Whether you’re browsing an article about the latest trends in insurtech or listening to a panel of insurance industry disrupters discussing customer acquisition strategies, it’s hard to avoid references about emerging technologies such as machine learning, artificial intelligence, chatbots and data analytics. But, have these digital advancements truly transformed the experience for customers shopping for insurance? Are insurers, agencies and consumers benefiting from such enhancements in technology?
Arguably, the answer is yes. The insurance buying experience has evolved dramatically in the last decade, and insurers, their agents and consumers have all benefited. However, when we examine the underlying products and the various touchpoints throughout the customer journey, we can see there are significant opportunities for improvement.
Insurance Shopping: Consumer shopping patterns and expectations have changed in all industries, and insurance is no exception. The enormous dollars spent by top insurers are pushing more consumers to start their shopping process in a digital format, where speed and accuracy are paramount in keeping customers engaged. Consumers have become accustomed to choosing from multiple product options and to one-click shopping, but replicating an Amazon experience in the insurance industry is extremely challenging.
For one thing, insurance products are highly complex and regulated, and premiums can change based on a multitude of variables that are not immediately transparent to consumers. Variables such as: age, coverage limits, credit, driving history, prior claims or age of home can dramatically affect eligibility or policy premium. And while these factors are key data points for underwriting, verification of these inputs often leads to lengthy question sets and inaccuracies in pricing at point of sale and beyond. Then there are the costs associated with verifying reports such as credit, MVR, CLUE and prior carrier through third party vendors, which add friction and cost in the shopping process.
These are among the challenges that a few digitally focused, independent insurance agencies such as Gabi Insurance are aiming to overcome. Such digital platforms can simplify the quote process while representing both traditional carriers and newer entrants to the market like Clearcover. Digital agencies stay engaged with the customer throughout the life of the policy and may help reduce the cost of third-party reports, which are currently passed on to consumers.
Beyond the Quote: While the point-of-sale experience is critical in effective customer acquisition, the entire customer journey — meaning all the touchpoints along the way — help maintain customer loyalty. Digital distribution channels that leverage emerging technologies can track customer interaction and use the data to identify improvement opportunities up- or downstream. While some insurers have made significant improvements in their frontline underwriting and product design, most still rely on products that were designed for traditional distribution channels (brick and mortar) and require some level of post-sale verification of policy attributes. As a result, customer experience can quickly shift from digital to paper-intensive, snail mail and the requirements can vary based on the type of products purchased. Consumers may be required to send proof of discounts, photos or evidence of insurance that were unverified at the time of the quote.
In such cases, digital agencies like Gabi may be better equipped to quickly engage customers via text, chat or email and expedite requirements on behalf of their insurance partners while contributing to higher net promoter scores (NPS) and improved overall retention.
Ultimately, to create an optimal insurance shopping experience that’s more aligned with customer expectations, insurers need to invest in revamping their products and processes for digital distribution channels. That’s easier said than done, as bringing products to market takes multiple years to deploy and millions of dollars in investment. Large, established insurers may require additional investment in core technologies, rebranding and potentially cultural and ideological transformation, while new insurers such as Clearcover, Hippo and Lemonade are not encumbered by legacy systems.
Adopting the entire digital transformation ecosystem is difficult and costly for insurers and involves multiple departments within an organization, which often have competing objectives and operate in silos. Insurers may have much to gain from partnering with digital agencies as their distribution models provide growth opportunities and turnkey access to customers who are less likely to buy from brick and mortar agencies. Further, insurers can gain valuable insight into customer demographics and behavior that are unique to online shoppers and use this information in future product development and process improvement strategies.
We have previously evaluated and discussed the financial performance and operating results of the insurtech trio Lemonade, Root and Metromile. Based on the analysis of the last available data, we think that:
There is a pricing war
The trio is missing an edge and story with respect to gaining a sustainable competitive advantage
At first glance, it appears that all three firms are focusing heavily on containing and improving their loss ratios. Metromile and Lemonade continue to have a relatively stable loss ratio, while Root has drastically improved compared with the prior quarter. At 91%, Root delivered a better result compared with the 105% in Q1-19 but still has some distance to go before getting closer to Lemonade or Metromile in terms of quality performance.
Note: The expenses ratios are not significant because part of the expenses are paid by the parent companies and not reported on the Yellow Books.
There is a pricing war
We believe the insurtech trio is facing a pricing war. We find three data points in support of this view:
Viewed through the lens of growth rate, after a robust Q1-19 for all three players, Q2-19 presents a different story. We find the most interesting perspective by looking at the performance over the last year and half. Clearly, the premium evolution of Metromile is the less exciting story, as I previously wrote. The pay per mile doesn’t seem particularly effective in attracting customers. The “pay per mile” model introduces an element of uncertainty for segments of customers who want to save money and know what insurance coverage will cost them. The only comfortable customers are those who almost never use a car. (We will cover the customer experience and expectations for usage-based insurance in future articles.)
Lemonade has shown consistent growth in the last two quarters and appears to be on target to meet the $100 million annual revenue target. This revenue target is a far cry from the “massive disruption effect” that was expected during its debut. The revenue curve is not yet showing the vaunted hockey stick.
Root is the only of these three players with exponential growth in revenue. However, something happened in the second quarter, and growth slowed significantly as the loss ratio improved. As mentioned in our last article, insurtech D2C seems to be a “price game.”
Let’s go back to look at the top-line numbers. Root and Lemonade registered a net increase in direct premium written compared with Q1-19. Metromile, on the other hand, registered a marginally lower DPW than in Q1-19.
Having looked at the top line, let’s switch our attention to the loss ratios. For an insurance carrier, the loss ratio is really the litmus test that assesses the strength and quality of the top-line numbers. Loss ratio is a fundamental insurance number, and the fact that all three players have improved this crucial metric is a sign of increased maturity for the “not so” fast-growing trio.
All three improved compared with the prior quarter. This bodes well for the trio. Of the three, Root continues to have the highest loss ratio at 91%, suggesting that between new sales and renewal it is still under-pricing risks.
The Q2-19 loss ratios are significantly better than what the three firms exhibited in Q2 of 2018, when Lemonade had a loss ratio of 120%, Metromile was at 95% and Root at 112%. The loss ratios are still far higher than the respective market segments.
Missing an edge and story with respect to gaining a sustainable competitive advantage
In our last article talking about insurtech direct-to-consumer (DTC) as a “price game,” we highlighted how the companies have not been able to make customers fall in love with anything other than “saving money.”
We would like to share some thoughts on the business models of these three full-stack carriers, investigating where and how their approaches might both enable and impede them in terms of gaining a sustainable competitive advantage. What might be the proverbial sling that the “insurtech Davids” can use against the entrenched Goliaths of State Farm, Geico, Progressive, Allstate, et al? Let’s explore.
If we consider the economics of an insurer, there are three areas where you can obtain a competitive advantage that can allow financing this kind of “pricing war”:
The loss ratio
The administrative expenses
Investment income even in the current market conditions characterized by low interest rates represents the main source of profit for U.S. P&C insurers. A recent report by Credit Suisse has pointed out how, “over the last five years, approximately 90% of the industry’s profits have been generated from the investment income (float) component of the income statement.” In 2018, U.S. P&C insurers generated $53 billion net investment income, which accounts for 8.6% on the premium written. Well, all three insurtech carriers were far from this investment performance in the same period.
Probably, hidden in the parent companies income statements, there is some additional investment income obtained investing the cash received by their investors.
However – as of today – the return obtained investing the floating is clearly a competitive disadvantage for the insurtech players.
As explained in a previous article, the loss ratio is the key measure of the technical profitability of an insurance business . The U.S. P&C market showed $366 billion net losses incurred, which means almost 61% loss ratio (net of loss adjustment expenses). Can any insurtech element allow Metromile, Root or Lemonade to have a competitive advantage on the loss ratio?
Metromile and Root are telematics-based auto insurers. Matteo is a fan of the usage of telematics data on the auto business and an evangelist of these approaches through his IoT Insurance Observatory, an international think tank that has aggregated almost 60 Insurers, reinsurers and tech players between North America and Europe.
Based on the Observatory research, four value creation levers have been the most relevant in telematics success stories:
The telematics approach has demonstrated around the world a consistent ability to self-select risks. Simply said, bad drivers don’t want to be monitored;
Some players such as UnipolSai and Groupama have achieved material results by improving claims management through telematics data;
Some other players have been able to change drivers’ behaviors, e.g., the South African Discovery and the American Allstate;
Many players have been able to charge fees to customers for telematics-based services, providing a revenue stream.
Metromile and Root are mainly using telematics for pricing purposes. Root is currently using a try-before-you-buy approach that allows potential customers to generate a driving score in a couple of weeks and obtain a tailored quotation. If consumers buy the policy proposed by Root, they will not be monitored anymore. This usage of a driving score at the underwriting stage could represent a way to price better the risk (if the price is settled at the right level), but the absence of further telematics data doesn’t allow Root to extract any value from the value creation levers above mentioned.
By contrast, the Metromile pay-per-mile approach is constantly monitoring the driver for the duration of the policy, which is the necessary foundation for those telematics value creation levers. As of today, the only area where Metromile seems to exploit the value of telematics data is claims management. The biggest limit for Metromile seems to be the nature of the pay-per-mile business, which has found only a limited market fit (niche nature of the mileage-based approach).
So, we think that both the players are still far from telematics best practices, currently represented by a few incumbents. However, the evolution of their telematics approaches can generate some competitive advantages against many incumbents that are less advanced.
About the possible capability of Lemonade to generate a better loss ratio than other renter insurers, the game is around its famous focus on behavioral economics and the attempt to influence behaviors with the iconic giveback. Everyone (among insurance executives) remembers Lemonade for the fixed percentage of premium it charges — the iconic slice of pizza — while all the rest is used to ensure the company will always pay claims; whatever is left goes to charities. As of today, nothing in the loss ratio shows benefits from this approach. Would you avoid submitting a claim or resisting the urge to file an inflated claim (an unfortunate reality in our industry) because “whatever is left goes to charities.” We find it hard to believe that the fundamental economic incentives will move from individual gain to community gain. Ancient Latins were saying homo homini lupus. (Man is wolf to man.)
Moreover, a recent comment by Lemonade CEO Dan Schrieber suggests that “AI may have played a role in higher loss ratios.” The increase of straight-through processing combined with a vast reduction or elimination of legacy checks and balances can increase the risk of fraud. Sri and his team at Camino Ventures, an AI/ML fintech, believe that this is a natural phenomenon with respect to AI/ML adoption. Ilich Martinez, co-founder and CEO at Camino Ventures, says, “Companies need to take a holistic view of AI/ML integration into business processes and business rules. Piecemeal or spotty inclusion of advanced AI/ML capabilities can be akin to installing a Tesla induction motor on a gas guzzler. It simply does not work.”
Sri expects to see a spurt in fraudulent claims in certain domains where autonomous claims management is introduced or expanded. As bad actors try to game the system, it is imperative that insurance companies expand the fraud detection models and be willing to enter a phase of continuous and strenuous test-and-learns. Eventually, usage of AI/ML can be crucial to achieving better administrative cost positions, but the path to that destination will not likely be a straight line.
The U.S. P&C markets showed costs that represent 37% of the written premiums on 2018 (of which 10% was loss adjustment expenses). Unfortunately, we are not able to see any more the real costs of Root and Lemonade; part of the costs are on the income statement of their parent companies, and we can only enjoy the results of their goal-seek. Efficiency – if it will ever be achieved by these insurtech startups — can be a way to compete and to sustain a pricing war, but the scale matters.
We ask whether the AI-driven approach of a player such as Lemonade will become a key competitive advantage against the current established incumbents. Can an early, extensive and immersive adoption of AI/ML provide insurtechs a competitive edge? Will incumbent leaders be fast followers or late adopters in a domain as critical as AI/ML?
We are already seeing the incumbents make early and deliberate moves to gain an AI/ML capability advantage. From domains like telematics to computer-vision-enabled image processing for claims, we see the Goliaths not waiting to be left behind. They are quickly moving from a “test and learn” approach to wide-scale adoption of numerous AI/ML capabilities and are finding early success. This adoption is accelerated by nimble, agile fintech and insurtech enablers like Camino Ventures that help industry leaders quickly move from opportunity to outcomes. Given these market conditions, we believe that advanced AI/ML capabilities would give insurtech an edge only against incumbents that are less focused, capable or invested in integrating insurtech solutions into their value chain.
We believe the current business models are not yet showing any clear competitive advantages that can make the pricing war sustainable for the three full-stack insurtech carriers. However, they have a lot of cash combined with highly talented teams that can experiment and find new ways to build moats and forts to gain competitive advantages.
The three P&C venture-backed U.S. insurtech start-ups — Lemonade, Metromile and Root — finished 2018 with pretty good results. Quarterly growth was the slowest ever, but all three paid out in claims less than they collected in premium. All three start-up carriers have more work to do to achieve sustainable financials.
A year ago, when I started with my friend Adrian a public conversation about insurtech statutory results, the picture was ugly — loss ratios well over 100%, an aggressive focus on price and promotional messages on company blogs that dismissed traditional measures of success in insurance.
Since the first post titled “5 Dispatches From Insurtech Island,” the conversation has shifted dramatically. Fast forward a year, and one founder said he “messed up an entire quarter” because premium growth turned negative, when in fact the company generated its best quarterly loss ratio ever. In the months since, several start-ups have hired top underwriting talent from their traditional competitors, showing that they increasingly recognize the value of traditional insurance skills.
Skeptics point out that a quarter doesn’t mean much, that there’s a long way to go before reaching sustainability and that each additional point of loss gets harder to take out. True, but the increased focus this year on reducing losses and increasing prices is making a difference.
Here are the quarterly results:
I think – as already mentioned in the previous articles – these companies have strong management teams who could ultimately create valuable businesses. This will take several years, but all three companies are well-funded, even if the combination of statutory capital injections and operating losses consumes tens of millions in capital each year. (The Uber/Lyft model of growing rapidly while also incurring large losses is doubly penalized in insurance because carriers have to maintain statutory capital that increases with premium.)
Here is a year-over-year comparison.
The three companies have sold in the last 12 months between $40 million and $110 million, less than some of the early 2017 enthusiastic forecasts that Lemonade (for example) would hit $90 million of premiums by the end of 2017. In auto, I pointed out at my IoT Insurance Observatory plenary sessions that the pay-as-you-drive telematics approach seems to attract only the niche of customers that rarely use cars – maybe a growing niche, but not a billion-dollar business (in premium at least).
Loss ratios have all been below 100%, which is a great improvement from the 2017 performances. The quarterly dynamics show a positive trend, but these loss ratio levels are far from the U.S. market average for home insurance (Lemonade) and auto insurance (Root and Metromile).
While loss ratio is a fundamental insurance number – claims divided by premiums — I’ve been asked how to normalize/adjust the loss ratio of a fast-growing insurtech company.
Imagine a fast-growing insurer with the following annual figures:
Premiums written: $10 million
Premiums earned: $6 million
Claims paid: $2 million
Losses incurred but unpaid: $5 million
Any of the following numbers might be called a “loss ratio”:
Claims paid divided by premiums written: 20%
Claims paid divided by premiums earned: 33%
Claims paid and losses incurred divided by premiums written: 70%
Claims paid and losses incurred divided by premiums earned: 117%
The least attractive is the right one.
Claims paid and losses incurred divided by premiums earned is the loss ratio, for a fast-growing start-up as for a large incumbent.
The others are only “exotic loss ratios.”
I’ve heard people say that accounting rules cause the loss ratio to be overstated based on the following unlucky scenario:
There is a book of business done by a one-year homeowner’s policy sold for $730. This policy will earn $2 of premium each day. If a $100 claim (net of the deductible) is received on that first day, the loss ratio is 5,000%. That’s how it works, but is it overstated? Well, as long as premium is being earned, more claims could arrive and the loss ratio could go even higher still.
Obviously, you expect the following 364 days to be less unlucky for this portfolio. But I don’t think there is any need to adjust that loss ratio…only to know that is not (statistically) relevant.
The analyzed start-ups have portfolios of more than 100,000 policies, so the bad luck can’t be accountable for eventual unfavorable loss ratios.
It could be that some approaches are specially targeted for fraud, and it only takes a few fraudsters to cause big problems in the loss ratio on a small book, as the above illustration shows. Some start-ups have advertised how quickly they pay claims, sometimes not even having a human review them, which invites unsavory people to pay a small amount to start a policy then “lose” a valuable item. Early on, when less premium has been earned, this fraud has a particularly great impact on the loss ratio. Over time, in a bigger and more balanced book, fraud gets tempered by the law of large numbers.
Additionally, some start-ups have offered large new-business discounts. If they can retain customers, reducing the premium leakage, their second-year loss ratios should be more reasonable, but the overall loss ratio will be elevated for however long they are acquiring customers with aggressive discounts.
I would love to discuss also the other lines of the income statements, but unfortunately they are not meaningful or comparable any more, because companies now move expenses among their entities not represented in the yellow books. The cost amounts represented in the yellow books are only a part of the real costs necessary to run the insurance business.
The statutory information I’m commenting on is reported only for insurance companies, not agencies, brokers or service companies. The term “insurance company” or “insurer” has a very specific meaning: “the person who undertakes to indemnify another by insurance.” Within an insurance holding company, it is typical to have an insurer and an affiliated agency, and sometimes other affiliates such as claims administrator. The insurer pays the agency to produce policies. This may feel like moving money from one pocket to another, but there would be reasons for it — which I won’t get into now.
The point for commentators and investors is to beware of this: If an insurer (for whom the public receives financial data) pays an affiliate 25% of its premiums to provide certain services, then the insurer’s expenses (which are reported in the yellow book) are set at (or close to) 25% of their premiums, regardless of what they actually are.
Major investors are typically privy to large amounts of information and can disentangle the back-and-forth between the insurer, agency and holding company. For smaller investors, or those who simply pick up a statutory filing, it is easy to be misled.
At the beginning of 2018, Lemonade was no longer consolidating its parent and affiliate expenses into Lemonade Insurance Co., its statutory entity. Lemonade’s CEO commented that this change was at the request of its home state regulator. Root followed suit in October 2018, so the 4Q18 expense ratio is moved to 28% from the 70% in the 3Q18. So the “new” expense ratios (and therefore combined ratios) are artificial and not comparable with the previous ones or with competitors’.
While regulators may have reasons for their actions, it is better for students of insurance innovation to know the full, real financials, so as to determine if the start-ups are ever able to “walk the talk” of better expense efficiency from “being built on a digital substrate.” Unfortunately, bloggers are not the main audience of statutory filings. Nonetheless, innovation cheerleaders, investors and journalists …please pay attention to these accounting differences before commenting the performances.
Since the beginning of the quarterly discussion of U.S.-based insurtech carriers’ financials based on their public filings, many have responded that these players needed to be evaluated on other metrics, too. I agree, so let’s look at one of those measures and talk about some questions to determine whether the measure really stacks up.
Misleading vanity metrics
The insurance value chain is complex and difficult to compare across models. This can lead to comparisons between very different companies. Take these two hypothetical companies:
Company A — flashy Start-up Insurance Co. uses outsourced call centers, bots, incessant Instagram ads, comparison rater websites, third-party claims administrators and a slick app. It sells one line of insurance, only personal, with low limits, and has no complicated old claims (yet). If your house burns down, you open an app and wait. The company has a low expense ratio, high acquisition costs and a high loss ratio.
Company B — old Traditional Insurance Co. uses a mix of direct sales, captive agents and independent agents. Claims are handled mostly by agents and in-house staff. If your house burns down, your agent turns up with a reservation for a nearby hotel, billed directly to the insurer. The company sells 12 lines of insurance, including small commercial, and a wide range of products within each line, with bundling encouraged. The company has a high expense ratio, high acquisition costs, strong customer loyalty and losses less than the industry average.
A “vanity measure” could easily make one of these companies look better than the other.
The start-up, for example, may claim performance several times better than the incumbent on a “policy per human” KPI, considering in the count of “humans” agents and brokers. Why does a policy-per-human number matter at all? And why is more policies per human better than fewer?
Company A and Company B are two different business models, with two opposite approaches about humans — neither of which is necessarily better. Steve Anderson and I wrote a heartfelt defense of the model based on agents, brokers and other distribution partners a few months ago.
To measure efficiency, I prefer to use the two traditional components of the expense ratio:
General operating expense ratio = general operating expenses ÷ earned premiums
Acquisition ratio = total acquisition expenses divided by the earned premiums (for high growth companies, it’s acceptable to do the division by written premium). This metric includes advertising, other marketing expenses, commissions and other distribution expenses. However, this number (like CAC) can be difficult to compare – for example, are fixed marketing expenses included or excluded? And the economics of customer loyalty are different between direct (where initial CAC is high but renewal is low) and agent sales (where initial CAC is lower and variable but renewal commissions are significant).
I love numbers and – as shared in an interview with Carrier Management – the absence of quantitative elements in self-promoting website articles, conference keynotes, whitepapers and social media exchanges have been one of the reasons for starting the publication of articles about the full stack U.S. insurtech start-ups.
Although I’m sometimes described as “critic” or “cynic” about insurtech companies, I’m only critical of the misuse of numbers and am a big fan of those who get the old school insurance KPI right. I’d love to see innovation succeed in the insurance sector, and I wish all the best to these three players and their investors.
Who will win: carriers or startups? It’s a question that has dominated conference panels, opinion pieces and many of the conversations I’ve had with insurance industry friends and colleagues throughout 2018. On the surface, this question feels appropriate. For many consumer-facing insurtech startups, their valuation is rooted in the promise of capturing market share from large carriers. While this has led to a major boom in the number of direct-to-consumer (DTC) insurtechs, in reality, 2018 hasn’t yielded any new startups that are able to make a significant dent in the collective portfolios of the large insurers (Lemonade aside). As many carriers are awaiting the fruits of their multiyear organizational transformation programs, the lack of inroads may prompt a sigh of relief. If the trends we have seen this year continue, perhaps there will be enough time for the product innovation to spring from within the old guard, keeping the industry pecking order intact.
Not so fast.
Reframing the Debate
Before breathing their sigh of relief, carriers might start asking themselves another question: If not carriers, then whom? As far as innovation goes, we continue to see resistance across the large carriers to properly invest in a “test and learn” approach for their internal product development teams. At the end of the day, standing up a new product that would generate only $10 million in additional annual premiums just doesn’t get the runway it would for a startup. Instead, we’re seeing the rise of venture groups, innovation labs and incubators (Metlife Techstars, NYLV, SOMPO Digital Labs, etc.) that are to innovate, then potentially bringing the work in-house.
Adrian Jones, who leads investment and reinsurance terms to insurtech startups for SCOR, recently wrote about changing market conditions for reinsurers and their increased exposure to getting “disrupted.” Jones outlines how simpler and leaner startups have eaten away at the markets with the highest profit margins for reinsurers. This has the potential to become one of the most significant factors affecting the consumer space in 2019. Given their new financial exposure, reinsurers will be highly motivated (in a way that carriers currently are not) to adapt and discover new ways to increase their returns. This very well could be the fuel needed to truly ignite the customer experience (CX) advancements the industry has been promising. For a reinsurer, $10 million in annual premium from a startup is not only $10 million. It’s a path to diversify their risk portfolio and, more importantly, to develop an acquisition channel that can yield much higher margins than the current carrier model.
In the larger conversation, reinsurers are generally seen as key observers in the carrier vs. insurtech showdown, not major players. But given their advanced underwriting capabilities, global footprints, lack of direct customer acquisition workforce and substantially less technical debt compared with their carrier siblings, with the right set of partners reinsurers can provide the scale and expertise the new players typically lack. This enables startups to focus on their differentiators: seamless customer experiences and innovative acquisition strategies.
You may or may not be surprised to learn that this trend isn’t new. Many insurtech “darlings” are already taking advantage of this partnership model. Jetty is backed by Munich Re, Root Insurance by Odyssey Re and Ladder Life by Hannover Re. Noteworthy is what these startups can offer consumers outside of the coverage itself. Jetty offers financial resiliency for renters. Root has an IoT-powered auto insurance underwriting model based on mobile data. Ladder Life has significantly trimmed their underwriting questions for term life. Yes, there may be flaws in each value-add example, but that is beside the point. These startups are able to experiment with modified underwriting parameters, and, once they fine tune these products for the masses, the major carriers will pay heavily either by losing market share or by acquiring the startups.
In a recent conversation with an executive from one of the largest P&C insurance companies, the executive told me that he sees reinsurers like Munich Re as very strategic partners, yet an ever-growing risk because, in his words, Munich Re could “start cutting us out.” The threat is real.
What Should Carriers Do?
For starters, carriers need to identify how to enable a top-notch customer experience (CX). In 2018, there has been plenty of talk about improving customer journeys, but few incumbents have released anything remarkable. The time is now for mid-sized insurers and MGAs. There is no reason not to take a cue from the reinsurer playbook. Whether it’s backing an insurtech, creating a direct-to-consumer channel (like our friends at ProSight) or forming platform integration partnerships (as AP Intego is doing), there are opportunities to jump into the fray because the space is perfectly fragmented. Identifying a similarly positioned insurtech is a promising strategy for carriers with a wealth of data in niche markets. But working with an insurtech or building a DTC offering requires underwriting customization and collaboration. If that’s not something a carrier excels at, determining how to leverage existing technology or marketing capabilities is critical. For those with a technology strength, parametric insurance, such as Jumpstart and Floodmapp, may be a better fit. It’s an emerging market I especially have an affinity for.
Regardless, it’s important that carriers develop a set of hypotheses on what will make them successful in whatever their new venture may be. At Cake & Arrow, we heavily rely on design thinking and qualitative research as a low-cost approach to validate strategies. Overall, being nimble, cross-functional and exceptionally tactical will be critical to success, which is why I consider large-scale organizational transformations not applicable here.
If all else fails, get the pocketbooks ready, because we will see no shortage of bidding wars in the coming year.
The debate on insurance innovation has been dominated recently by comments generated as a result of the State Farm TV ad where this insurance giant celebrates the superiority of its thousands of human insurance agents compared with the AI-based chatbots.
Lemonade — a smart U.S. insurtech startup — has credited itself as the target of this ad, because its marketing story is that a chatbot is just as good – if not better – than any human insurance agent. It does appear that Lemonade’s platform does need to learn a bit more about how insurance works, as AIs have regularly paid out more in claims than they’ve collected in premiums.
Many comments on various social platforms have called the commercial, “the worst commercial I’ve seen,” creepy, freaky and hilarious. Many blame the insurance giant for releasing this “attack ad.” Even our friend Chunka Mui has written a well-articulated censure to this ad.
However, we love this ad. We hope this discussion will encourage two calls to action for insurance companies:
Be proud of the way you do business
Master the art of communication.
Be Proud of Your Business Model
Let us start with the first aspect. In the past years, technology arrogance and a sort of politically correct tech-speak have forced the storytelling of the largest insurers around the world to, on one side, shyly hide that real people generate the vast majority of their business and, on the other hand, celebrate any insurtech proof of concept as evidence of their innovation, even when it has an immaterial impact on profit.
It seems insurance companies have felt embarrassed by their agents, brokers and other distribution partners. Most of their innovation efforts have been on solutions that in some way challenge their greatest asset, the human agent and broker.
“The last agent is already born” is a slide title we have seen at industry conferences for the last 10 years, but as of today, all around the globe, the sale of P&C insurance continues to be dominated by agents and brokers (excluding a few exceptions like the retail auto business in the U.K.).
For life insurance, digital distribution accounts for less than 1% of global sales.
It is great news to finally see a large insurer that is very proud of its agents. We love this communication because it is not hypocritical and gives a clear message both to customers and to agents: This is the way (through agents) we do business, and this is the reason why we do it this way.
We are not celebrating or encouraging “old school” thinking. We are firm believers in insurance innovation – and agree with Chunka that chatbot, machine learning and AI use cases are among the technologies that will have the greatest impact on the future of the insurance sector.
However, we are also pragmatic. We want to provide a view about insurtech that is different from the superficial mainstream. We think it is a pity to let the innovation cheerleaders – people raising their pom-poms at any PR released news but are not able to distinguish a loss ratio from a combined ratio – guide the debate about the future of the insurance sector.
Our view is that insurtech is a superpower for insurers, a terrific enabler for performing the job of insurance in a better way: to assess, to manage and to transfer risks.
The world is full of opportunities for reinventing each step of the insurance value chain through technology and data usage. Moreover, an insurance company has a key opportunity to share these superpowers with its agents, brokers and distribution partners.
Many insurers already understand that not involving their distribution system in corporate innovation is a wasted opportunity, so these carriers have introduced technologies that can enhance the capabilities of their human intermediaries. Instead, we have seen only a few players communicating effectively and consistently to support their agents and brokers. Because of this, carrier innovations are frequently perceived as threats by agents and brokers.
Insurance companies don’t need to create this kind of barrier. Maintaining this conflict only pleases the innovation cheerleaders who not like and want to get rid of intermediaries.
Master the Art of Communication
Let’s move to the second call to action. The insurance sector has always experienced bad press and has never excelled at storytelling. The new generation of insurtech startups are demonstrating the power of a consistent and modern communication strategy. The startup that has started the discussion about this ad is the best example of this communication ability. From our perspective, Lemonade’s two years of case history must be studied in marketing courses at any university. There is a lot for the current industry to learn.
The company has pretended to be the good guys who will be the remedy for a broken business. This home insurance startup has positioned itself as champions of trust. Everyone remembers the company for the fixed percentage of premium it charges – the iconic slice of pizza – while all the rest is used to ensure they will always pay claims, and whatever is left goes to charities.
In today’s age of post-truth, only a few people go deeper, study and try to understand fully. Therefore, that slice of pizza celebrated by insurtech cheerleaders has flown tweet to tweet, article to article, conference to conference. Moreover, consistent and well-orchestrated communication has fed this mechanism.
What does “all the rest is used to ensure they will always pay claims” mean? In the long and wordy FAQs, the startup mentions the necessity to cover “internal reinsurance,” reinsurance costs and other expenses. Therefore, at the end, the maximum amount available for the charity giveback is 40% of premiums.
The terrific 40% giveback happens only in the theoretical scenario where there are zero claims within the peer group. In a scenario with claims at 40% of the premiums (40% loss ratio) or above, the giveback is zero. This means there is a giveback only if the loss ratio is lower than 40%.
Insurance is a contract where someone promises to indemnify another against loss or damage from an uncertain event as long as a premium is paid to obtain the coverage. On average, the U.S. home insurance business line had a loss ratio of 74% in 2017 (an exceptionally high year; 46% has been the lowest loss ratio in the past five years). This means that 74 cents have been used to indemnify the policyholders for each dollar collected as premium.
In the age of post-truth, the Insurtech startup we talked about pretends to be the good guy that will fix a broken business model because it guarantees to pay – as claims or giveback – at least 40 cents for each dollar collected as premium within each peer group.
It seems clear to us that the insurance incumbents have more arguments for claiming they are the good guys, but they have only to develop consistent and modern communication storytelling.
Following are some suggestions on next steps that insurance companies can take:
Be proud of and support your agents, brokers and distribution partners
Encourage them to be part of your innovation initiatives
Develop a frictionless process to help the people who distribute your products better engage with policyholders
Learn how to tell a better story – about your company and your agents and brokers and distribution partners.
What ideas do you have for helping the industry to help agents and broker better protect their clients?