who you are and how you are positioned in insurance, the hindsight of fintech may be prescient for your company.

New Entrants Flood Into Insurance

New entrants seem to be coming out of the woodwork in insurance. The insurtech movement, the advance of emerging technologies and the appetite of the global tech titans are all contributing to new entrants, new partnerships and new business models. A few recent examples illustrate the new interest in insurance from those both inside and outside of the insurance industry.

  • WeWork partners with Lemonade. In what seems like a very natural partnership, WeWork plans to offer its WeLive members renters’ insurance through Lemonade. WeLive members rent fully furnished apartments from WeWork for short-term situations.
  • Credit Karma enters insurance. This fintech intends to build on customer relationships to expand into auto insurance. While the initial focus will be education – helping Credit Karma customers understand how credit and adverse driving affects insurance rates – the longer-term goal is to provide yet another shopping/comparison site.
  • BMW and Swiss Re partner for ADAS scores. BMW Group and Swiss Re will collect telematics data from vehicles related to the use of ADAS (Automated Driver Assistance Systems) and build scores that can be used by primary insurance companies.
  • Lending Tree buys QuoteWizard for $370 million. Fintech Lending Tree, which has been on a buying spree, moves into insurance with the acquisition of insurance comparison shopping site QuoteWizard.
  • Travelers partners with Amazon for the smart home. Travelers will set up a digital storefront on Amazon featuring smart home devices for a discount (especially security-related devices) as well as discounts on homeowners’ insurance.
  • JetBlue invests in insurtech Slice. This appears to be a pure investment play, but it is still interesting that an airline would be following insurtech and seeking investment opportunities.

Something is going on here. It is not as if there have never been new entrants or that companies from other industries have ignored insurance. But the flurry of activity and innovative partnerships, investments and market approaches may represent a bigger trend. Insurance is transforming, and, despite some of the doom and gloom warnings, a case can be made that there is more opportunity than ever for the industry. Even in the examples provided above, the emphasis is more on new opportunities than displacing incumbent insurance players. Indeed, in the Swiss Re and Travelers cases, the incumbents are part of the new partnerships – and these are just two of many examples.

See also: 5 Cs of Transformation in Insurance  

One of the main themes of the examples highlighted above is the attention on distribution and customer relationships. While insurtechs are working with insurers on many opportunities to improve underwriting, claims, and other areas, so far the new entrants from outside the industry don’t appear to have the appetite to underwrite risk and handle claims. This may change, but it is likely that there will be even more interest from outside insurance in capitalizing on customer relationships. Above all, these new entrants and innovative partnerships serve to accelerate the transformation of insurance.

What Should Future of Regulation Be?

It is of course much easier to look back and second-guess regulatory actions. It is far more difficult to propose a way forward and to do so in light of the emerging hot-button issues, including data and the digitization of the industry, insurtech (and regtech), emerging and growing risks, cyber, the Internet of Things (IoT), natural catastrophes, longevity and growing protectionism. The way forward requires consideration of the primary goals of insurance regulation and raises critical questions regarding how regulators prioritize their work and how they interact with one another, with the global industry and with consumers.

We offer below some thoughts and suggestions on these important questions and on how regulation might best move forward over the next 10 years.

Establish a reasonable construct for regulatory relationships.

Relationships matter, and it is imperative for there to be careful consideration of how regulators organize their interactions and reliance on each other. We have some examples in the form of the Solvency II equivalence assessment process, the NAIC’s Qualified Jurisdiction assessment process (under the U.S. credit for reinsurance laws), the NAIC’s accreditation process for the states of the U.S., the U.S.-E.U. Covered Agreement, ComFrame, the IAIS and NAIC’s memorandum of ynderstanding and the IMF financial sector assessment program (FSAP). Each of these provide varying degrees of assessment and regulatory cooperation/reliance.

These processes and protocols, however, have largely emerged on an ad hoc, unilateral basis and in some cases have had a whiff of imperial judgment about them that may not be justified – and certainly is off-putting to counterparties. We would urge regulators to give careful consideration to the goals, guiding principles and the process for achieving greater levels of cooperation and reliance among global regulators.

We hope these efforts would include an appreciation that different approaches/systems can achieve similar results that no jurisdiction has a monopoly on good solvency regulation. There must also be respect for and recognition of local laws and a recognition that regulatory cooperation and accommodation will benefit regulators, the industry and consumers. Most importantly, regulators need to work together to develop confidence and trust in one another.

The IAIS first coined the phrase “supervisory recognition” in 2009. In March of that year, the IAIS released an “issues paper on group-wide solvency assessment and supervision.” That paper stated that:

“To the extent there is not convergence of supervisory standards and practices, supervisors can pursue processes of ‘supervisory recognition’ in an effort to enhance the effectiveness and efficiency of supervision. Supervisory recognition refers to supervisors choosing to recognize and rely on the work of other supervisors, based on an assessment of the counterpart jurisdiction’s regulatory regime.”

See also: Global Trend Map No. 14: Regulation  

The paper noted the tremendous benefits that can flow from choosing such a path:

“An effective system of supervisory recognition could reduce duplication of effort by the supervisors involved, thereby reducing compliance costs for the insurance industry and enhancing market efficiency. It would also facilitate information sharing and cooperation among those supervisors.”

This is powerful. We urge global insurance regulators to take a step back and consider how they can enhance regulatory effectiveness and efficiency by taking reasonable and prudential steps to recognize effective regulatory regimens − even where these systems are based on different (perhaps significantly different) rules and principles, but which have a demonstrated track record of effectiveness.

As noted above, we have seen some efforts at supervisory recognition. These include Solvency II’s equivalence assessment process, the NAIC’s accreditation process for other U.S. states, the NAIC “Qualified Jurisdictions” provisions for identifying jurisdictions that U.S. regulators will rely on for purposes of lowering collateral requirements on foreign reinsurers, the E.U.-U.S. Covered Agreement and the IAIS’s Memorandum on Mutual Understanding. Some of these processes are more prescriptive than others and have the danger of demanding that regulatory standards be virtually identical to be recognized. This should be avoided.

One size for all is not the way to go.

The alternative approach to recognition of different, but equally effective systems is the pursuit of a harmonized, single set of regulatory standards for global insurers. This approach is much in vogue among some regulators, who assert the “need for a common language” or for “a level playing field” or to avoid “regulatory arbitrage.” Some regulators also argue that common standards will lead to regulatory nirvana, where one set of rules will apply to all global insurers, which will then be able to trade seamlessly throughout all markets.

There are, however, a variety of solvency and capital systems that have proven their effectiveness. These systems are not identical, and indeed they have some profoundly different regulatory structures, accounting rules and other standards such as the systems deployed in the E.U. (even pre-Solvency II), the U.S., Canada, Japan, Bermuda, Australia, Switzerland and others. Attempting to assert a signal system or standard ignores commercial, regulatory, legal, cultural and political realities.

Moreover, we question some of the rationale for pursuing uniform standards, including the need for a common language. We suggest that what is really needed is for regulators to continue to work together, to discuss their respective regulatory regimes and to develop a deep, sophisticated knowledge of how their regimes work. From this, trust will develop, and from that a more effective and efficient system of regulation is possible. The engagement and trust building can happen within supervisory colleges. We have seen it emerge in the context of the E.U.-U.S. regulatory dialogue. We saw it in the context of the E.U.-U.S. Covered Agreement. No one, however, has made a compelling case for why one regulatory language is necessary to establish a close, effective working relationship among regulators.

Similarly, the call for a level playing field sounds good, but it is an amorphous, ambiguous term that is rarely, if ever, defined. Does the “playing field” include just regulatory capital requirements? If so, how about tax, employment rules, social charges? How about 50 subnational regulators versus one national regulator? Guarantee funds? Seeking a level playing field can also be code for, “My system of regulation is heavier, more expensive than yours, so I need to put a regulatory thumb on the scales to make sure you have equally burdensome regulations.” This argument was made for decades in the debate surrounding the U.S. reinsurance collateral rules. We hear it now regarding the burdens of Solvency II. It must be asked, however, whether it is the responsibility of prudential regulators to be leveling playing fields, or should their focus be solely on prudent regulatory standards for their markets.

Finally, the dark specter of regulatory arbitrage is often asserted as a reason to pursue a single regulatory standard, such as the development of the ICS by the IAIS. But one must ask if there is really a danger of regulatory arbitrage today among global, internationally active insures? Yes, a vigilant eye needs to kept for a weak link in the regulatory system, something the IMF FSAP system has sought to do, supervisory colleges can do and the IAIS is well-equipped to do. But using regulatory arbitrage as an argument to drive the establishment of the same standards for all insurers does not seem compelling.

Proportionality is required.

Often, regulators roll out new regulatory initiatives with the phrase that the new rules will be “proportionate” to the targeted insurers. Too often, it seems there is just lip service to this principle. Rarely is it defined – but it is tossed out in an attempt to say, “Do not worry, the new rules will not be excessive.” Greater debate and greater commitment to this principle is needed. Clearly a key component of it must be a careful cost/benefit analysis of any proposed new standard, with a clear articulation of the perceived danger to be addressed – including the likelihoods and severity of impact and then a credible calculation of the attendant costs – economic and otherwise to industry and to regulators. In October 2017, the U.K. Treasury Select Committee published a report criticizing the PRA for its excessively strict interpretation of Solvency II and its negative effect on the competitiveness of U.K. insurers. The report concluded that the PRA had enhanced policyholder protection at the expense of increasing the cost of capital for U.K. insurers, which hurt their ability to provide long-term investments and annuities. Although the PRA emphasized its mandate of prudential regulation and policy holder protection, the Treasury Committee reiterated its concern with how the PRA interpreted the principle of proportionality.

Simplicity rather than complexity.

Over the past 10 years, there has been a staggering increase in proposed and enacted regulatory requirements, many of which are catalogued above. There is a danger, however, that increasingly complex regulatory tools can create their own regulatory blind spots and that overly complex regulations can create a regulatory “fog of war.”

Andrew Haldane, executive director at the Bank of England, in August 2012 delivered a paper at a Federal Reserve Bank of Kansas City’s economic policy symposium, titled “The Dog and the Frisbee.” He graphically laid out when less is really more by talking about two ways of catching a Frisbee: One can “weigh a complex array of physical and atmospheric factors, among them wind speed and Frisbee rotation” − or one can simply catch the Frisbee, the way a dog does. Complex rules, Haldane said, may cause people to manage to the rules for fear of falling in conflict with them. The complexity of the rules may induce people to act defensively and focus on the small print at the expense of the bigger picture.

Focusing on the complexity of the banking world, Haldane compared the 20 pages of the Glass-Steagall Act to the 848 pages of Dodd-Frank together with its 30,000 pages of rulemaking, and compared the 18 pages of Basel 1 to the more than 1,000 pages of Basel III. The fundamental question is whether that additional detail and complexity really adds greater safety to the financial system or has just the opposite effect and significantly increases the cost. Haldane’s analysis provides compelling evidence that increasing the complexity of financial regulation is a recipe for continuing crisis. Accordingly, Haldane calls for a different direction for supervisors with “…fewer (perhaps far fewer), and more (ideally much more) experienced supervisors, operating to a smaller, less detailed rule book.”

Although Haldane’s analysis and discussion focuses on the banking system, his assessment and recommendations should be considered carefully by global insurance regulators. The sheer volume and complexity of rules, models and reports that flood into regulatory bodies raise the real question of who reviews this information, who really understands it and, worst of all, does a mountain of detailed information create a false confidence that regulators have good visibility into the risks – particular the emerging risks – that insurers are facing? A real danger exists of not seeing the forest for the trees.

See also: To Predict the Future, Try Creating It  

Regulation should promote competitiveness rather than protectionism.

At a time when competition has been growing not only from within the established companies but also more importantly from outside the traditional companies, protectionism will only inhibit growth and stifle better understanding of risk in a rapidly changing business environment. The goal must be to make the industry more competitive and to encourage transfer of innovation and create better ways to address risk, distribution of products and climate changes. Protectionism will only limit the potential of growth of the industry and is both short-sighted and self-defeating.

Recognition of the importance of positive disruption through insurtech, fintech and innovation.

The consensus is that the insurance industry is ripe for disruption because it has been slow (but is now working hard) to modernize in view of an array of innovative and technological advancements. Equally, regulators are trying to catch up with the rapid changes and are trying to understand the impacts through sandbox experiments and running separate regulatory models. The pace is fast and presents challenges for the regulators. Solvency and policyholder protection remain paramount, but cybersecurity, data protection, artificial intelligence and the digital revolution make advancements every day. Where this will lead is not clear. But changes are happening and regulators must work to understand the impact and need to calibrate regulatory rules to keep up with the industry and encourage innovation.

Regulation must be transparent.

Too often, regulation is drafted in times of crisis or behind closed doors by regulators believing they know better how to protect policy holders and how to prevent abuse of the system. As we have said, getting it right matters. A strong and healthy industry is the best way to protect consumers and policy holders. Industry engagement is essential and acknowledging and actually incorporating industry’s views is critical. This is particularly true given the dramatic changes in the insurance sector and the need to adopt regulation to new economics, business practices and consumer needs and expectations

This is an excerpt from a report, the full text of which is available here.

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.