For anyone involved in vehicular transportation, it’s accepted that distracted driving is a deadly problem that needs continued attention. Earlier this year, the National Highway Traffic Safety Administration (NHTSA) published a detailed research report on Distracted Driving in 2016. According to the NHTSA’s statistics:
Nine percent of fatal crashes in 2016 were reported as distraction-affected crashes
In 2016, there were 3,450 people killed in motor vehicle crashes involving distracted drivers.
Six percent of all drivers involved in fatal crashes were reported as distracted at the time of the crash.
Nine percent of drivers 15 to 19 years old involved in fatal crashes were reported as distracted. This age group has the largest proportion of drivers who were distracted at the time of the fatal crashes.
In 2016, there were 562 nonoccupants (pedestrians, bicyclists, and others) killed in distraction-affected crashes
Notice that teen drivers are the largest proportion of drivers who were distracted at the time of fatal crashes. However, a recent Arity survey shows that millennials are significantly less likely than the general population to say that “I never multi-task while driving” (48% vs 57%). What does this say about that demographic? With National Teen Driver Safety Week approaching at the end this month, it’s important to fuel this age range with the danger that distracted driving imposes on them.
Here at Arity, we used our own data to compare the rate of smartphone penetration in the US, with distracted driving activity of telematics users and industry losses. Our research goes a step further to demonstrate that this problem is only getting worse. The percentage of losses attributed to distraction over the last several years has tripled, costing the industry an estimated $9 billion annually.
The insurance industry has taken a multi-pronged approach to reduce distracted driving. In addition to high-profile campaigns designed to raise general awareness of distracted driving, such as AT&T’s #ItCanWait initiative, distracted driving solutions have been developed by insurance providers, OEMs and shared mobility and telecommunications companies.
As these solutions get closer to reality, there are a few core elements to consider. Here is a five-step process for the creation of a superior recipe for distracted driving detection:
Mobile Phone, No Substitutes: While embedded systems and OBD devices are the gold standard for assessing vehicular motion and risky driving patterns, today there is no substitute for the mobile phone in distracted driving detection. The mobile phone is the leading culprit fueling higher rates of distracted driving accidents. Pinpointing mobile phone movement and interaction is the most robust way to identify and prevent these risks.
One Part Movement, One Part Interaction: Phone movement only reveals part of the story. Distracted driving algorithms that rely solely on sensor information―accelerometer for translational motion, gyroscope for rotational motion, gravitometer for orientation, etc.―will be subject to false positives and false negatives. For instance, a motorcyclist with a phone safely in his pocket could be unfairly penalized each time he puts his foot down at a stop for balance.
Measure Each Ingredient Carefully: Not all forms of distracted driving are equally risky. Checking navigation while stopped at a traffic light is generally less risky than taking a selfie while speeding down the beltline during rush hour. To effectively assess relative risks, there are two fundamental considerations: context and mode. Context means, what were the conditions present at the time of the distracted driving behavior? At what speed was the car being driven; what was the weather like; was there traffic? Mode means, what distracted driving behaviors were taking place? Phone call; texting; navigation; gameplay; etc.
Monitor Continuously: Discrete or instantaneous markers only tell part of the story. For instance, counting only moments of large phone movement omits important information about the behaviors that took place interstitially. We can conceptualize distracted driving in terms of continuous sessions and endeavor to identify the starts and ends of these sessions. The total duration of distracted driving will provide the most predictive metrics for risk.
Modeling Bakeoff: Distracted driving models can be founded on logic and intuition, but they should be developed and validated with a data-driven approach. For the best solution to emerge, many alternatives should be assessed relative to their performance on labeled data sets―data sets composed of both telematics data as well as reliable labels for the periods of distracted driving. An example of this blended approach would be the Arity and Allstate research that estimated the cost of distracted driving for the insurance industry at $9 billion. This insight was derived from data sourced from national smart phone usage, vehicle telematics and incident claims data.
At Arity, our mission is to make transportation smarter, safer and more useful for everyone, and understanding and eliminating distracted driving is central to why the company was founded. What’s important is that we don’t see this solely as a technical problem. Aside from understanding the true behaviors that are causing insurance loss, we must also provide a meaningful experience to the driver to eliminate the behavior. It’s important that we don’t stop learning and experimenting; there’s so much more we can do to #enddistracteddriving.
We enjoy many technological devices that used to be pure science fiction — mobile phones, video chat, Bluetooth speakers, touchscreen tablets, driverless cars and so on. So what’s next?
Here are four of the coming insurance technology trends:
More online tools to attract millennials. Millennials are the new Holy Grail group of customers for insurers and agencies. Many of these young people are just now venturing into adulthood, and over the next few decades they’ll be on the receiving end of the biggest transfer of wealth that we’ve seen. This newly intensified focus on millennials will likely mean greater efforts to improve online customer services and mobile-responsive sites. Some of the online tools we’ll see in the coming years—probably sooner than later—include millennial-focused financial planning and educational resources, specialized social media tools and online customer service and policy change options.
The development of subscription insurance coverage. Insurers will begin offering suspension of coverage options for certain lines to accommodate people who have increasing or decreasing risk. Insurers will need to be prepared by having a flexible front- and back-end system that can keep up with these changes and minimize or automate underwriting efforts as coverage is turned on and off.
The increased adoption of digital solutions for claims processing. To increase efficiency and accuracy while also lowering costs, claims departments will become more open to embracing digital solutions for both accumulating and analyzing data. Digital solutions help claims in many of the same ways that they help underwriting. They can flag suspicious situations, process more information, help insurers better analyze their underwriting and approval process and pay policyholders faster, thus attracting even more business.
Insurers will create more apps and tools. Tools allow insurers to collect data on driving habits and health and fitness metrics, thus helping to attract and retain clients, improve policy rating and reduce risks. The app revolution is just beginning. There are still legitimate concerns on privacy and tampering. Some of the recent announcements are marketing with first-mover publicity. Once that is sorted out we will see many more insurance companies offering web apps.
There’s no question that adopting new technology is what’s going to drive our industry and insurers forward. Now is the time to make sure your infrastructure is ready to adopt what’s coming.
For the past few years, the innovation rate in the global insurance industry has run at peak levels, in good part because of digitization, which continues to be a pervasive influence—if not as disruptive as early projections.
Initial expectations of a departure from traditional distribution channels turned out not to be the case. Clients preferred direct, personal contact when buying insurance products. While online channels have not generated major changes—for example, in the vehicle insurance sector in Italy (5% of premiums today are generated online, compared with 1% in 2012) —telematics has had a substantial impact. It represents 15% of all insurance policies today in Italy. (These policies did not exist in 2002.)
Digital transformation is, of course, leaving its mark in four macro areas.
First, consumer expectations: A Bain survey suggests that more than three out of four consumers expect to use a digital channel for insurance interactions.
Second, product flexibility: The traditional Japanese player, Tokio Marine, for example, started offering temporary insurance policies via mobile phone, e.g., travel insurance limited to the dates of travel and personal accident coverage for people playing sports.
Third, ecosystems: They are created when the insurance value proposition depends on collaboration with partners from other sectors. For example, when Mojio sells a dongle (at, say, a supermarket) that requires connection to an open-source platform to be installed in a car, third-party suppliers are able to extract driving data from that platform and create services based on it. Onsurance, for one, offers tailor-made insurance coverage based on the data collected.
Fourth, services: Insurers today are moving away from the traditional approach of covering risks to a more comprehensive insurance plan, which includes additional services.
Connected insurance: a telematics “observatory” to promote excellence
The fact that the Italian insurance market represents the best of international automotive telematics practices gave rise to the idea of creating an “observatory” to help generate and promote innovation in the insurance sector. Bain, Ania, Aiba and more than 25 other insurance groups are among its current participants.
The observatory has three main objectives: to represent the cutting edge of global innovation; to offer a strategic vision for major innovation initiatives while reinforcing the Italian excellence paradigm; and to stimulate research and debate concerning emerging insurance issues such as privacy and cyber risk.
The Observatory on Telematics Connected Insurance & Innovation, will focus not only on vehicle insurance (where Italy has the highest penetration and the most advanced approach worldwide), but on additional important insurance markets related to home, health and industrial risk, which, I am convinced, represent the next innovation wave.
Italy is currently the best practice leader in connected insurance. Italian expertise in vehicle telematics is finding applications in other insurance areas, particularly in home insurance—where Italy is the pioneer—and in the health sector, where we recently launched our first products.
InsurTech on the rise
Another sector that has seen an increased number of investments in 2016 is InsurTech. Until last year, attention focused on many types of financial service start-ups. Today there is significant growth in investments in insurance start-ups: almost $2.5 billion invested in the first nine months of 2015, compared with $0.7 billion in 2014 [according to CB Insight]. Many new firms are entering the sector, bringing innovation to various areas of the insurance value chain. The challenge for traditional insurers will be to identify firms worth investing in, and also to create the means for working with those new players.
The challenge is integration
Ultimately, the main challenge for insurers will be to find ways to integrate the start-ups into their value chains. The integration of user experience and data sources will be key to delivering an efficient value proposition: It is untenable to have dozens of specialized partners with different apps in addition to the insurer’s main policy. It will be necessary to manage the expansion and fragmentation of the new insurance value chain.
To come up with an answer to this problem, start-ups are generating innovative collaborative paradigms. One example is DigitalTech International, which offers companies a white-label platform that integrates various company apps and those of third-party suppliers into a single mobile front end, even as it offers a system for consolidating diverse client ecosystems (domotics, wearables, connected cars) into a single data repository.
Integrating and managing complex emerging ecosystems will be one of the greatest challenges in dealing with the Internet of Things (IoT) for the insurance industry.
For most of 2015 I have been banging on about disrupting insurance (or Instech, if you like that kind of jargon). I’d like to use this blog post to talk about why I find it exciting.
1. Insurance is an enormous market
Life insurance premiums are $2.3 trillion globally. Non-life insurance premiums are $1.4 trillion globally. (Both numbers are from 2012, from a McKinsey report.) I don’t get to write the word “trillion” often when looking at market sizes.
Importantly for a European venture capitalist, Europe is a disproportionately large chunk of the market, coming in at $700 billion of life and $400 billion of non-life. And London, as the place insurance was invented, remains its biggest global hub.
2. Incumbents face a number of challenges
The insurance industry in Europe and the U.S. is mostly composed of large traditional insurers that have been operating for decades or centuries. They have struggled to adapt to a digital age, as shown by the graph from BCG below. As with banks, their back-end software and underwriting is tied into legacy software from previous decades, with major system integration challenges.
Insurers also have very little contact with their customers, contributing to low brand loyalty and retention.
In many countries and verticals, insurance is still mostly distributed via expensive offline broker networks. Insurers are often tied to these networks, making it very hard for them to move to direct/online distribution. For a typical insurer, distribution costs are significantly higher than all their other non-claims costs combined. Regulatory change in some countries is forcing insurers to make brokerage costs more explicit, which could well lead to customer backlash.
3. Technology can be highly disruptive in insurance
Technology can have a huge impact on every important aspect of insurance. Distribution was the first part of insurance to be disrupted, with insurance comparison engines such as Moneysupermarket and Check24. Further disruptive mobile-first distribution models are emerging. On the underwriting side, there is a huge volume of new data available (telematics, mobile phone, health tracking, etc.) with which to make decisions. And there are new machine-learning techniques to work with existing data. Smartphones allow a much more efficient and pleasant claims experience. Personalization software and machine learning enable :segment of one” insurance. The list goes on. (You can download a good report on this from BCG here.)
4. There are obstacles to entering the industry
It wouldn’t be an achievement if it was too easy. Insurance presents start-ups with a number of barriers to entry, of which the most significant are:
Regulation. Insurance is (with good reason) a highly regulated industry, and regulations vary by country (and by state in the U.S.). To get going in the UK, for example, you need to get into the nitty gritty of brokers, MGAs, reinsurers, Solvency II, warehousing, etc., etc. You also need to understand a different set of accounting standards and terminology.
Balance sheet. Once you get through the regulation, you need to prove that you have the balance sheet to be able to pay up for claims in any eventuality. This requires serious capital before you can write your first policy.
Partnering with incumbents. Both of the above make it near-impossible to start fresh, unless you can raise an Oscar-like $100 million-plus. Any other Instech start-up is going to need to partner with existing insurers. This presents a number of challenges and limits flexibility. Some insurers are trying to encourage innovation (e.g., axastrategicventures.com), but good intentions are confronted by big-company politics, vested interests and “not invented here” syndrome.
Historical data. If you are going to get into underwriting insurance, you need historic claims data on which to base your decisions. However, this data is privately held by insurers. Building up enough data over a long enough time frame (given that claims are infrequent events) is a real challenge. Without it, there is a danger of start-ups mispricing risk.
5. These obstacles put off the big tech players
For the likes of Alphabet/Google, Facebook and Amazon, insurance is too hard and too boring. When you have a huge war chest, self-driving cars and drones are much more interesting areas to explore. In the war for engineering talent, it is hard to get your best developers to work on financial services. When I was with Google in 2007-09, I worked on the early days of Google Compare. Despite much hand-wringing in the insurance industry, this hasn’t gone anywhere. It’s just not high enough up Google’s priority list.
6. Despite the obstacles, there are success stories
Ping An is one of the most impressive growth stories of any company globally. It was founded in 1988 in Shenzhen and was the first insurance company in China to adopt a shareholding structure. It took the nascent Chinese insurance industry and put a rocket under it, going IPO in 2004 at a $10 billion valuation. It is now valued at $100 billion. Ping An has always been a technology-led company and continues to lead the way in tech-led innovation.
Moneysupermarket was the first player to really crack insurance comparison, allowing users to type in their details once and receive competing quotes from dozens of insurers. It was quickly copied, leading to a fierce TV and Google ad spending war with Comparethemarket, Confused and Gocompare that continues to this day. Despite this, Moneysupermarket is still valued at almost $3 billion.
esure was founded in 2000, went public in 2013 and is now valued at $1.5 billion. Its success has been built on efficient, low-cost operations and building brands (both esure and Sheilas’ Wheels ). esure also owns Gocompare, one of the players in the UK comparison market.
7. There are a number of impressive start-ups emerging, but there is room for plenty more
Over the last year, I have seen a step change in the number of startups going after insurance. But this change has been from “almost none” to “a trickle.” Tiny in comparison to the huge number of start-ups going after the similar-sized fintech market.
Here are a few of the areas in which I see Instech start-ups emerging:
Insurance distribution beyond comparison
This is the most obvious area for start-ups to address, as it is not subject to many of the challenges above (less regulated, no balance sheet, no underwriting). A few interesting new players:
Knip. Mobile-first insurance concierge. Initial proposition for users is to remove administrative pain: Have all of your insurance policies in one place. Over time, there is the potential to be a user’s trusted insurance adviser, recommending where he should increase/decrease cover and who he should insure with. Started in Switzerland, now taking on German market with competition from Safe and Clark. PolicyGenius in the U.S. is a different twist on the insurance concierge concept.
Boughtbymany. Social distribution for niche insurance. Boughtbymany finds niche groups who have challenges finding good insurance today (e.g., diabetics, young drivers). It plugs into these affinity groups to push specially designed insurance products to them.
Simplesurance. Seamless insurance cross-sell at checkout. The idea of selling insurance for high-value items at point of purchase is not a new one. Simplesurance’s innovation is to make it as frictionless as possible for users and online retailers.
New forms of capital provision/peer-to-peer
In our persistent, low-interest-rate environment, new capital is flowing into the insurance industry in search of returns. One manifestation of this is hedge funds getting into reinsurance.
As a start-up, one opportunity is peer-to-peer insurance, where a group of members cover some or all of claims made by the group. In some ways, this goes back to the original concept of cooperative insurance. The advantages should be less fraud, lower acquisition costs (through referrals/social), greater loyalty and, over time, better pricing.
Friendsurance in Berlin was the first company with this approach.
Guevara in London is a different take on the P2P concept.
New sources of data
Connected devices and other online data offer insurers a huge amount of additional data on their insured risks. The first success story has been telematics for car insurance, where your driving behavior affects your premium. A number of good businesses have been created, such as Insurethebox, which sold 75% of the business at a valuation of around $200 million earlier this year. However, so far, telematics has remained a niche product, in particular addressing young drivers. Connected cars and ubiquitous smartphones will take it to the mass market.
Going forward there are many more opportunities to use connected hardware to refine insurance: wearable devices for healthcare, smart homes for home insurance, mobile phones for almost anything. There is also the opportunity to use people’s online presence and social networks to reduce fraud and (possibly) improve underwriting.
A few examples in this area:
Climate Corp. Collecting weather data with high precision, offering farmers crop insurance and in depth analytics.
Metromile. In the car insurance telematics space, but using your smartphone to collect data, and a new pricing approach (pay per mile).
Vitality. Keeping fit and healthy reduces your health insurance costs. Data taken in from partners and wearable devices. Has grown to 5.5 million members. Oscar is also using data from wearable devices for its insurance.
Reinventing the insurance experience
This is a broad category, including changing how claims are handled, how insurance is sold and how it is bundled with other services.
Oscar is the best example of this, reinventing U.S. medical insurance from the bottom up. It has been well-covered by the tech press, so I won’t go into it further here.
Aircare is part of Berkshire Hathaway but worth a quick mention as it eliminates claims completely – it automatically pays out if your flight is delayed. Claims management is the most painful part of dealing with an insurer, with expensive offline measures to try to combat fraud. As everything we do becomes connected (starting with our car) the concept of “claiming” may become an anachronism.
There is always a new category emerging for insurance. Smartphone insurance has seen huge growth. Cyberinsurance is a current hot topic. However, addressing these new lines of business is something that insurance insiders are pretty good at. Unless a start-up can come in with a real tech advantage (which in cyberinsurance might be possible), the worry is that new segments quickly become competitive.
The insurance market is still in its early stages in much of the developing world, offering opportunity for land grab. Compare Asia is an example of one company addressing this. DirectAsia, acquired by Hiscox, is another.
SaaS to help the insurance industry keep up
The insurance industry is more than big enough for a SaaS provider focused on the industry to build a billion-dollar business. There is a lot of Excel still being used. The question is which parts of insurance require unique software, as opposed to a slight customization of generic business intelligence, CRM or machine-learning SaaS packages. A couple of insurance-specific SaaS companies are Quantemplate, offering business intelligence and data warehousing, and Shift Technology in fraud detection. Balderton’s portfolio company InterResolve is a different sort of B2B insurance company, with a technology-led approach to insurance claims mediation.
What I am looking for as a VC in insurance
Finally, a quick summary of what I look for as a VC in insurance start-ups:
Founding team who combine deep understanding of the insurance industry with an external, tech-led DNA. This probably means two founders, or a truly exceptional founder who can combine both. This is not an industry you can bluff your way through. On the flip side, I worry that a team of insurance industry insiders will struggle to break from industry norms.
Real tech DNA in the company (something I look for in any sector).
A clear focus on the customer, not the insurer/partner.
Simplicity: an ability to take a complex industry and present it in a beautiful way using plain language.
If you are an insurance start-up in Europe than I haven’t spoken to before, please contact me!
Earlier this year, a group of eight leading insurers and brokers established a consortium to promote microinsurance ventures in developing countries, unsurprisingly called Microinsurance Venture Incubator (MVI). Together, AIG, Aspen Insurance, XL Catlin, Guy Carpenter, Marsh & McLennan, Hamilton Insurance, Transatlantic Reinsurance and Zurich plan to launch 10 microinsurance ventures over the next 10 years.
While conventional insurance targets middle to high-income urban dwellers, microinsurance targets rural residents living on the edge of poverty. Most popular are microinsurance products that offer life, health, accident or property insurance.
However, to really be the “can-do” coverage for the poor, it is not enough for microinsurance to be affordable and accessible; it also has to be tailored to the unique environment in which it is being offered. After all, context is king.
So with the context of “poor people deserve innovation too,” here are five examples of innovative microinsurance schemes that target different risk pools:
1. The Use of Technology to Combat Fraud
Insurers providing livestock insurance in India have been struggling with high claims ratios, mostly because of fraud. Typically, to get coverage, a veterinarian would place an external plastic tag on the animal’s ear as an indication that that specific animal is insured. However, this produced zero controls in place, and insurers learned that these plastic tags somehow made their way to dead cattle, way too frequently.
Nowadays, India’s IFFCO-Tokio (ITGI) insurance company is using radio frequency identification (RFID) chips that are injected under the skin of the animal (which is less painful than tagging!). These chips are accessible through a reader, which allows an insurance official to easily verify that the RFID reading coincides with the identification number on the policy, when a farmer reports a claim. This results in fewer fraudulent cases and faster claim processing.
Almost a fairy tale ending if it wasn’t for the high price of these microchips. Nonetheless ITGI is using a combination of external plastic tags and RFID chips to control their costs yet still prevent excessive fraud. It’s working.
2. Forming Index-Based Insurance to Build Trust
Another promising innovation is index-based insurance, where an external indicator triggers payments to clients rather than the traditional “I’m calling to report a claim.”
Kilimo Salama, AKA Safe Farming, combines mobile phone payment system with solar powered weather stations to offer farmers in Kenya “pay as you plant” insurance.
Here’s how it works:
A farmer goes to an approved dealer and buys a bag of fertilizer, which he pays 5% extra for to get climate coverage.
The dealer scans a special bar code, which immediately registers the policy with the insurance provider and sends a text message confirming the insurance policy to the farmer’s mobile phone.
When data transmitted from a particular weather station indicates drought or other extreme condition is taking place, the farmer registered with that station automatically receives payouts via a mobile money transfer service.
Similarly, a more recent entrant called ClimateSecure says it will “work hand-in-hand with [its] clients, meteorologists, financial experts and other brokers in order to build indexes that most accurately reflect [their] clients’ risk.”
3. Targeting the Cash Poor by Relaxing Liquidity Constraints
In China, pork composes roughly 48% of livestock production, with most pigs generally raised in small numbers by rural families in their backyards, forcing Chinese hog farmers to face the risk of hog diseases. Yet, despite the obvious benefits of microinsurance products, the demand is still low because of cash constraints and a lack of trust in insurance providers.
Yet a pig insurance scheme, which offered credit vouchers that allowed farmers to take up insurance while delaying the premium payment until the end of the insured period, coinciding with when pigs are sold, saw their insurance premiums go up by 11%.
By the same token, telecommunications companies embed insurance premiums in their service contracts, with the advantage of offering (oftentimes free) coverage as part of a pre-existing plan. In Africa, for instance, free insurance is linked to phone data usage; the more airtime one buys, the more coverage he/she gets.
4. Product Bundling to Attract Customers
The 2014 winner of the prestigious Hult Prize, NanoHealth, is a social enterprise that not only offers microinsurance but also tackles chronic diseases by providing door-to-door diagnostics via its network of community health workers, which it equips with a low-cost point-of-care device called Doc-in-a-Bag. This startup is slowly but surely creating India’s largest slum-based electronic medical record system and disease landscape map.
5. Coverage Within Reach via Garbage in, Coverage out
Forget bitcoin, garbage is the new currency with this Indonesian startup called Garbage Clinical Insurance (GCI), which was founded by a 26 year-old doctor named Gamal Albinsaid. Through GCI, community residents are encouraged to recycle and get healthcare coverage at the same time because trash is translated to funds that can later be used to pay for medical insurance.
In sum, in this micro world of microinsurance, where only 260 million of the world’s low-income citizens are covered, words like big data and claim history could not matter less. What matters is how quickly an insurer can scale, how low can its margins go and how clearly can it communicate its offering to the low-income farmer all in the name of for-profit social enterprise.