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?
Asia will be the key pillar in the coming revolution of insurance and in all likelihood will become the hottest market for insurance technology (insurtech) globally. It’s no longer just a pipe dream, as this time all the stars are aligning. Take the sheer population size and rapidly emerging tech-savvy middle class, together with low effectiveness of traditional insurance distribution. Combine that with a destabilizing wave of political populism, making its rounds across much of the developed world, and you’ve got most of the ingredients for a region that will take on a leading global role for insurtech.
So what, if anything, is missing to really ignite insurtech in Asia? It turns out that while the region is ripe for insurtech, the actual quantity and quality of startups in Asia is nowhere near that of other regions… at least not yet.
Share of investments in insurance startups can be used as a good proxy to the overall level of insurtech activity around the world. According to the figures, the U.S. takes 63%, with Germany (6%), U.K. (5%) and France (3%). China is at 4% – which doesn’t account for Zhong An’s massive investment in 2015 — and India at 5% (Source: CB Insights).
So the logical question is, why aren’t there more startups in Asia, considering the substantial opportunity and funding that exists in the region? Is it due to a shortage of experienced entrepreneurs, difficulty of starting a business, lack of access to investment or something else? The answer is that it’s likely a combination of a few factors, including a weaker early-stage entrepreneurial ecosystem, which doesn’t yet effectively support startups, and a cultural aspect of lesser tolerance for failure. Both of these are changing fast, though, and entrepreneurs across Asia are starting to identify and test innovative insurtech solutions.
The following are just a few recent notable insurtech startup examples across Asia that have already reached beyond Series A funding: Zhong An (an $8 billion Chinese insurtech startup), Connexions Asia (Singaporean flexible employee benefits platform with a U.S.$100 million valuation), and two large insurance aggregators out of India– Policybazaar and Cover Fox.
So why am I convinced that Asia insurtech startups will not end up dominating their regional home turf ?
Probability and “Survival of the Fittest”
The lack of critical mass of startups in the region means that they will not enjoy the same quality filters and network effects of the larger entrepreneurial ecosystems of the U.S., Europe and to a somewhat lesser degree China.
“Surviving” U.S. and European startups have to fight their way across a lot more competition to reach scale in their home markets. Hence, where a weaker startup in Asia could get repeated life support simply because there aren’t that many others to invest in, natural selection weeds out the weaker models in EU/U.S. much quicker in favor of more robust ones. Stronger startups then get to attract the best talent from the entrepreneurial ecosystem, including talented entrepreneurs whose models didn’t work as well, further reinforcing successful EU/U.S. startups.
Home Market Advantage
Success in a large home market like the U.K., Germany or a few U.S. states gives a substantial boost to any startup. It provides both credibility and cash flow to allow a much more aggressive expansion into other regions. This also gives a startup flexibility to develop the necessary adjustments to the business model to adapt it for Asia.
The U.S. and EU have a deep domain level of insurance expertise, which gives EU/U.S. startups from those regions a further edge to tap advisory expertise locally, because most of the largest global insurers are based in these two regions.
Lastly, considering that most startups adopt a collaborative approach with insurance companies, having a relationship that originates close to the top decision maker at headquarters gives an added advantage to EU/U.S. startups when they are looking at expanding to new regions. I’ve personally experienced examples of relationships developed in Europe that later carried over in creating a pre-warmed partnership with the insurer’s operations in Asia.
Asia is made up of a large number of countries, where each has its own insurance regulator, who possess views on how things should be run. This means an additional potential growth hurdle for Asian startups.
For example, a startup out of Singapore will need to figure out how to navigate the neighboring Asian country regulatory regimes pretty early in its growth cycle. Thailand, Malaysia, Indonesia and Vietnam markets all have diverse regulatory requirements. This lands the Singaporean startup at a disadvantage vs. a more mature startup out of EU/U.S. – which not only has experience dealing with regulators in its home market but also possesses a proven track record and a larger resource pool that it can use to overcome any regulatory issues.
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!