As the U.S. continues to wrestle with healthcare and how to provide insurance, the country seems to be in a state of flux; many individuals and employers alike question how they will ultimately be affected. Warren Buffett and Charlie Munger have identified healthcare as the biggest issue facing American businesses, and the National Federation of Independent Business ( NFIB) reports that the cost of health insurance is “the most severe” problem facing American small businesses today. The growth in healthcare costs has long been an issue in a monopolized industry controlled by the major health carriers (i.e. Blue Crosses, United, Cigna and Aetna).
The problem started spiraling out of control when insurance industry leaders, e.g. MetLife, converted from mutual company structures to stock company structures. When the best interests of the consumer become misaligned with the best interests of the service provider, we create a conflict of interest. After all, their fiduciary duty is to their shareholders, not their consumers.
The benefits system in the U.S. has been flawed for many years. It is plagued by a lack of transparency and leaves the employer powerless to fight increased premiums with each renewal, for what is most often their second largest expense next to payroll.
It’s time to collectively question the status quo and demand innovative solutions that leverage enhanced benefit plan design with emerging technology and contextual data. Business owners’ cost for healthcare should be directly correlated with the health risk and outcome of their employees. All aspects of plan design need to be transparent, and business owners and employees must own their healthcare data, so they can understand exactly what is driving costs and actually control their spending.
Viable solutions will come through companies like iXledger, a London-based blockchain insurtech start-up and collaborator with Gen Re that has partnered with online information hub Self Insurance Market to develop a marketplace for the growing self-insurance risk management sector. The marketplace leverages iXledger’s blockchain platform to navigate the complex, data-intensive processes of self-insurance, providing the visibility, workflow and resource management to receive cost-effective bids for appropriate services.
The current group benefits market is primarily controlled and monopolized by the Blue Crosses, United, Cigna and Aetna (BUCAs), leading to diminishing provider networks, unclear benefits coverage and consistent premium increases over the last decade. American employees are unable to afford to participate in their own employer’s group medical plan. Aetna recently announced that it will not pay commissions to brokers on groups with fewer than 100 insured lives.
Technology alone is not the key to driving down the cost of healthcare and enhancing benefits. The famed health insurance unicorn Oscar has the technology, but only leveraging new tools with legacy processes is not going to yield significant returns. Disruption in healthcare requires a totally new approach, not just new technology to try to enhance the current, monopolized benefit plan offering.
Unfortunately, I believe Oscar will continue to lose to the BUCAs, unless it can quickly pivot. Oscar is currently losing roughly $1,750 per member, yet its last capital round provided for a $2.7 billion valuation with 120,000 insured lives, or $22,500 per member. Although Jeff Bezos and other technology leaders have defied all conventional means of valuation across the capital markets, an analysis into Oscar’s business has me a bit stifled. If you look at the member population, 48% of the New York enrollments in 2015 came from the ACA state exchange, who are often high-risk members. Perhaps that is why Oscar’s ratio of hospital costs to premiums earned was 75%, compared with 62% at UnitedHealthcare. The lack of capital relative to the BUCAs and Oscar’s existing member risk population will make it quite difficult to compete.
As Oscar shows, the solution to the health benefits crisis in the U.S. will not be driven with just new technology and enhanced analytics, but by integrating enhanced data and new technology, such as telemedicine, with innovative and enhanced benefit plan designs similar to what iXLedger is endeavoring to facilitate. The solution is a paradigm shift requiring new tools that compel new processes to put both employers and employees in control of their cost of healthcare while offering enhanced health benefits coverage.
I hadn’t worried much about U.S. health insurance in years, eight to be exact. I was interested, but not worried, because while I was living abroad I didn’t need it. Furthermore, I had a health insurance plan that covered me wherever I lived in the world. When I returned to the U.S. this past July, I was faced with buying an individual health insurance plan, which was something I’d never done (all my previous work experience in the U.S. gave me insurance as part of a group plan).
In August, I bought a policy with a carrier and used an agent.
As this is Open Enrollment season and I just purchased my first policy in the post-ACA world, I thought it would be a apt to talk a bit about the U.S. healthcare system and how I think insurtech can help. I will focus on three areas.
First is my experience with Open Enrollment this year (to, I hope, help some who are going through the same experience right now!). Second is areas that need to be considered when looking at U.S. health insurance. Third is a summary and ideas for insurtech startups.
Healthcare, especially U.S. healthcare, is very, very complex. Hence, I will only dive into a few areas, and as usual, my recommendations at the end will be fundamental and principle-based.
While there are a lot of politics surrounding U.S. healthcare, I will endeavor to not touch on the political aspects (though through the reading you should understand my opinions on the current state of affairs).
Open Enrollment – How Open Is It?
As of the writing of this article, I am in the final steps of selecting my plan for 2018. If you are currently going through the Open Enrollment process yourself, I have included some links at the end of the article that are some great guides on the overall process (including one from Oscar for “solopreneurs”).
What follows, is my experience of preparing for Open Enrollment.
A few weeks ago, I received this in the mail:
And about a day later, an email from my agent that said this:
Well, neither one of these were very encouraging.
I started with the Covered CA website and PolicyGenius to do my search to see what carriers/plans were available.
As I went through both sites, I realized that I was going through a modified needs analysis (these questions were a combination of what I went through on both sites):
How much am I willing to spend a month?
How much of a deductible am I willing to have? (These two questions were followed by a lot of math playing between the variables of 1 and 2 on different scenarios.)
Do I want to be able to book my own specialist, or do I care if I have a referral. Plus, do I want to have the ability to go out of network or not? (HMO or PPO?)
Do I have any doctors whom I need to keep in my network? By the same token, which hospitals/doctors do I want in my network?
Regardless of the answers to 1, 2, and 4, number 3 was the key: Do I want an HMO or PPO? Because I wanted a PPO, I had a whopping TWO carriers available to me.
In addition to this, I think it’s worth it to mention that (I think) the US is the only developed country in the world that has a 2 month period of time in which one can purchase a health Insurance plan.
So much for ‘Open’ Enrollment…
As I was going through this process, I realized some of the biggest challenges with this whole thing
Some of the points that I mention below may seem like old news to many that have been dealing with US health Insurance since ACA came into effect. Though, since this is my first time going through it, that is the case.
Hence, I will share what I think is wrong with US health Insurance and subsequently, how Insurtech may be able to help. As mentioned earlier, this is not meant to be a political stance and I will focus on the fundamentals of Insurance as I go through this.
These are the a few key things wrong with the the current US health Insurance:
It’s mandatory (if you’re not covered by a group plan)
If one buys an individual plan – they may not choose the specific coverage that’s right for them (other than premium and deductible)
There is no underwriting for it (it’s all guaranteed issuance)
While these things aren’t likely to change, it’s important to understand why these three pillars are here, because there are some guiding principles here which are meant to help individuals; namely 1) making it more affordable and 2) making it more accessible. There still may be some opportunities to shape US health Insurance within the current confines of the regulation, which will have to be adhered to as long as the current regulation is in form.
Aside from cost and access, what else needs to be looked at?
Some of the key areas to look at when it comes to health care are:
Participants/Users – how to interact with them?
Provider coverage – which doctors/hospitals will be ‘in network’/accessible to participants?
Claims process – how can this be made easier?
Treatment and monitoring – in addition to 2&3, how will ongoing monitoring be done?
This relates back to the triangle I had a few weeks ago and how all 3 parties needs need to be looked at when looking at the overall Insurance value chain (regardless of line of business):
Before I go into the summary, a quick note on Oscar.
I took a serious look at Oscar a consideration for my health Insurance.
Not only did I read through their policy and network coverages (as they were cheaper than every other network out there), but I did all the research on Oscar that I would do for any other start-up I would consider working with for my work outside of Daily Fintech.
I started with the Coverager Companies tab (especially the News tab, where I like to see to see their past reporting of the company which usually outlines the good, bad and ugly of the company itself). I also read the Oscar Health Strategy teardown from CB Insights. I read consumer reviews and even asked my doctors and their receptionists about dealing with Oscar. I did not do this much research for any other company I was considering (even though there were only 2 PPO providers from my initial search, I still took a quick look at all 6 providers in California…).
Ultimately, I think they are really on to something and I salute them for going after such a big and complex area (both in terms of product line and geographic area of that line!). I would encourage everyone to read the teardown above to see what some of their strategies are. Tackling US health Insurance is no easy feat, and they did take a long term view as described below:
While I do like them and some of the things they are doing, the reviews are not up to scratch yet. My guess is that the long term view somewhat backfired on them, as customer expectation for a product that is so highly despised by many would have to have a real good experience very early on.
I have had real good experience with my current carrier and they are the most well known/biggest in my state. As such, I’ll likely need to stick with them. Health Insurance is too important to try something new on in my opinion.
I do think Oscar is very well positioned for the future, and they have outlined their strategy clearly above. Building of an Insurance company takes time. Health is a whole other animal. Health in the US…well, that’s just going right for the gullet. But, if done right, it can be a big prize (not only monetarily, but also for the sanity and health of US citizens!). I’ll definitely be keeping en encouraging watchful eye on them.
Summary: It’s Complicated…
As I was preparing for this article, I read a few posts on Daily Fintech last year from Amy Radin, which I encourage you to read in conjunction with this post. I have included them at the end for easy reference.
In her first post, she mentions four lenses to look at when it comes to US health Insurance: ‘the health of the American people, marketplace trends, the role of regulation, and the players’.
In her second post, she mentions that ‘Incumbent health insurers are pursuing legacy tactics to compete in the ACA world: M&A…; increasing premiums …; and reevaluating participation in the public exchanges…
As well as ‘the root of user pain points can influence how plans are selected and health care is consumed’:
# 1 People don’t see value because they don’t understand what they are buying.
# 2 People are being held accountable for health decisions that they are not equipped to handle.
# 3 People don’t always make rational decisions.
Fast forwarding 15 months since her last posts, other than some slight changes announced earlier this year and the recent subsidy cuts, not much has changed in terms of health of Americans, incumbent tactics and pain points for users.
Currently, CVS and Aetna are working on a merger. It is rumored that Amazon is trying to expand into pharmaceutical sales as well (not to mention it’s other Insurance aspirations). It’s also no secret that Apple has been preparing itself for a run at health care too. Are all of these in the name of helping out the customer or just trying to get a slice of a pie that is so huge that everyone in the tech industry can taste it?
Recommendations for Insurtechs
Given that current regulation is both stringent and has an unknown future, it can be challenging for Insurtech start-ups to know where to start. However, here are a few areas where I think can help the US health Insurance value chain, irrespective of regulation:
Education – I know this seems like something basic, but shopping for health Insurance was a nightmare. Policy Genius was good, but it didn’t have it all. Also, since health Insurance is so complex, there needs to be something that makes it really easy for people to understand. Aside from how the subsidies work, which can be a challenge in it of itself, the specific clauses, terms and coverages for health Insurance is really complex and the majority of the population would likely not understand it.
Blockchain – With such a wide variety of illnesses, coverages and benefits, blockchain make a ton of sense for health care.
P2P – I wrote a couple weeks ago that I didn’t think P2P could be useful for health Insurance. As I wrote this article, I do see some benefits, especially with a model like Inspeer, may be able to help.
Ecosystems – I’ve been reading more about ecosystems lately as it relates to Insurance/Insurtech, specifically with some of the things being some in China. When it comes to health, look at Ping An and Good Doctor (see below for infographic too). Talk about user experience. The value proposition (image) below says it all..the more this can be integrated for the user, the better. Though it doesn’t come without it’s challenges:
Wearables – how much will people trust Insurance companies with all of their ongoing health information? This is a big debate when it comes to information asymmetry. Those that are healthy and live healthy lifestyles will be happy to, and others, may not be.
Integration with hospitals/doctors – This will enhance the customer experience greatly, both for ongoing monitoring of the health from their doctors as well as with the claims process. I recently had a few check ups at various doctors, having to fill out loads of paperwork that asked the same questions, bringing my images with me wherever I went, and having to re-explain my history over and again was a bit cumbersome. It would be nice if the paperwork process was easier, if all doctors in my network had all the information on me (not just the ones in the same hospital) and the claim processed could be seamless after treatment received. Integrating all of this is not easy when the infrastructure is not there and legacy systems exist for all parties.
I know the motto of many entrepreneurs/founders out there revolves around solving challenging problems, so, despite my feelings at the moment about US health Insurance, I am confident about the future of it!!
In the age of the fourth industrial revolution, risks are changing. The advent of technology has made digital assets more valuable than physical ones.
In this scenario, the insurance sector has been increasingly left to deal with technological change and disruption and is having to reconsider the way it defines itself. Having had the opportunity to discuss this transformation in more than 15 countries, I have seen that insurtech is helping to redefine the way the insurance industry is perceived.
Insurance is about providing protection for people in life and in employment. It is about providing 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 this coverage – the concept has been around since 1347.
It’s unthinkable for an insurer today not to ask how to evolve its business architecture by thinking which modules within the value chain should be transformed or reinvented via technology and data usage. I believe all the players in the insurance arena will be insurtech – that is, organizations where technology will prevail as the key enabler for the achievement of the strategic goals.
Insurtech startups have received more than $18 billion in funding to date, according to Venture Scanner data. Fantastic teams and interesting new insurance cases have been grabbing the attention of analysts.
Full-stack insurtech startups are generating a lot of excitement in the investor community and attracting relevant funds, and some have achieved stellar valuations, with Oscar, Lemonade, Sonnet, Alan, Element, Zhong An some of the most fascinating players. It looks like the aim of disrupting the status quo, combined with a skepticism about the incumbents’ ability to innovate, is focusing the attention on players to create new insurance products.
A business model adopted by more and more players is the MGA/MGU approach (Managing General Agents/Managing General Underwriter), a way to satisfy investor appetite for players covering a large part of the activities in the insurance value chain and partnering only with an incumbent for receiving underwriting capacity. Trov, Slice, so-sure, Insure the Box, Root, Bought By Many and Prima are some examples of this approach.
I am positive about the ability of the incumbents to innovate, and about the potential for incumbents and insurtech startups to collaborate. This view is based, for example, on the impressive international success of players such as Guidewire and Octo Telematics. I believe service providers for the insurance sector will be more successful in scaling at an international level than the other models described above. This kind of collaboration is leveraging on the incumbents’ technical knowledge and their customers’ trust, which has frequently been underestimated by insurtech enthusiasts. The most relevant opportunity is the collaboration between incumbents and specialized tech players capable of enabling the incumbents’ innovation in the different steps of the business model.
For insurtech startups to outperform traditional insurance companies, they need to have their business models concentrated in what I call the four axes (4 Ps): productivity, profitability, proximity and persistency.
An excellent example is Discovery Holding, with its Vitality wellbeing program. This has been replicated in different business lines and countries with different business models – they are carriers in some countries, operate joint ventures with local insurers in other regions and are a service provider in other nations. They are using state-of-the-art technologies such as wearables and telematics to create a model based on value creation outperforming on all the four Ps, enabling them to share value with their customers through incentives and discounts.
The startups are the talk of the town today. Fintech, insurtech, retailtech, regtech, autotech, edtech are the new vocabulary for enterprises. Innovation is on the priority list of most executives globally. Many are getting worried about the risks, disruption and impact of startups.
With more than $80 billion of investment funding already injected into the startup ecosystem in the last three years, it would be foolish for companies to overlook startups. There are more than 4,000 startups globally active at the moment across various categories that are challenging incumbents across industries.
A good number of companies across financial services, insurance, retail, travel and healthcare segments are already exploring partnership with startups. But many executives are confused about how to deal with startups.
Buying a startup not the right answer for innovation
There are still questions on how effectively companies can leverage and integrate startups into their ecosystem. A few companies are exploring selective startups for purchase while many others are keeping their options open.
While buying a startup may sound like a good move, it does not guarantee success. Companies can buy a startup — but not the innovation.
Companies must innovate internally first. While startups can help to bridge the innovation gaps to some extent, they cannot solve the basic innovation challenges. There is a need to build innovation culture.
Many large organizations today struggle with innovation. If a startup coming from nowhere can innovate, drives passion within teams and delivers incredible value, what is stopping the large companies to excel?
The problem is with the traditional, tactical approaches. Many executives, used to stringent financial measurements, measure innovation with a similar yardstick. The results are obvious. When innovation initiatives fail to deliver quick results, executives back away.
It is time for executives to revisit their approach on innovation.
Get the basics right before fixing the organization
Innovation demands commitment, agility, perseverance, collaborative culture, hard work and passionate teams. Innovation is mostly achieved as a result of failures and continuous learnings. There is no company in the world that has delivered disruptive innovation without witnessing failure. 90% startups fail, proving that innovation is not easy.
Today’s dilemma is that executives hate failure. The quarter-on-quarter pressure, macro-economic conditions and competitiveness in business hinders them from committing 100% to innovation. Organizational complexities, silos, bureaucracy and rigid culture add more pain in delivering innovation.
Startups are no longer a bubble, but an ongoing challengers
Many see the growth of startups as a bubble that may bust soon. But startups are not going away, so companies must exercise caution and develop a symbiotic relationship with startup ecosystems.
The best strategy is to partner for co-existence. While many startups operate on the periphery of business, they will move into the core part of business across industries. We are already seeing many examples in banking and insurance, where startups are getting licenses to manage end-to-end business. London-based startup Monzo, Berlin-based Number26 (N26), Atom and Tandem in the U.K. and Klarna in Sweden signal the backing of banking regulators for startups globally. Similarly, Lemonade in New York, Oscar in New York, Zhong An in China and Acko in India are examples of insurtech startups licensed for business.
Soon, companies will find startups snatching portion of their business. The only way to respond is to become a startup. Companies must start thinking like startups and act and deliver value like startups.
Without building an innovation culture, this is not going to happen.
Innovate or pay the price: Choice is yours
Startups will continue to be a challenge for companies of all sizes. Companies must innovate continuously and develop tailored strategies to manage the growing influence of startups. While partnership with startups or even a purchase of a startup can fast-track innovation efforts, these are not sufficient to transform a company or ignite its culture.
Companies must simplify complexities and structure and invest in people to develop an innovation-centric culture.
Headlines about the insurtech disruption are split between issues like improvement to the customer experience and how traditional carriers expect to be affected. The situation is reminiscent of the days when Wal-Mart announced that a store was coming to a small town, and local retailers began screaming that the sky was falling.
We keep a close eye on insurtech at WeGoLook because, as a leader in the gig economy, we find natural partnerships abundant between our on-demand workforce and innovative insurtech services.
According to PwC Global, many insurance carriers see the potential downside to ignoring insurtech:
48% of insurers fear that as much as 20% of their business could be lost to insurtech startups within the next five years;
Annual investment in insurtech startups has increased fivefold over the past three years, with total funding reaching $3.4 billion since 2010; and
More than two-thirds of insurance companies say they have taken concrete steps to address the challenges and opportunities presented by insurtech.
Will incumbent carriers accept the anticipated losses or will they fight to retain market share?
Traditional insurers have begun to throw a lot of money at the insurtech situation. Many of them have significant venture capital funds.
These steps are not necessarily being taken to compete with the startups that are expected to capture the 20% but to retain control over methods of distribution.
Even though insurtech startups appear to be better than incumbents at creating products and distribution systems, many still rely on their insurance partnership with standard carriers for underwriting and claims administration. New pay-per-use companies such as Metromile and Simplesurance, which are not regulated insurers, sell policies that are underwritten by established insurers.
A Threat to Distribution
Insurtech startups will take a significant bite out of the traditional insurance distribution system. Startups and incumbents will be forced into partnerships because both are vital to delivering products.
Insurers are certainly not blind to the opportunities that have become available as a result of technology that will allow them to learn more about the consumer experience and how the consumer behaves.
If incumbent insurers can embrace and adapt to the innovation, creativity and agility of the startups, the insurance industry will be better positioned to meet the needs of the consumer.
The newly created partnerships are destined to make significant progress in solving the problems of the new economy and bring consumer-centric innovative products to the marketplace.
The New Competition Partners
Some of the startups that have already succeeded in taking a bite out of the traditional distribution system:
Founded in 2012 with $750 million in venture capital, and one of the first to establish its presence, Oscar was created as a result of the Affordable Care Act. Oscar relies on technology and data so it can improve the healthcare it offers to customers. With annual revenue of $200 million, the company is currently valued at $3 billion.
Also founded in 2012, Trov is a U.S. startup funded with $46 million. The company was established to sell insurance by the piece.
The company will provide insurance on a per-item basis and offer policies on a term selected by the consumer.
Although founded in the U.S., the company first marketed its innovative product in Australia and targeted millennials. Like most other startups, the company partnered with a traditional insurer to handle the underwriting.
PolicyGenius is banking on consumers’ preference to have all their insurance products in one place and online.
The company was founded in 2014 with $21 million in capital and has partnered with major traditional players such as Axa, Transamerica and MassMutual.
As a virtual online insurance broker, PolicyGenius intends to make a dent in the insurance distribution system through satisfying the preferences of the consumer.
San Francisco-based Metromile has created disruption in the auto insurance market by offering pay-per-mile auto insurance.
Through the use of an innovative app working in concert with the Metromile Pulse plug-in, consumers who use their vehicle on a limited basis will obtain significant savings on auto insurance.
The company offers a full customer service team and 24/7 claims service. All policies are underwritten via its partnership with National General Insurance Company (formerly GMAC).
After promising to reinvent the insurance industry, Lemonade offers home and renters insurance by using bots instead of brokers.
After testing the product in New York, the company launched nationwide in 2017. As licenses are approved on a state-by-state basis, the Lemonade footprint will continue to grow.
Unlike traditional insurers, Lemonade charges a flat-fee commission and then gives back unclaimed money to charitable causes that policyholders care about.
Lemonade is a perfect example of how insurtech startups are revolutionizing the insurance industry.
But There’s Hope
Although the threat of losing market share is demonstrated by the success of many of the insurtech startups, it’s important to recognize that a relationship can manifest that benefits both traditional insurers and the innovative startup.
New business for one startup doesn’t necessarily mean a loss for another.
Also, traditional insurers are already positioned to raise the additional capital needed to compete with the startups — if they choose to do so.
So, will the 20% market loss actually be realized?