Tag Archives: Huckstep

Distribution: About To Get Personal

The buying of insurance is going to change. The “sold, not bought” view of insurance distribution has run its course for many lines of business. Customer expectations have changed, and the inside-out approach to building silo-ed, exclusion-filled,  fixed-term products just doesn’t cut it anymore.

For this month’s InsurTech Insightslet’s look at a new means of distribution that will fundamentally change the insurance supply chain, where insurance will be supplied through ecosystems as part of a wider proposition and not a solo purchase bought in isolation.

After all, people don’t set out to “buy” insurance per se. What they want is a safety net in case something untoward happens.

“Your fat margin is my opportunity”

The insurance supply chain is typically seen as a linear model. Insurance distribution starts with brokers, ARs and MGAs at the front end. Carriers underwrite risk and decide whether to pay a claim. And the buck stops with the reinsurers. Front to back, risk and premium move from one intermediary to another, each one taking its share. It’s a model that hasn’t really changed over the last century.

“Your fat margin is my opportunity” is the Jeff Bezos quote that defines the era of digital disruption. We now see tech-savvy entrepreneurs finding ways to “disrupt” established business models using digital and mobile to streamline out-of-date business models oozing with fat margin.

When you look at the world of insurance, it’s easy to imagine that Bezos was looking at the world’s largest industry when he made that quote. It’s no surprise that insurtech has become the new fintech.

The combination of many intermediaries in the supply chain, each one taking margin, together with the inefficient friction that goes with it has fueled the rise in insurtech. When you add in the shift in agency to the consumer (because of the likes of Bezos and how he built Amazon by putting the customer absolutely and unequivocally at the center), it is easy to see why insurance is a juicy target for digital disruptors.

See also: Taking the ‘I’ Out of Insurance Distribution  

Redefining the Insurance Supply Chain

As the insurance industry catches up and embraces the Fourth Industrial Revolution, we will see a redefining of the insurance supply chain. It’s started already.

It will evolve from the traditional linear model where risk and premium move front to back in a bi-directional flow. In its place, we see new supply chain models for insurance distribution at the front end with efficient management of risk capital at the back.

Of course, as a highly regulated industry, insurance faces a drag on change from the legislature. But just as regulators and lawmakers made adjustments to accommodate the fintech models for alternative finance, they will follow suit in insurtech. And why wouldn’t they?

In the new model for insurance distribution, the supply chain will co-exist with brands and within ecosystems unconnected to insurance.

Customers will be rated as individuals and not members of a risk pool. A greater share of premiums collected will be set aside to pay claims. Instead of sales commissions, there will be platform fees. Time to pay claims will become the KPI of choice for customers to rate their insurance experience.  And as convenience replaces price as the key buying criterion, the way that insurance is distributed will change.

Automation is key for insurance distribution

In the new insurance supply chain, there will be fewer handoffs, less friction, less premium erosion. Just like with Amazon, the customer will be absolutely and unequivocally at the center of the ecosystem.

Trusted brands will own the customer relationship. These brands know the meaning of loyalty and will value these relationships highly. They also understand how expensive it is to build them in the first place, and how easily that can be lost.

Amazon-like levels of service will become the norm for both insurance distribution and paying out claims. Automation is the key to making it very, very easy to do business.

Of course, someone will need to manage risk capital. This will be the domain of the reinsurers, with the role of the carrier becoming superfluous.

The reinsurers know better than anyone how to manage large pools of risk capital. They’ve been carrying the insurance industry for long enough. In the new insurance supply-chain, firms like Sherpa will own and manage the customer experience.

The Sherpa model is to charge a value-based annual fee to a customer in return for meeting all insurance needs. This removes sales commission from the equation.

The founder and CEO of Sherpa, Chris Kaye, explained to me, “Today, insurers pay sales commission for selling the insurance products that the insurers have created.

“We are turning that on its head and creating a membership organization that is unequivocally on the consumer’s side. No more commissions for products you don’t need, instead a flat fee to assure the risks that matter most are protected.”

How does this work in the Sherpa model?

On behalf of customers, Sherpa goes straight to Gen Re and buys insurance wholesale. Sherpa can distribute personalized insurance products to customers while packaging up parcels of risk at the back end.

This innovative approach is one example of how customer brands will be able to fine tune, personalise and price based on a whole set of new and different risk criteria.

So what? Well today, insurers create the products that they want to sell. Brokers do their best to find the best match of their customer’s needs to the fixed insurance products on offer. But customers end up paying for cover they don’t need. And they don’t always get the specific cover that they do want.

The new approach allows the brand, in this case Sherpa, to personalize the cover specific to the individual while packaging up modules of risk for the expert managers of risk capital.

Go west to see the future of insurance distribution

China’s ZhongAn epitomizes everything that is insurtech.

It is a 100% digital tech business with around 1,500 employees. More than half of them are developers, and none are in sales. The company also happen to provide insurance, and a lot of it!

In the first three years of trading, ZhongAn wrote more than 5 billion policies. It sold 200 million policies in one day alone last November during China’s annual online shopping fest!

The thing that makes ZhongAn the darling of insurtech is that 99% of all operations are automated. Quote, policy, premium collection and claims are all automated, which is why the company can process 18,000 policies a second.

But it’s ZhongAn’s approach to premium pricing and insurance distribution that really set it apart. First, the insurance business is built around retail ecosystems. The products are embedded in the customer buying process through retail sites. The company makes it super easy to buy insurance, simply by checking a box.

Next, the insurance is micro-priced, based on a personalized premium, unique to the individual customer.

ZhongAn does not use the law of large numbers to price risk premium. Instead, ZhongAn uses big data for dynamic and personalized pricing. There is no single price list for insurance products. Customers are risk-assessed individually and priced accordingly.

For ZhongAn, it is more important to build customer loyalty (aka stickiness) through speed and convenience.

See also: Distribution Debunked (Part 1)  

ZhongAn use ecosystems to distribute insurance

A question I get asked a lot is: “Are these insurtechs an insurance firm or a tech firm?” It’s a great question, just like asking if AirBnB is a hotel chain or if Uber is a taxi firm.

Of course, there are many old diehards of the insurance industry who rail against that question and revert back the old mantra of “an insurance company is an insurance company.”

But the reality is that, in this rapidly changing digital world, the fundamental nature of providing a financial safety net is changing, too.

The old “insurance product,” designed by insurance companies to suit their own needs and aimed at customer segments that never claim, is on its way out.

In ZhongAn’s case, it is a tech company first, which is why it can take a fresh approach to insurance, unhampered by old ways of thinking.

When it comes to insurance distribution, ZhongAn’s business model is based on supplying insurance cover through an ecosystem partnership model. The company doesn’t pay broker fees or have to support a huge cost of sale. Instead, it has partnered with leading players that already have a customer base across many different market sectors.

This allows ZhongAn to directly embed insurance products into an online experience, making it really easy for the customer. Customers simply check a box to include the insurance cover. The premium is dynamically, real-time, micro-priced, unique to the customer at that moment. This is all about improving customer experience.

Insurance distribution is going to change, it’s just a matter of time

For many, it is hard to imagine a world where insurance could be any different than how it has been for the past 100 years. To them I say, cast your mind back to 1995.

It was only 20 odd years ago that people were talking about this thing called the World Wide Web and about how everything could change. A lot of it sounded science fiction and the stuff of fantasists at the time. Even so, nobody could have possibly imagined the full extent to which the world would change. And, over such a short span. All because of this thing called the internet.

Just as the supply chains of many industries have changed in the internet era, so will that of the insurance industry. It’s no long a question of “if,” but “when.”

The Death of Core Systems

Insurance is overweight and unhealthy. For too long, the insurance industry has accepted that it is OK for at least a third of customer’s money to be spent on admin, overheads, sales and marketing. Insurance CEOs have been announcing operational efficiency programs for years, yet the percentage of premium left for the risk pool hasn’t really changed. Thank goodness for the insurtech digital implementation strategy for insurers!

Hampered by legacy technology, large workforces and cumbersome business processes, insurance is an inefficient business. But that’s changing! Insurtech is now on the corporate agenda for all insurers who wish to be around in the next five to 10 years — which means embracing digital ways of working in an age where speed of change is the defining characteristic.

For this month’s “Insurtech Insights,” Rick Huckstep explores the subject of the insurtech digital implementation strategy and the impact of digital platforms as an alternative to core systems implementations.

Why now for insurtech?

The insurance industry has always been a technology user, so why is there now all this fuss over and attention about insurtech digital implementation? IMHO, insurance is going through a massive catch-up phase. I call this a rapid evolution, rather than use “disruption.”

Nonetheless, this is about digital implementation for insurers, who have failed to keep pace with technology since the mid-’90s and the birth of the internet. You only have to consider the iPhone, already a decade old, and incumbent insurers still appear clumsy when going “mobile.”

For decades, software vendors and systems integrators were the source of technology insight and innovation. Now they find themselves increasingly irrelevant in the digital age — even more so with the emergence of insurtech. That is why many are scrambling around looking for ways to engage with the insurtech ecosystem; if anyone is going to be disrupted by insurtech, it will be them!

See also: Let’s Keep ‘Digital’ in Perspective  

The problem is that software vendors have focused on providing all-encompassing core systems at massive expense and demand on company resources. Often, by the time these large IT implementations are finished, they are already a legacy system. It is no wonder that so much of the IT budget is spent on keeping the lights on, leaving little for internal innovation and value creation.

These core insurance systems are like giant aircraft carriers. They’ve got massive capability and scale and are deep and rich functionally, are generalist and are built to last (well, at least 17 years, which is about the average for a policy admin system.) They are designed and built to do just about everything! They are also very expensive, take ages to commission and are difficult to adapt to external, unforeseen changes.

Whereas insurtech’s core systems are like the latest generation of robotic armed patrol boats — agile, automated, cheaper, have a shorter cycle times to commission and are task-specific.

The demise of core systems

In the traditional software licensing model (the way legacy systems are sold), the insurer buys a license to use the software. For this, the insurer typically pays a large one-off, upfront fee. Then, the insurer pays an annual maintenance charge that is based on a percentage of this fee (in the 15% to 25% range).

Added to this is the cost of implementation. This is where the systems integrators come in, because not all software vendors provide the services needed to implement and configure the new system.

These implementations become large IT-led projects that are measured in years and tens, if not hundreds, of millions of dollars. And they’re big decisions that the insurer is going to have to live with for several decades! That is why the average time to make a buying decision is also measured in years.

Meanwhile, the product and sales teams are frustrated by the IT department because it sees customer opportunities and competitive threats in a constantly moving market and is powerless to respond. IT has become a constraint — not the enabler it was always meant to be. Speed-to-market has become an oxymoron!

The rise of the platform

By contrast, those involved with insurtech are digital natives, mobile in nature and cloud-savvy. The entrepreneurs and founders are born out of the post-iPhone world. For the insurtechs, it’s all about building a flexible and agile tech platform. There’s little need for an in-house IT department when the insurer can buy a service on a pay-as-you go basis.

The insurtech digital implementation can be measured in months and thousands of dollars (instead of years and millions). Speed-to-market is the defining characteristic of these tech-enabled platforms.

In the old-world model, if an insurer wanted to launch a new product or enter a new market, they’d have IT on the critical path, defining the timescale for the launch.

Partnering is the new route to market

In the insurtech world, it’s a different story. And the incumbent insurers have cottoned on to the new way of working: partneringIn this model, the insurer picks insurtech platforms — rather than deploying their own core systems — when launching new products. The insurer focuses on insurance. The insurtech focuses on tech. A leader in this model is Munich Re Digital Partners. Its approach is to provide its own underwriting platform as the back-end engine while the insurtech partner provides the product and customer engagement. Either way, this insurtech digital implementation strategy offers insurers speed, cost and customer advantages.

The result is a significantly less expensive implementation approach with a quicker actual speed to market.

Let me give you an example. Let’s say Insurer A wants to launch a health product in a new territory. Its insurtech digital implementation strategy is to partner with, for example, Sureify.

If you don’t know Sureify, here’s what I wrote about them last year under the heading “Sureify, the Salesforce.com of insurance engagement.” In it, I described the company as follows:

“Sureify is an insurance technology platform that allows insurers to digitally acquire, engage and up-sell with prospective and current policyholders. Part of the platform capabilities includes health, disability and life insurance products built around IoT devices to enable dynamic premium modeling. It is a platform that emphasizes web and mobile distribution channels with multiple engagement possibilities. And it is offered as a white-label platform for the carriers where they define the underwriting questions, policy terms, risk and pricing tables using a plug-and-play approach.” 

Digitalization is the redirection of the company to the customer

To get a industry perspective on the subject of digital implementation, who better to give me an opinion than the well-qualified Martin Pluschke, head of digitalization at NuernbergerVersicherung.

We met up recently at a RiskMinds conference in Amsterdam, where we were both speaking. Martin and I first met during Startupbootcamp’s original insurtech cohort in 2015. I was mentoring, and he was the executive in residence as part of the Munich Re/Ergo support for the program. Martin has spent 25 years in the insurance industry, but he also has several years working with insurtech start-ups at SBC and Axel Springer Plug & Play Accelerator.

I asked him for his POV on digital implementation. He said:

“Digitalization is the redirection of the company to the customer.

This means that we have to look at the whole value-chain — from product management, contract closing to claims processing. Everything we do has to be from the customer’s mindset. It’s a totally new way of thinking for the insurer. There is nothing else, it is all about the customer.”

This is 21st century insurtech thinking inside one of Germany’s oldest life insurers. Formed in 1884, Nurnberger has plenty of experience adapting to challenges and changing customer behavior. The company is no stranger to technology, either. Any life insurer that has been around this long will have seen massive technology change — from tabulation to the introduction of programmable computing in the 1950s to the internet age and now to 21st century digitalization.

Moving from passive risk taker to active risk manager

Martin had something to say about this, as well:

“The new model for insurance is tech with insurance. Insurers must change from being a passive risk taker, where they take a bet and wait for a claim. They win when no claim is made.

“With the use of tech, insurers can have a new relationship with customers. They become an active risk manager. In this model, the insurer will add value through additional services to the customer, such as giving customers advice on ways to manage their risk or offering them specific support and solutions when they have a problem.”

What Martin is describing is one of the key insurtech trends of engagement. This is where the relationship with the insurer is not a once a year occurrence. Instead, the insurer finds ways to continually engage with its customer through the use of tech, such as wearables, telematics and IoT. The result is enhanced customer loyalty where value replaces price as the key buying criteria.

See also: Digital’ Needs a Personal Touch  

Executive mindset is critical to insurtech digital implementation 

I asked Martin how well prepared he thinks are insurers for digital implementation? He said:

“It starts with the very top. The executive mindset is critical because they can not measure the outcome of their decisions based on a business case or ROI anymore.

Never try, never learn! That is the way insurers have to think now. That is the way startups and entrepreneurs think and act. But that is very difficult for insurers who are risk-averse. Which is why the strategic commitment to digital implementation can only come from the top layer of management.

In my view, this is no longer optional for insurers. The only way to stay in the market is to become totally digital. It is a matter of survival.”

I totally agree with Martin on this point. When we look back at today, the winners and losers will be defined by those that did and did not embrace an insurtech digital implementation strategy. The likes of Munich Re, Swiss Re, Aviva and others are all showing a clear intent towards embracing insurtech digital implementation through partnerships and a customer centric digital strategy. They will be among the winners. 

Ditching the legacy

The only way insurers can fully embrace an insurtech digital implementation strategy is to take a clean-sheet approach. This means ditching the legacy!

IMHO, we will start to see insurers separate out their current operations, books of business and all the legacy that goes with it. They will no longer try and re-platform, modernize, migrate their existing core systems or redirect precious resources at another operational efficiency program to take out huge swaths of costs. At the end of the day, all these programs do is shift cost from one place to another. They seldom drive truly permanent and radical change.

The insurance digital implementation strategy will be to run down investments in legacy operations and start new business ventures based on insurtech partnerships. And companies will put the customer at the very heart of their thinking.

That will be the insurtech legacy!

Lemonade: Insurance Is Changed Forever

On Sept. 21, 2016, at 7 a.m. EDT in New York, Lemonade issued a press release. Paraphrased, it said: We’re open for business!

Only time will tell the true impact that Lemonade can have on the insurance industry. Or if we will look back at 2016 in the same way we trace the origins of insurance to 1688 and the birth of underwriting in London.

I’m convinced. The launch of Lemonade will go down as a defining moment in the history of insurance. And, after today, this industry will never be the same! 

This week's article from InsurTech Weekly is Lemonade are here - And Insurance will never be the same again!. Rick Huckstep leads The Digital Insurer in Europe and produces Insurtech Weekly.

I trust you, you trust me.

Insurance didn’t start out badly. When you look back in history, there are many examples of civilizations and societies supporting each other. Looking out for each other is natural behavior.

This is what insurance is meant to be: mutuality in the pooling of shared risk.

Sadly, the industry has lost its way with the evolution of mass scale personal lines in the 20th century. The profit motive has gotten in the way of trust; the insured and the insurer are both chasing the same dollars.

And now, their interests are no longer mutual but are misaligned. The insured wants a helping hand and to be “made whole.” The insurer wants to satisfy its duty to shareholders.

With a very high cost of sale and administration overhead (and little that can be done to reduce it), the insurer is motivated to minimize the amount it pays in claims.

See also: Be Afraid of These 4 Startups

It’s an unfair relationship from the customer’s perspective. The customer has paid the premium and yet has to prove a claim to get what is rightfully hers. No amount of technology can obviate this fundamental failing of today’s insurance business model.

And that is why the launch of Lemonade is so significant!

lemonade-screen-shots-1

Insurance reinvented   

About a month ago, it was my privilege to have some time with Daniel Schreiber, the CEO and co-founder of Lemonade. We talked about the launch of Lemonade and the reasons for taking the hardest route to get a license in New York. We discussed the things that needed to change in the industry, and Daniel explained the philosophy and motivation behind Lemonade.

Next month, I plan to write a longer piece with Daniel on the company’s business model and tech. With his permission, I will share some of the detail behind Lemonade, which is, quite frankly, awesome, mind-blowing and game-changing!

And if that doesn’t whet your appetite, take a look at these videos on YouTube:

The thing to know about Lemonade is that it has built a full-stack insurance model from the ground up.

This is NOT a mobile app sitting on top of traditional insurance. That’s what you get when you ask a bunch of people to find a new way to drive a nail into a piece of wood. If those people have only ever used a hammer, the chances are their solution will be kind of like a hammer.

See also: The Insurance Renaissance (Part 1)  

This innovation dilemma is not a problem unique to insurance. The incumbents in all industries have shown it’s difficult to innovate from within. That’s why it took an Amazon to reinvent shopping, PayPal to change the game on payments and AirBnB and Uber to disrupt in their respective markets. (See this great article on Daily Fintech about the seven acts in the creative destruction play.)

lemonade-screen-shots-2

Lemonade is truly different

Here’s why:

  • It’s a platform.

The way Lemonade has addressed conflict of interest between insured and insurer is inspiring — the company has simply eliminated it! Operating as a platform that enables the insurance engagement, Lemonade doesn’t make any gain from the non-payment of claims. It takes a flat fee for running the platform. It makes its profit from the fee. If Lemonade doesn’t pay any claims, it doesn’t increase its bottom line.

Lemonade has taken out the “winners and losers” dynamic that today’s insurance model is built around. Like all great ideas, it’s simple and bleeding obvious.

  • It’s peer-to-peer insurance.

Unspent premiums are put to good use. As a signed-up member of B-Corp, Lemonade groups its customers by affinity to good causes. This means that, for example, everyone who cares passionately about local youth development or finding a cure for cancer is grouped together. Unspent premiums from the risk pool are donated to the good cause at the end of each term.

When a customer makes a claim, he or she knows any embellishment will be taking money away from the good cause they support, not the so-called “fat-cat insurers.”

This is pure genius. Now you have a dynamic where the insurer’s job is to pay claims, and the insured’s motivation is to help others.

  • It’s a pure-play tech stack.

The tech behind Lemonade is pretty special. It’s a 21st century platform built on 2016 technology. It uses artificial intelligence to communicate through a mobile platform with its customers. From quote and buy to making a claim, the customer journey is simple, automated and immediate. 

Underwriting is quick and easy and automated. Lemonade is more likely to ask how many friends you have than how your roof is constructed! Claims are the same. You tell the app what you’ve lost, make a short video testimonial and the company pays out. Immediately. There is no claims submission. There is no approval process. You state your loss, and they pay you what you’ve asked for.

  • It’s all about trust and behavior.

Lemonade’s secret sauce is Dan Ariely, the company’s chief behavioral scientist. Dan studies behavioral economics and has written a series of books, including “The (Honest) Truth About Dishonesty.”

Daniel explained to me why trust and behavior are so important to the fabric of Lemonade. He said, “People are generally honest. We all have a trust self-image that we might push from time to time. It’s like speeding; that doesn’t make us  feel like bad person when we do it. The same goes for insurance. People don’t feel aligned to the insurer, but they do feel the relationship is adversarial. This gives people a sense of entitlement and leads to embellishment and even fraud.”

A great example of how trust can improve human behavior can be seen at Grameen Bank in India. This is a bank for poor people. It is trusted to repay unsecured loans without reliance on credit scores or enforcement through debt recovery agencies. And the repayment rates are higher than those of the traditional lenders who won’t lend into these mass markets for fear of default.

  • It’s about the greater good.

Lemonade is a public benefit corporation. This means it balances the needs of shareholders with a social responsibility to make decisions for the greater good. Like a government department, Lemonade has a corporate duty to make decisions that do not put profit and returns to shareholders first.

Insurtech comes of age

Out of all these characteristics, it is this last one that I think will be the most enduring and the most significant. It fundamentally cements the alignment of trust between the insured and the insurer. This is not paying lip-service to satisfy a corporate social PR agenda. Lemonade is putting its money where their mouth is.

In the age of the 4th Industrial Revolution, trust is the defining characteristic of the modern era.

See also: InsurTech: Golden Opportunity to Innovate  

Now, for the first time in the insurtech era, we are about to see a true game-changer come into the market. Of course, a lot will depend on consumer adoption. Will they “get it”? Do they want it?

But one thing is for sure — up until now, no one has come this close to addressing the fundamental issues in personal lines. And if Lemonade succeeds (and I think it will), we will look back to 2016 and New York as the birthplace of 21st century insurance.

3rd Wave of P2P Insurance

The P2P insurance model promises to change the conflict dynamic between insured and the insurer. From Friendsurance to Guevara and the eagerly anticipated Lemonade, P2P insurance has already evolved two generations in six years. Now, we see the emergence of the next generation of P2P insurance; the self-governing model.

People-to-People Insurance

The jury may be out on the peer-to-peer insurance model, but that hasn’t stopped the steady stream of new entrants who believe in fundamentally changing the dynamic between insured and insurer.

Back in December, I wrote this article on P2P insurance and featured two very different InsurTech start-ups.

First, there was TongJuBao, a Chinese peer-to-peer insurer that provides social risk sharing insurance products. Recently, Tang Loaec, the founder/CEO sent me this announcement of a strategic partnership to distribute the company’s products through Huaxia Finance across Greater China.

See Also: Is P2P a Realistic Alternative?

The second was Guevara, the U.K. motor insurer that was first to take the P2P model beyond a pure distribution play. I must give credit to Paul Andersen, Guevara’s co-founder and CEO, for the term “people-to-people insurance,” which is way more appropriate than peer-to-peer.

Since that article, there has been a stream of announcements from the pseudo-stealth peer-to-peer insurer Lemonade.

First, the company caught everyone’s attention with a $13 million seed round (which is significantly higher than usually associated with a pre-revenue, no-customer first raise.)

Then, the company announced a list of high profile reinsurers lined up to back the business when it launches later this year. The latest news is the announcement that the company had hired a chief behavioral officer in guru Dan Ariely.

There’s much speculation about what they’re going to do when they go live, but we’ll just have to wait and see on this one.

In the meantime, I’ve been drawn to a new wave of P2P insurers. Some on the blockchain, some using Bitcoin and all based on a self-governing, peer-to-peer network model.

The Next Wave of Peer-to-Peer Insurance is “Self-Governing”

The first wave is based on a distribution model where “friends and family” risk pools self-insured each other’s deductibles to lower premiums.

Then we saw the carrier model, wave 2. Here, the pools are the primary bearers of risk, and they share in any retained premiums not paid out in claims.

Wave 3 is the self-governing model, A back-to-the-future model that takes us further toward a mutual insurance than we’ve seen to-date.

To find out more, I Skyped with Alex Paperno, the co-founder of Teambrella, the Russian InsurTech that uses Bitcoin to hold client money.

This article appeared in The Digital Insurer.

fortune telling

Fortune Telling for Insurance Industry

In the world of InsurTech, there are distribution players and there are data players. The data players are essentially doing two things:

First, they are enabling and exploiting new sources of data, such as telematics, wearables and social listening.

Second, they are processing data in completely new ways by applying data science, machine learning, artificial intelligence and high-performance computing.

The result is that, for insurers, the InsurTechs are creating opportunities for the development of new products for new customers; improved underwriting and risk management; and radically enhanced customer engagement through the claims process.

Which is why, in my humble opinion, tech-driven innovation in insurance will be data-driven.

As a result, this week I feature an Israeli start-up called Atidot, a cloud-based predictive analytics platform for actuarial and risk management…aka, the next gen of data modeling and risk assessment!

I’ve recently Skyped with CEO Dror Katzav and his co-founder Barak Bercovitz. Both have a background in the Israeli military, where they were in the technological init of the intelligence corps. Both have a background in cyber security, data science and software development.

These are two very smart cookies!

And they have applied their minds to the world of insurance and, very specifically, to data. To change the way that data is cut and diced to provide multiple insights from very different perspectives has been their purpose.

Atidot
The result is Atidot, which in Hebrew means, “fortune telling.”

What’s the problem?

Dror explained it to me:

“Insurers (or rather, actuaries) are not doing all that they could with the data they have. And there are several reasons for this.

“First, they miss the point, Insurers look at data from a statistical perspective and miss out on the insights and perspectives that can be seen from different points of view.

“Next…, the traditional modeling tools that are still being used today are cumbersome, difficult to re-model and rely heavily on manual effort. With new sources of data now available, these tools are simply inadequate to handle them.

“And third, they’re too slow. The frequency of updating the models is too long, measured in weeks and months. This is because many of the current tools are limited in scale and flexibility, unable to cater for the huge volumes of data now available to them.”

How is work done today?

Today, insurers think about key questions to ask prospective policyholders. Do you smoke? Do you drink? Do you have diabetes? What is your gender? What is your location?

Insurers map the customer’s answers onto a statistical table. This linear modeling approach provides a risk rating of a certain outcome, such as the mortality rate for a life product.

But data science does not follow a linear model. It is different and varied. Data is modeled to show different correlations of risk to key variables.

This is what Atidot does.

It applies multiple approaches simultaneously to process a much larger set of data. This will include existing data that was previously ignored, such as the day of the month the salary is paid or frequency of ATM withdrawals, through to new sources of data, such as driving behavior or activity levels.

And while it is still very new for insurers to link, for example, increased levels of activity to mortality rates, there is enough evidence to suggest that it is just a matter of time before they do. You only have to look at the number of competitions on Kaggle to see that!

This shift gets to the crux of the insurer’s problem:

Quite simply, traditional models don’t have the ability to handle the new sources of data. Nor do they have the muscle to process it.

I’ve previously covered some brilliant InsurTechs in the data space, including Quantemplate and Analyze ReFitSense is a data aggregation platform that provides insurers with a new source of data to underwrite life risk differently. The platform collects data from all major fitness and activity tracking devices. The data is then normalized (to weed out differences in the way activity is tracked) and presents the underwriter with a common score to indicate activity patterns and levels (just as Wunelli enables a driver behavior score from telematics data).

However, the challenge for insurers is knowing what to do with this data and how to handle it.

Dror put this into context for me:

“Let me give you an example from a South African life company who were building two life products – accidental disability and severe infection disease. To test our platform, we ran their traditional method alongside ours.

“We found that they had a lot of data about their customers that they were not using or taking advantage of. And even if they tried to, the actuaries did not have the means to group this data and properly assess it in their models.

“Atidot were able to group the data differently using our tech and show them how they could significantly improve the accuracy of their forecast tables.

“We showed them how they could look at data in a different way.“

This all sounded great, so I pressed Dror for examples and we started to talk about a piece of data that seemed irrelevant to a life risk assessment – the day the premium is collected.

Dror showed me a sample of data from a live pilot the company ran for a U.S. life business on a 50,000-customer sample.

It showed that customers who paid their premiums on the 14th of the month had a 20% lower lifetime value than those who paid on the 1st.

Atidot graph
By enabling multiple data models to run simultaneously and picking the best model to better understand customers, Atidot drew a relationship between data that the actuary didn’t have before. Nor would the actuary have intuitively thought of it or arrived at it through a linear modeling approach.

So, is this enough to change the way insurers rate risk? Or change the risk selection criteria for an insurer?

To answer this I turned to Alberto Chierici, co-founder of Safer and an actuarial consultant with Deloitte. He told me:

“One issue to overcome for insurers is communication to the customer and regulators. For example, in some states it is compulsory to communicate to consumers why and how rating factors (gender, age, ZIP code) are used in pricing.

“That is making many insurers reluctant to adopt machine-learning-based risk rating and pricing. Think about the example you cited about people paying the 1st of the month versus people paying the 14th – how do you explain that to customers?”

Alberto pointed me to this discussion on Kaggle to illustrate the point.

One thing is clear, the InsurTech puck is heading Atidot’s way.

 

The original version of this article appeared here.