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Insurtech: One More Sign of Renaissance

Just before the Italian Renaissance, guilds were formed in Florence and throughout Italy to bring together people of like occupations under a social network. Their purpose was to agree upon standards and rules, represent the group to government, improve upon their art, science or trade and provide support services to families and widows when needed.

Working together, these guilds fostered Renaissance attributes. They were patrons of the arts. They contributed to the advancement of medicine and technology. They advanced construction methods and learning in all spheres. In fact, the end of many guilds was brought about when they were merged into universities. The Renaissance created a cultural bridge from the Middle Ages or past to modern history.

However, the Renaissance didn’t just sprout up overnight. It was spurred on by a convergence of factors, the greatest of which was increased wealth. Trading in Florence had produced a new class of financier who was willing to fund artistic and scientific endeavors. Wealth created ease. Ease allowed time for thought and innovation.   Innovations in practical sciences, such as mathematics and architecture, benefited from broader thinking. Fast forward to today, and the comparison to that time is striking, with a similar influx of money and a new class of insurance technology investment via insurtech.

Insurtech as a concept has grown to become, not an official organization, but a collaborative movement. It has become a bridge from the old to new being created in the insurance industry today.

Insurtech:  A New Era of Innovation

Insurtech as a movement branched out from fintech (financial services focus) earlier this year following reports of significant capital entering the market for insurance startups … from insurers and MGAs to technology providers. Significant capital investment in insurtech for new insurance greenfield or startup companies is fueling massive innovation in products, services and business models and de novo options. These de novo options are a driving force underpinning the insurtech movement and why new and existing companies are looking to new business models to innovate, test ideas and bring new products and solutions to market.

See also: The Insurance Renaissance (Part 1)  

A host of venture-backed startups have propelled property & casualty insurance tech investment deals to a new high in 2016, with total funding to insurance tech startups topping $1 billion in the first half of 2016, according to CB Insights. 63% of deal activity to the insurance tech market went to U.S.-based startups in the first half of 2016.  Startups that distribute policies or provide software and services across the P&C insurance value chain have risen 50% compared with all of 2015. And life insurance is now also ramping up.

We saw an innovation movement in spades last week at the much awaited InsureTech Connect Conference in Las Vegas, which brought together more than 1,500 entrepreneurs, technologists, venture capitalists, insurance executives and startups. The energy, engagement and enthusiasm were infectious. It had the feeling of the “dot com” era… but with more substance. This gathering sent a clear message to the insurance industry, that we have rapidly entered a new era that is more profound and important… a renaissance. It has placed the importance of innovation and technology on a stage and signaled that, from here forward, insurance must and will be innovating. But like the forming of guilds, insurtech demands cooperation and conversation.

InsurTech and Insurance Renaissance

Just like the original Renaissance, today’s Insurance Renaissance is spurred by the converging factors of people, technology and market boundaries. Insurtech is powered by all three. Within insurance, this new Renaissance represents a real shift with significant business impli­cations beyond legacy modernization. It represents a whole realm of new opportunities via greenfields, startups and incubators to cover a fast-changing market landscape.

In our view, based on our Future Trends – A Seismic Shift Underway thought leadership report in January 2016, and picked up by many in the insurtech movement, there are three main areas of impact:

  • People – Expectations, products and business models that were built around the silent and baby boomer generations, do not meet the millennial and Gen Z expectations or needs. More importantly, Gen X is the “swing group” tipping with millennials and Gen Z. These changes in people’s lives drive changes in their expectations and their risk profiles/needs, reflected in our coming primary research on customer expectations for individuals and small business owners.
  • Technology – How often do you use your smartphone in your daily life for researching, buying, servicing and convenience? Think Amazon, Uber, news and music. These new expectations drive businesses and institutions to use technologies and processes to develop new business models and channels, which give customers the capabilities they’re seeking.
  • Market Boundaries – Market boundaries are being erased. New competitors and new channels are at the forefront of the insurtech movement. Consider how the largest number of startups are build around new distribution options. Then think about how existing and new businesses from Tesla, Ford and Trov are looking to offer insurance as part of an auto purchase. These new business models and capabilities will drive additional changes in people’s lives, leading to new needs.

Insurtech Leadership and Options

As we have tracked, observed and talked to our customers and other influencers/leaders in the industry this year, we are convinced this is not a “new fad” but a movement with substance that is just getting started. Unlike the “dot com” era, many of the insurtech participants have real capabilities, real business plans and real substance in how they can enable the industry through our renaissance to meet and exceed the expectations of our customers.

But it requires leadership, vision and active collaboration/participation.  Standing on the sidelines waiting to be a fast follower or thinking you can do it yourself will likely not work this time.  What is different?  Chunka Mui reminded our customers at the Majesco Convergence Conference, just before InsureTech Connect, that the industry is moving at such a rapid pace that the gap between today’s technology and future technology possibilities is being filled by insurtech active participants. From here forward, tech advancement won’t slow to allow followers to catch up.

See also: The Insurance Renaissance, Part 2  

It is an exciting time for the industry…a time of great change, challenges and opportunities.  While insurers have different strategies and paths to their future, we are convinced that insurtech will be a big part of that future and are committed to helping shape, embrace and engage in the movement to enable the renaissance of insurance.

Blending the New With the Old

The insurtech phenomenon reached new heights at the InsureTech Connect 2016 event in Las Vegas in October. More than 1,600 attendees spent two days absorbing new ideas, connecting and making followup plans to explore working together.

I’ve participated in many of the insurtech and emerging tech (in insurance) events over the last couple years, but I have recently noticed a distinct shift. Most of the initial events included insurtech startups, investors and industry consultants and influencers. The focus was all on the “new” – exciting new ideas, developments and companies that were poised to transform the insurance industry. While a few insurance executives participated, the vast majority of people with insurance business cards were representing the venture capital arms of the companies. Recently, there has been a dramatic shift in the participants in everything insurtech. Companies and individuals representing the traditional, incumbent part of the industry are now actively participating. So, I am going to coin a term here: I’m calling this group MatureTech.

Insurance executives leading key parts of the business, driving innovation and creating strategies are now involved in force, representing all sizes of companies and all lines of business. Incumbent tech players are on the scene, as well. While there have been a few leaders involved in some of the early events and insurtech activities, there has now been a ramp-up of participation from these companies.

See also: 8 Exemplars of Insurtech Innovation  

This blending of the old and new is, in fact, a great development. Our central theme at SMA has been the need to bridge from today’s insurance company to the Next-Gen Insurer of the future. And it is really much more about transition and adaptation than disruption. This is not meant to downplay, in any way, the revolutionary ideas, new business models and innovative products and services emanating from the insurtech world. But there are some fundamental realities about the insurance business and operations that make it difficult to change overnight. Insurance is complex and highly regulated, especially once you get beyond the personal/individual products. Some of the key themes emerging that show how insurtech and MatureTech are beginning to blend are the following:

  • Partnering and new ecosystems are the path forward: All types of players are looking to create value in new ways and with new types of partners.
  • Core systems are called that for a reason: One way or another, there is still a need for automated solutions for policy, billing, claims and other core areas of the business. Although there can be new approaches, the reality is that integration with the existing systems that every insurer has today is important.
  • The MGA model is appealing: It allows companies to create and sell innovative solutions and own the customer relationship but not have to hold the risk and raise the level of capital required to be an insurer.
  • Insuring new things and offering new services are huge opportunities: Perhaps one of the greatest opportunities is microinsurance, which is now much more possible in the digital era. Offering new services in conjunction with insurance cover is enabled by the broad availability of real-time data.

See also: Calling all insurtech companies – Innovator’s Edge delivers marketing muscle and social connections

There is no doubt that the world of insurance is changing. There is an open debate about how rapidly that will occur and what parts of the business will be most affected. But one thing is for sure. Bringing together the strengths of the existing insurance world with the emerging new approaches is inevitable, and it is beginning to happen. And as insurtech collides with MatureTech, insurers must develop bridging strategies to become Next-Gen Insurers and capitalize on the opportunities ahead.

Quick Takes From Insuretech Connect

Last week, I was excited to attend the first Insuretech Connect conference, which brought together entrepreneurs, VCs and industry insiders to focus on the innovative (and some say disruptive) developments within the industry. I wanted to get a closer view of the emerging technology and begin to hear a clearer message about how these developments are connected with the core issues facing the industry, such as: the industry in total very rarely delivers cost of capital returns; the products are complex, and structured in ways that make them not easily consumable by customers; there is aversion to new risks by the carriers given lack of credible loss information used for pricing; a third of P&C premium is absorbed in cost of sales and delivery, an unsustainable figure; etc.

With the event behind us, here are my top takeaways:

1. There are fantastic stories beginning to emerge about the engagement of millennials (notoriously uninterested in insurance products) that over time could be hugely instructive for the broader industry.

Both Trov and Lemonade are genuinely different, with an experience that is more akin to a social media exchange with your friends as opposed to the arduous image (and sometimes reality) of most insurance buying, servicing and claims interactions. Both appear to have genuinely rethought the product being delivered.

In the case of Lemonade, the company has removed the implicit contention between insured and customer with an affinity-oriented dimension: Excess premiums not used to pay claims go to a charity of the customer’s choice. These factors alone (I will cover more below) fundamentally reposition the insurance provider in the mind of the consumer.

Trov is delivering an on-demand, single-item, micro-duration coverage – a genuinely innovative product concept. The takeaway here is that true innovation in customer experience is unlikely if there isn’t innovation in the product. Trov also provides its user with an app that has real value to the consumer independent of the insurance cover — effectively the app is a a super-easy-to-use personal asset register.

The “value in use” delivered in this app is a launch point for an entirely different type of engagement. Metromile is doing the same thing with its free smart driving app, which helps you with  where you parked your car, with diagnostics and maintenance and with trip planning. The Metromile app has tremendous value to its users independent of the usage-based insurance the app provides.

So the real question for the industry is whether Lemonade and Trov are just great ingenuity to deliver renters and single-item coverage to a segment that is meaningfully under-penetrated and uninterested in insurance, or whether these fundamental innovations will be harnessed and applied by others not just elsewhere in personal lines but in commercial and specialty lines, as well.

2. Unsurprisingly, the conference was dominated with many who are endeavoring to attack the distribution part of the value chain by changing customer experience and the cost to deliver those experiences. Many of the entrepreneurs are borrowing pages from the countless other categories that have gone through dramatic changes in distribution (financial services, travel, etc.).

It is early days, but I look forward to companies such as Embroker, which is legitimately trying to re-create the entire customer-broker experience (focused on the more complex middle-market commercial risks), with technology as a critical enabler.

One far narrower example is Terrene Labs, which is a really interesting play on big data that potentially flips the application-for-insurance process for commercial insurance on its head. Effectively, the company is developing the technology that combs the public domain to create a near-completed (and far-higher-quality) insurance application based on only a handful of questions. I highlight this venture led by the ex-CIO of Great American as he is seeking to improve the customer experience in small commercial while simultaneously slashing the front-end agency cost of entering the application data to carrier’s on-line systems.

I suspect that the much-anticipated launch of Attune, the initiative backed by Hamilton-Two Sigma-AIG, will feature this sort of change in experience. I anticipate the developments next year on distribution are going to be far more robust and measurable.

3. While there is an intensifying discussion about the Internet of Things (IoT) and the exponentially increasing data that can be accessed to evaluate risk — including sensor technology that can convert risk taking into a continuously monitored, pay-as-you-go model (even in liability classes) — most of this is futurist stuff. The exceptions are usage-based insurance (UBI) in auto, some modest developments in smart home and increasingly smart machinery monitoring you find in a variety of commercial applications.

Yet one company really stood out in its ambitions. The company, Understory, has been installing micro weather stations (wireless, solar-powered, etc.) to get a far more finite view of rain, hail, wind, etc. than the National Weather Service can provide. During a panel discussion, the CEO noted that the company can put 60 of these micro weather stations in a city for the cost of a single large radar system (around $200,000).

It is difficult to cite the specific loss to the industry of straight-line wind and hail (it runs in the tens of billions of dollars in the U.S. alone each year), and hail loss is notoriously difficult given the sometimes long tail to discover it and, in certain cases, the high fraud rate and difficulty to empirically verify whether a hail storm that occurred during a specific period of insurance coverage caused the damage.

But the sort of innovation occurring at Understory was one of the few focused on a core aspect where the risk takers can improve performance and meaningfully reduce loss costs. This is not to say that the many excellent developments around machine learning and predictive analytics applied to underwriting and claims is not similarly attacking these sorts of costs, it is just that Understory is unusual in that it is a tangible quantum improvement in data that can drive improvement in loss costs.

Look out for the next wave of “Understories” and to more tangible results from the variety of vendors pushing the machine learning/big data angle for both claims and underwriting,

4. I finish with my “not so impressed” takeaway. The most obvious aspect missing at the conference was a good economic understanding of the insurance industry by many of the entrepreneurs selling their wares. In some cases, including panelists, they were flatly wrong in their assertion and some showed little regard for the facts.

Even Daniel Schreiber, the CEO of Lemonade (whom I found to be thoroughly entertaining, insightful and articulate about many things, including behavioral economics), responded to a query from the interviewer/moderator in a way that indicates that some independent research suggests that the pricing of Lemonade’s product is a fraction of competitors. Schreiber suggested that the 25% cost for distribution (I interpreted this as total commission) and 40% total operating costs for the industry, compared with the “20% management fee Lemonade charges its customers,” is a key contributor to the difference in costs.

Underlying Schreiber’s comments was an obvious point that the cost of today’s insurance product to the customer is far too high and that innovation has to drive down costs for the insurer and prices for the consumer. At least Schreiber took on the issue in a thoughtful way.

Unfortunately, though, the 25% and 40% numbers are simply wrong. I go back to the factual economics of our industry. The INDUSTRY IN TOTAL DOES NOT EARN COSTS OF CAPITAL, so the industry in total is not getting paid for the risk it is taking. In 2015, 31% of premium (not 40%) went to sales and service. In personal lines, the numbers are far lower. As a reference point, Progressive’s total expense ratio is just under 20%, and Travelers homeowners expense ratio hovers around 28% (with a large part in commissions, given their retail distribution model ).

I am not suggesting that the industry is not ripe for some disruption, but that those are seeking to disrupt (or even enable) it need to understand the macroeconomics and then follow the money (kind of what Understory is doing).

Back to Lemonade. I can imagine that the company has built its infrastructure in such a way that the investors will get an appropriate return from the 20% management fee. I can further imagine that the model may self-select a better class of renters than the wider population and that maybe the fundamental proposition reduces fraud-driven loss costs, so a far lower price could be justified. Yet only a few of those at the conference started with a good foundation of industry and value chain economics, an understanding of the unique regulatory and product attributes that will remain for the foreseeable future, and where and how underwriting and loss performance can be improved.

As these issues come into focus, I suspect that the innovations will begin to fulfill the expectations that are building in the insurtech space.

9 Impressive Facts on Sharing Economy

I am so excited to participate in the InsureTech Connect 2016 Conference taking place in Las Vegas this week. If you haven’t picked up your tickets yet, do so. It’s going to be a blast!

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I am also honored to be speaking at the conference, alongside amazing entrepreneurs like Jacob Brody of Helpful Networks, Isaac Oates Founder of Justworks and Jeff Oberstein, chief customer officer and head of science, Global Consumer Insurance at AIG. I’m actually a little nervous.

Our discussion on Wednesday, Oct. 5, is titled “Sharing Economy’s Impact on the Insurance Ecosystem.” We will attempt to unpack the implications of the rise of the sharing economy for the insurance industry, and how it’s changing the nature of work, and workers.

In this vein, I want to pave the road slightly with a few key insights that will help frame our discussion.

The sharing economy has been termed many things over the years: gig economy, freelance economy, circular economy, collaborative consumption, and most recently “digital matching firms” by the federal government.

No matter what you term it, this new industry has changed how we consume, much like insurtech has disrupted the traditional insurance industry. How products and services are delivered is changing before our eyes. And this is a good thing.

See also: 8 Exemplars of Insurtech Innovation  

To better situate our thinking for InsureTech Connect 2016, here are nine impressive facts about the rise of online marketplaces, something we now term the sharing economy.

1. PricewaterhouseCoopers predicts that the sharing economy will grow to a $335 billion industry by 2025. In 2013, this industry was valued at $15 billion.

Why it matters: We are in the midst of a transformation.

2. In 2013 alone, it was estimated that revenue passing through the sharing economy into people’s wallets was more than $3.5 billion.

Why it matters: Can you imagine what that number is now? The sharing economy is becoming a new employment marketplace faster than we may think.

3. Airbnb has hosted 60 million guests since its founding and now has two million properties listed. This is almost double the hotel rooms currently owned by the largest hotel chain, Starwood-Marriott, which has 1.1 million rooms.

Why it matters: Airbnb was founded in 2008. So, in eight years, Airbnb has more than overtaken the largest hotel chain in the amount of rooms available. This is disruption 2.0.

4. Sharing economy work is overwhelmingly part-time. Consider that the vast majority of Uber drivers work less than 30 hours a week, with 66% saying they have no set hours. Further, the average Airbnb host rents out her property for 33 nights a year.

Why it matters: This is hardly full-time employment. It’s exactly what we see at WeGoLook; people are leveraging our platform to supplement income through flexible part-time work. It’s patchwork employment, and this is good because it gives people options and employment flexibility.

5. According to Time, 44% of U.S. adults have participated in the sharing economy in some fashion. The same study found that 22% of Americans have sold services in the sharing economy. And, the vast majority of those who offered services in the sharing economy described their experience as a positive one.

Why it matters: Americans are using and selling in the sharing economy. Simple as that.

6. According to JP Morgan, working in the sharing economy boosts incomes by 15%. For Airbnb hosts, on average, JP Morgan found that sellers earn an extra $314 a month, or $533 for Uber and TaskRabbit.

Why it matters: People are actually earning decent supplemental income, and they love it.

7. Although millennials use the sharing economy more than other demographics, we cannot forget about the Baby Boomers. According to research by Emergent, 18% of workers in the sharing economy are 55+. This study concludes that “the number of older Americans seeking this type of work will likely continue to grow.”

Why it matters: We all think of innovative technology and equate it with millennials, but Baby Boomers are right in there as well and will require new tools as they retire and age.

8. There are currently 50 million freelancers, or gig workers, in the U.S. By 2020, 50% of the US workforce is expected to be a freelancer.

Why it matters: We are moving to a freelancer workforce. People are craving flexibility and are willing to trade the certainty of a 9-to-5 job with benefits and pension, for the freedom of freelance and gig work. At WeGoLook alone, we’ve seen our gig workforce grow from zero to now more than 27,000 in just seven years.

See also: How to Insure the Sharing Economy  

9. The sharing economy makes people happy by making their lives affordable. For instance, 86% of respondents from a recent PwC survey agree that the sharing economy makes their lives more affordable.

Why it matters: There’s a reason people are gravitating toward access over ownership. It makes their lives easier, more affordable, and offers them income generation opportunities with almost zero startup costs.

So, how will the insurance industry adapt to the sharing economy and growing disruption of the insurtech revolution? You’ll have to meet me in Vegas to find out.