Tag Archives: Peter Thiel

A Simple Model to Assess Insurtechs

“The paradox of teaching entrepreneurship is that such a formula necessarily cannot exist; because every innovation is new and unique, no authority can prescribe in concrete terms how to be innovative.”

― Peter Thiel, Zero to One

Whether we’re talking about telematics, artificial intelligence (AI), digital distribution or peer-to-peer, investing in insurance-related technology (commonly termed “insuretech” or “insurtech”) is no longer considered boring. In fact, insurtech is one of the hottest investable segments in the market. As a 20-plus-year veteran in insurance, I find it surreal that insurance has become this hip. Twenty years ago, I gulped as I sent an email to the CFO of my company, where I proposed that there was a unique opportunity in renters insurance. That particular email was ignored. Today, that idea is worth millions of dollars.

What changed?

Insurance seems to be the latest in a string of industries caught in the crosshairs on venture capital. With the success of Uber and AirBnB, VCs are now looking for the next stale industry to disrupt, and the insurance industry carries the reputation of being about as stale as they come. The VCs view the needless paperwork, cumbersome purchasing processes, dramatic claims settlement and overall old-school look and feel of the industry and think they can siphon those trillions of dollars of premium over to Silicon Valley. It seems like a reasonable thesis.

The problem is, it’s not going to happen that way. Insurance will NOT be disrupted. While insurance looks old and antiquated on the exterior, it is actually quite modern and vibrant on the interior. The insurance industry is actually the Uncle Drew of businesses; it’s just getting warmed up!

The Model

Much of the reason I think VCs are unaware of their doomed quest for insurance disruption is that they are looking at the market from a premium standpoint and envisioning being able to capture large chunks of it. $5 trillion is a lot of money. Without an appropriate model, an outsider coming into insurance can naively think they can capture even a fraction of this. But premium is strongly tied to losses. Those premium dollars are accounted for in future claims.

I once had a VC ask me what the fastest way to $100 million in revenue was. The answer is easy, “slash the premium.” I had to quickly follow up with, “and be prepared to be go insolvent, as there is no digging yourself out of that hole.” He didn’t quite get it, until I walked him through what happens to a dollar of premium as it enters the system. And it was this that became the basis of the model I use to assess new product formation and insurtech startups.

There are four basic components to my model. Regardless of new entrants, new products or new sources of capital, these four components remain everpresent in any insurance business model. Even if a disruptive force was able to penetrate the industry veil, that force would still need to reflect its value proposition within my four components.

Component 1 – EXPOSURE

This is the component that deals with insurance claims: past, present and future. Companies or products looking to capture value here must be able to reduce, prevent, quantify or economically transfer current or new risks or losses. Subcomponents in this category include expenses arising from fraud and the adjustment of claims, both of which can add substantially to overall losses.

See also: Insurance Coverage Porn  

Startups such as Nest are building products that increase home security by decreasing the likelihood of burglary (or increasing the likelihood of capturing the criminals on video) and thus reduce claims associated with burglary or theft. Part of assessing the value proposition of Nest is to first understand the magnitude of the claims associated with burglary and theft and then quantify what relief this product could provide (along with how that relief should be shared among stakeholders).

Another company that is doing some interesting things in this model component is Livegenic (disclaimer: I have become friends with the team). Livegenic allows insurers to adjust claims and capture video and imagery using the mobile phone of the insured. This reduces the expenses associated with having to send an adjuster out to each and every claim. Loss adjustment expenses can be in excess of 10% of all claims, so technology that reduces that by a few basis points can be quite valuable to an insurer’s bottom line and ultimately its prices and competitiveness.

Component 2 – DISTRIBUTION

This component focuses on the expenses associated with getting insurance product into the hands of a customer. Insurtech companies in this space are typically focused on driving down commissions. This can be done by eliminating brokers and going directly to customers. Savings can also be achieved by creating efficient marketplace portals that allow customers to easily buy coverage.

Embroker is one of many companies trying to do just that in the small commercial space by creating a fully digital business insurance experience. Companies such as Denim Labs are providing social and mobile marketing services to companies in insurance. And then there is Lemonade, which is developing AI technology that it hopes will reduce the friction of digitally purchasing (its) insurance and making the buying process “delightful.”  Peer-to-peer (P2P) insurance is a fairly new insurtech distribution model that attempts to use the strength of close ties via social methods for friends and close associates to come together to make their own insurance pools.

Distribution expenses in insurance are some of the highest in any industry. As with the risk component, reducing expenses in this component by even a few basis points is incredibly valuable.

Component 3 – CAPITAL

This component focuses on the expenses associated with providing capital or the reinsurance backstop to a risk or portfolio. For many insurers, reinsurance is the largest expense component in the P&L. Capital is such an important component to the business model that the ramifications of it almost always leak into the other components. This was one of my criticisms of  Lemonade recently. Lemonade will have a lot of difficulty executing some of the aspects of its business model simply because it cedes 100% of its business to reinsurers. So, when it comes to pricing or its general underwriting guidelines, its reinsurance expenses will overwhelm other initiatives. Lemonade can’t be the low-cost provider AND a peer-to-peer distributor because its reinsurance expenses will force it to choose one or the other. This is a nuance that many VCs will miss in their evaluation of insurtechs!

For those seeking disruption in insurance, we have historical precedent of what that might look like based on the last 20 years of alternative capital flooding into the insurance space. I will devote space to this in future articles, but, in brief, this alternative capital has made reinsurance so inexpensive that smaller reinsurers are facing an existential crisis.

Companies such as Nephila Capital and Fermat Capital are the Ubers of insurance. Their ability to connect investors closer to the insurance customer along with their ability to package and securitize tranches of risk have shrunk capital expenses tremendously. Profit margins for reinsurers are collapsing, and new business models are shrinking the insurance stack. It is even possible today to bypass BOTH veritable insurers and reinsurers and put the capital markets in closer contact with customers. (If you are a fan of Michael Lewis and insurance, you will enjoy this article, which ties nicely into this section of the article).

In the insurtech space, VCs are actually behind the game. Alternative capital has already disrupted the space, and many of the investments that VCs are making are in the other components I have highlighted. Because of the size of this component, VCs may have already missed most of the huge returns.

Component 4 – OPERATIONS

The final component is often the one overlooked. Operations includes all of the other expenses not associated with the actual risk, backing the risk or transferring the risk from customer to capital. This component includes regulatory compliance, overhead, IT operations, real estate, product development and staff, just to name a few.

It is often overlooked because it is the least connected to actually insuring a risk, but it is vitally important to the health and viability of an insurer. Mistakes here can have major ramifications. Errors in compliance can lead to regulatory problems; errors in IT infrastructure can lead to legacy issues that become very expensive to resolve. I don’t know a single mainstream insurer that does not have a legacy infrastructure that is impinging on its ability to execute its business plan. Companies such as Majesco are building cloud-based insurance platforms seeking to solve that problem.

See also: Why AI Will Transform Insurance  

It is this component of the business model that allows an insurer to be nimble, to get products to market faster, to outpace its competitors. It’s not a component that necessarily drives financial statements in the short term, but in the long run it can be the friction that grinds everything down to a halt or not.

SUMMARY

I have presented a simple model that I use when I assess not just new insurtech companies but also new insurance products coming into the market. By breaking the insurance chain into these immutable components, I can estimate what impact the solution proposed will provide. In general, the bigger the impact and the more components a solution touches the more valuable it will be.

In future articles, I will use this model to assess the insurtech landscape. I will also use this model to assess how VCs are investing their capital and whether they are scrutinizing the opportunities as well as they should, or just falling prey to the fear of missing out.

Originally published at www.insnerds.com,

3 Forces Disrupting Personal Lines

Five years ago, insurance-focused technology conferences were attended mostly by insurance carriers and large consulting firms. Now, I’m amazed and encouraged at both the size of the audiences and the diversity of the audiences – a melting pot of venture firms and eager entrepreneurs, as well as all the traditional industry folk. “Insurtech” is starting to get some serious attention, and for good reason.

There are new funding announcements every couple weeks, new conferences popping up left and right and corporate venture funds now at almost all major carriers. The funding in this space alone has risen from $740 million in 2014 to $2.65 billion in 2015, and as a category insurance tech has seen 50% more deal activity in 2016 year to date than in all of 2015 combined.

As Peter Thiel has said, “Humans are distinguished from other species by our ability to work miracles. We call these miracles technology.” We’ve seen technology revolutionize other industries, and now it’s our time.

Our industry has been here before, and, every time, new companies have emerged while incumbents have suffered. Technology has cycled through the industry many times, each time weeding out the latent and rewarding the agile.

What’s different this time is the pace of change – winners will become losers faster than we’ve ever seen. This time, three forces will significantly affect the personal lines insurance industry: shifts in consumer purchasing behavior, the proliferation of data and the interplay between data and consumers.

The mobile-first era

Technology makes life easier for consumers, and we’ve seen a shift in behaviors because of it (or is it the other way around?). Regardless, as a result of this shift, mobile is the fastest-growing retail channel, and “one click” ordering has become the standard.

See also: Blockchain Technology and Insurance  

Unfortunately, as an industry, we are far behind. The industry standard still touts a 15-minute purchasing experience as a win – on a computer. Despite the inherent value of convenience, the mobile experience is far more tenuous for consumers than other distribution channels across all major competitors. Consumers are asked to enter in form field after form field designed for a desktop, but on a mobile device and with only two thumbs. The result is a digital experience that ranks worse than government services.

We’ve seen this trend before. The internet had a very similar effect on our industry in the late ’90s and early 2000s and continues today. With the exception of Progressive, Geico and USAA, most large carriers still struggle to understand how to compete in an internet-first world. These three companies successfully cornered the market by embracing the internet while the rest of the industry doubled down on the spiraling agent-model.

It’s clear that we’re trending toward the same pattern with mobile. Today, it’s a relatively level playing field. Those who support a mobile-first experience will win big. Those who are late to the game won’t ever catch up.

Open the data floodgate

The rise of mobile means access to new data, and new data is paramount for our industry. A fundamental value that insurance companies provide to the economy is the ability to price and understand risk. Data is essential to this understanding.

As Seth Lloyd of MIT says, humans used to be hunters and gatherers of data. With technology, data is now flying by us every second, and the real challenge is successfully understanding how to capture, sort and use this data.

Smart mathematicians and engineers have already figured this out to a large extent, creating supercomputers able to do machine learning mathematics on large quantities of data, producing insights never before seen. However, despite the accessibility of these improved techniques, most actuarial modeling is still based in classical statistics and generalized linear modeling.

The interactions: data + consumer

These two trends — the customer move to mobile first, and the proliferation of data — are difficult to manage alone. When combined, the interaction becomes disproportionately challenging. This has created an environment where the industry has largely pegged new data collection against consumer experience, rather than executing on both simultaneously.

For example, telematics through OBD II programs have been major efforts of the industry. The reality is these devices are confusing for consumers, the value proposition to them is meager and the process of receiving the device, plugging in the device and returning the device is starkly arduous in contrast to modern consumer purchasing experience expectations.

Smartphones can now do everything an OBD II device can, and, with connected cars, these OBD II devices are completely obsolete. The question is whether carriers will continue to throw good money after bad, or realize the sunk cost of OBD II programs and begin investing in new technologies.

See also: Insurtech: One More Sign of Renaissance  

And it’s not that the industry isn’t spending money on IT – it is. Armies of engineers working on old technologies are provided with hundreds of millions of dollars to attempt to overhaul policy management systems. Billion dollar companies specializing in just fixing policy management systems exist, capitalizing on the inability and incompetence of the industry.

The dawning of insurance tech

The industry has for too long mistreated technology, looking at it as a cost of doing business, rather than an investment in consumer experience and better data management. It is rare, if ever, that you see a seasoned engineer in the C-suite at an insurance company or even on the board. Talented engineers run from the industry. Can you blame them? The agile engineer, eager, stumbles into a lagging and latent system. It’s almost the start of a bad joke.

The result is that all of these implications and their interactions with one another have cost consumers dearly. The purchasing experience is confusing and onerous. The price is unfair, based off the same data as 20 years ago and off out-of-date statistical modeling. Consumers are paying for an inefficient system.

This is clear to the venture community, and clear to many entrepreneurs. The industry has been protected by regulation, capital and complexity. These barriers may have slowed the pace, but, increasingly, we are seeing startups that are not partnering with existing carriers, but becoming carriers. This is the beginning of a new end for car insurance. Technology will continue to create miracles, and these miracles will belong to the consumer.

Does College Matter Any More?

In the technology future we are headed into, the half-life of a career will be about five years because entire industries will rapidly be reinvented. Education counts more than ever. A bachelor’s degree is now the equivalent of high school, and technology skills are as fundamental as reading and writing. Given this, my greatest frustration is that Silicon Valley is regressing by encouraging children to skip college and play the start-up lottery. That approach glorifies college dropouts who start companies—even though the vast majority will fail and permanently wreck their careers. Billionaire Peter Thiel, who cofounded PayPayl and Palantir, goes as far as giving elite students $100,000 to drop out of college.

Sadly, I am on the losing side of this debate. My first defeat was in a globally telecast Intelligence Squared debate on whether too many kids go to college. With Northwestern University President Emeritus Henry Bienen by my side, I debated Peter Thiel and conservative icon Charles Murray. We lost, with 40% of the well-educated Chicago audience voting against the need to college and 39% agreeing with us. Needless to say, I was shocked.

I lost again over the weekend, on a segment on CBS Sunday Morning, which is the most watched morning news show in the U.S. CBS hyped the college dropouts without showcasing the dozens of failures and lives that have been ruined. CBS took the Thiel Foundation at its word that its fellows have started world-changing companies, created 1,000 jobs and raised $330 million in venture capital. These are gross exaggerations; even the  start-ups that CBS featured are all more of the same silly apps—and there are literally thousands more like these.

Here is what I said on the show:

“It breaks my heart when some of the most promising students don’t fulfill their potential because they’re chasing rainbows.

“It’s like what happens in Hollywood: You have tens of thousands of young people flocking to Hollywood thinking that they’re gonna become a Brad Pitt or an Angelina Jolie; they don’t.

“They don’t become billionaires. There haven’t been many Mark Zuckerbergs after Mark Zuckerberg achieved success.”

I added that there is little evidence the Thiel dropouts are doing much that isn’t already being done in Silicon Valley. “Everyone does the same thing: It’s social media, it’s photo-sharing apps. Today it’s sharing economy. It’s ‘Me, too,’ ‘More of the same.'”

You can see the full article published by CBS here, and you can view the segment here.

Better Way to Assess Cyber Risks?

As the saying goes, there are two kinds of motorcyclists: Those who have fallen off their bikes and those who will.

The insurance industry assesses the corporate world’s cybersecurity risk much the same way. Everyone is equally at risk, and, therefore, everyone pays the price for higher insurance premiums.

Not a day seems to go by without news of a high-profile security breach. It’s no surprise, then, that the cybersecurity insurance market is expected to rise to $7.5 billion by 2020, according to PwC. Even worse, the industry does not have effective actuarial models for corporate cybersecurity, say Mike Baukes and Alan Sharp-Paul, the co-founders and co-CEOs of UpGuard.

The two audacious Australians have developed what they say is a better way to assess the risk for cybersecurity breaches.

peep

Alan Sharp-Paul (L) and Mike Baukes (R), Co-Founders and CO-CEOs, UpGuard

The pair’s company recently unveiled its Cybersecurity Threat Assessment Rating (CSTAR), the industry’s first cybersecurity preparedness score for businesses. UpGuard’s CSTAR ranking is a FICO-like score that allows businesses to measurably understand the risk of data breaches and unplanned outages because of misconfigurations and software vulnerabilities, while also offering insurance carriers a new standard by which to more effectively assess risk and compliance profiles.

According to Baukes and Sharp-Paul, many companies forego available policies due to perceived high cost and uncertainty that their organizations will suffer an attack. With countless patches and endpoint fixes slapped onto IT infrastructure to hastily remediate breaches, companies have found themselves with less visibility into their core systems than ever before and, as a result, no way to understand how at-risk they are for hacks. With CSTAR, businesses are able to regain transparency into their own stack and take the appropriate steps to bolster their cybersecurity. Insurance carriers, meanwhile, can make smarter underwriting decisions while accelerating the availability of comprehensive and cost-effective cybersecurity insurance policies for businesses. It’s a win-win for both the insurance industry and for businesses.

After spending years in financial services in Australia and the U.K. and witnessing the disarray of corporate IT, Up-Guard’s two co-founders decided they could make a difference by developing a better way for corporations to understand their software portfolios and their associated potential risk for security breaches. Baukes says, “Our experience showed that that there were thousands of applications and thousands of machines powering all of this critical infrastructure. And the thing that we learned throughout all this was just how hard it is for an IT organization to understand and get a handle on what they’ve got.”

“Today, everything is out in the cloud,” Sharp-Paul says. “We’re all more connected. Employees are connected 24 hours a day, seven days a week. Now what keeps CIOs and CEOs up at night is, ‘If we get breached, I could get thrown in jail. I could get sued.’ It’s a very, very different world we live in today. We built a system to help companies understand and prevent downtime, and helping them save on project costs is just as relevant today from a security perspective.”

The two initially started a consulting company to help companies catalogue and manage their software platforms and applications. According to Sharp-Paul, “We realized the biggest problem companies have from an IT perspective is that they don’t really have appropriate visibility into what they’ve got and how it’s changing because so many things are changing daily in these environments that it’s really hard for them to know what ‘good’ looks like.”

Sharp-Paul and Baukes’s consulting led them to develop software to automate the process, providing the means to quickly and effectively crawl every server and software application to present a profile of what needed to be updated or patched and to identify the system holes that allowed for security breaches.

As Baukes tells it, “Getting that all to mix well and be safe, secure and capable of pinpointing where problems go wrong really quickly is an incredibly difficult task. So, we built up the first commercial version of the product—a very rudimentary version—and we shopped it around, and people were very excited at the time.”

From there, the pair realized their software had commercial potential and implications more far-reaching than what they had first thought. “We started with that very simple version with a few sales and no sales force—just Alan and [me] at the time—growing to the point now where we now have 3,000-plus customers, and the team is steadily being built,” Baukes says.

Now, the company has nearly 50 employees and is growing fast. The Mountain View, CA–based company attracted early seed funding from the likes of Peter Thiel, Dave McClure and Scott Petry, leading to a near $9 million Series A funding underwritten by August Capital.

The co-CEOs admit the co-managing arrangement is unconventional and would be challenging to make work under different circumstances. However, Baukes and Sharp-Paul feel their skills and temperament complement each other.

“To be honest, when people ask us about it, my first response is always that it’s a terrible idea,” Sharp-Paul says. “And that’s not because it’s been a horrible experience for us. It’s because I kind of think we’re really the exception. And the only reason I say that is that I know the unique things we went through and the type of people we are that makes this work. I can’t imagine that being a common thing at all.”

Baukes is generally a more aggressive and strategic thinker, while Sharp-Paul describes himself as more pragmatic and conservative.

Sharp-Paul and Baukes first worked together at the Colonial First State Investment firm back in Sydney, where the two lived the DevOps experience before DevOps became the buzzy concept that it is today. There, Sharp-Paul was a web developer, and Baukes was a systems administrator, and they talked a lot about things like continuous integration and continuous delivery.

“Now these are all fantastic things,” Sharp-Paul says. “But you need a foundation or a basis of understanding what you have. I mean, we like to say you can’t automate what you don’t understand. Or you can’t secure or fix what you don’t understand. And that’s always missing. Everyone’s trying to rush to this goal of DevOps or moving to the cloud. Everyone wanted to be there, but companies and vendors in particular weren’t helping businesses on the journey there.”

Baukes says, “Once you have that base understanding of what you have, then that opens everything else up. You can think about DevOps. You can think about automation. At the time, we were thinking, ‘Why hasn’t anyone thought to do this before?’ It seemed like such a foundational, basic thing. It was almost like it was so foundational that everyone just moved past it, and they were looking at the next shiny thing down the road. I think that was the white space. That was our opportunity. We jumped on it.”

As it turns out, in the world of corporate IT, applications never get retired. Even worse, the people who manage them move on because the life cycle of an employee at a company is short. As as result, the institutional knowledge about these applications is lost.

“Corporate memory is so short typically,” Sharp-Paul says. “They often get to this point five years down the track where they rediscover this server or this application, and everyone’s too scared to touch it because they don’t know what it does. They don’t know how it works. The people with the knowledge just left with it all in their heads. We come across that all the time.”

Sharp-Paul and Baukes had always seemed destined to do something on their own.

“I always had a healthy disrespect for authority. Throughout my corporate life, I was looking outside to see what else is [WAS?] out there,” Sharp-Paul says. “I actually started the first step of creating a business on my own—with something as mundane as a French language website that I used when I moved overseas for a couple of years. … It taught me that I can actually build something myself that makes money.”

Baukes agrees.

“The big difference is that I grew up in an immigrant family in the middle of nowhere, effectively. I won’t say the Australian Outback, but really rural,” he says. “We built everything ourselves. My father was a great wheeler and dealer. So, I learned a lot of from him. I fell into all of this by playing computer games and was really good at it, frankly. For me, that was a springboard into an accidental corporate life. I always knew that I would do something else.”

Now, for the future?

Baukes says, “It makes good business sense to quantify the risk in your company’s IT systems and report it effectively. And I think that for us, we could continue growing our business with that in mind—giving people visibility, helping them get to the truth of what they’ve got, teaching them how to configure it, and showing them if they’re vulnerable. That is beginning to accelerate for us, and we’re incredibly proud of that.

“We truly believe that, over time, CSTAR will be adopted as an industry standard that companies and carriers alike can rely on to make critical coverage and cybersecurity decisions.”

Digital Is Not Enough; Nor Is Paperless

The service of risk management within insurance companies needs to innovate. Today, a small fraction of commercial customers take advantage of risk management services provided by insurance agencies. And insurance companies are fine with this, as they have limited supply — or people — that can provide risk management services.

But what if the same high level of risk management services could be offered to all customers of an insurance company?

How would an insurance company go about offering widespread, and high-quality, risk management services?

The Solution to Better Risk Management Is Your People (Plus Technology)

Insurance agencies currently engaged in risk management services have a distinct advantage: the accumulated knowledge of its people that provide contract reviews for customers.

I had this epiphany as I was reading through a slidedeck titled “Innovation is almost impossible for older companies,” which states:

“People have acquired skills that, at moments, have given significant advantages to companies in order to prosper.”

Insurance agencies now must figure out how to harness the risk management skills of its people in new ways. The alternative is scary for my insurance professional friends, because someone else — someone with new technology and a new supply of risk management knowledge — will figure it out instead. Insurance companies could quickly be out-innovated, as occurred to the taxi industry.

For some time, the taxi industry had skills that allowed it to prosper. Taxi companies used technology and money to set up phone numbers that could be called to request a ride; these companies also stockpiled just enough cars and drivers to meet the minimum level of demand. But then Uber came along and created a better technology that connected riders to a different (and bigger) pool of drivers. The taxi industry got out-innovated.

Insurance agencies are composed of people who have acquired risk management skills. My friends in the industry can review contracts with the best of them. But each of them has a limited capacity to complete contract reviews based on hours in the day. So not all customers get risk management services (either because they don’t know about them or don’t want to pay for them).

A technology will come along that will expand the supply of risk management services. One insurance consultant thinks that technology will be a computer avatar that analyzes and predicts risks independently.

I think the idea of an independently functioning risk management avatar is misguided. I am reminded of a quote from Zero to One, written by the founder of Paypal, Peter Thiel:

“Better technology in law, medicine and education won’t replace professionals; it will allow them to do even more.”

Better Technology Will Allow Insurance Professionals to Do More

I continue to be drawn to the word “collaboration” as I envision the future of insurance technology. Recently, I spent time evaluating software solutions in the insurance industry. All of the solutions I reviewed are focused on step one, what I call “Make it Digital.” Only within the last five to 10 years have insurance carriers and agencies gone paperless, and the insurance software companies are filling this need.

Digital is not enough. Paperless is not enough. Insurance technology must connect people and the knowledge that they create. Don’t think about just connecting to your customers. Think about connecting your team.

Imagine if your entire risk management team could work as a living, breathing entity to assess and evaluate risk. When Agent Jim in Kansas City has a question about liquidated damages in Texas, he should be able to quickly identify work completed by Agent Bob in Dallas dealing with this exact issue. He can then evaluate the work and bring Bob in on any follow-up questions.

I have yet to find an insurance carrier or agency that has figured this out.

This is where the opportunity lies in insurance technology: collaboration.