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New Entrants Flood Into Insurance

New entrants seem to be coming out of the woodwork in insurance. The insurtech movement, the advance of emerging technologies and the appetite of the global tech titans are all contributing to new entrants, new partnerships and new business models. A few recent examples illustrate the new interest in insurance from those both inside and outside of the insurance industry.

  • WeWork partners with Lemonade. In what seems like a very natural partnership, WeWork plans to offer its WeLive members renters’ insurance through Lemonade. WeLive members rent fully furnished apartments from WeWork for short-term situations.
  • Credit Karma enters insurance. This fintech intends to build on customer relationships to expand into auto insurance. While the initial focus will be education – helping Credit Karma customers understand how credit and adverse driving affects insurance rates – the longer-term goal is to provide yet another shopping/comparison site.
  • BMW and Swiss Re partner for ADAS scores. BMW Group and Swiss Re will collect telematics data from vehicles related to the use of ADAS (Automated Driver Assistance Systems) and build scores that can be used by primary insurance companies.
  • Lending Tree buys QuoteWizard for $370 million. Fintech Lending Tree, which has been on a buying spree, moves into insurance with the acquisition of insurance comparison shopping site QuoteWizard.
  • Travelers partners with Amazon for the smart home. Travelers will set up a digital storefront on Amazon featuring smart home devices for a discount (especially security-related devices) as well as discounts on homeowners’ insurance.
  • JetBlue invests in insurtech Slice. This appears to be a pure investment play, but it is still interesting that an airline would be following insurtech and seeking investment opportunities.

Something is going on here. It is not as if there have never been new entrants or that companies from other industries have ignored insurance. But the flurry of activity and innovative partnerships, investments and market approaches may represent a bigger trend. Insurance is transforming, and, despite some of the doom and gloom warnings, a case can be made that there is more opportunity than ever for the industry. Even in the examples provided above, the emphasis is more on new opportunities than displacing incumbent insurance players. Indeed, in the Swiss Re and Travelers cases, the incumbents are part of the new partnerships – and these are just two of many examples.

See also: 5 Cs of Transformation in Insurance  

One of the main themes of the examples highlighted above is the attention on distribution and customer relationships. While insurtechs are working with insurers on many opportunities to improve underwriting, claims, and other areas, so far the new entrants from outside the industry don’t appear to have the appetite to underwrite risk and handle claims. This may change, but it is likely that there will be even more interest from outside insurance in capitalizing on customer relationships. Above all, these new entrants and innovative partnerships serve to accelerate the transformation of insurance.

The Opportunities in Blockchain

Blockchain and smart contracts have enabled the development of new approaches in the insurance industry, as they begin to replace outdated business models (with excessive paperwork, communication problems, multiple data operating systems and duplication of processes and the inability of syndicates to mine their data). By digitizing payments and assets—thus eliminating tedious paperwork—and facilitating the management of contracts, blockchain and smart contracts can help cut operational costs and improve efficiency. Smart contracts also allow for automation of insurance claims and other processes as well as privacy, security and transparency. It is estimated that roughly one-third of blockchain use cases are in the insurance industry.

How Blockchain Is Used in Insurance

How will blockchain and smart contracts transform the insurance industry?

  • Quick and efficient processing and verification of claims, automatic payments—all in a modular fashion, thus minimizing paperwork.
  • Transparency, minimizing fraud, secure and decentralized transactions, reliable tracking of asset provenance and improving the quality of data used in underwriting. Besides improving efficiency, this also reduces counterparty risks, ensuring trust and safety both from the insurer’s and customer’s perspective. By computing at a network, rather than individual, company level, the consumer is reassured that the process was completed appropriately and as agreed upon. From the perspective of the insurance company, this fosters trust, as well, and encourages consistency, as the blockchain provides transparent and permanent information about the transactions.

The insurance industry has traditionally been associated with tedious administration, paperwork and mistrust; the incorporation of blockchain, however, has the ability to transform this image by bringing operational efficiency, security, and transparency. The long-term strategic benefits of blockchain are thus clear.

Top insurance blockchain projects:

AIG (American International Group) – Smart contract insurance policies

HQ: New York

Description: AIG, in conjunction with IBM, has developed a “smart” insurance policy utilizing blockchain to manage complex international coverage.

Blockchain network: Bitcoin

Deployment: In June 2017, AIG and IBM announced the successful completion of their “smart contract” multinational policy pilot for Standard Chartered Bank. It is said to be the first such policy to employ the blockchain digital ledger technology.

Fidentiax – Marketplace for tradable insurance policies

HQ: Singapore

Description: As “the world’s first marketplace for tradable insurance policies,” Fidentiax hopes to establish a trading marketplace and repository of insurance policies for the masses through the use of blockchain technology.

Blockchain network: Ethereum

Deployment: Fidentiax succeeded in raising funds for the project through its Crowd Token Contribution (CTC, aka ICO) in December 2017.

See also: How Insurance and Blockchain Fit  

Swiss Re – Smart contract management system

HQ: Zurich, Switzerland

Description: Swiss Re, a leading wholesale provider of reinsurance, insurance and other insurance-based forms of risk transfer, has partnered with 15 of Europe’s largest insurers and reinsurers (Achmea, Aegon, Ageas, Allianz, Generali, Hannover Re, Liberty Mutual, Munich Re, RGA, SCOR, Sompo Japan Nipponkoa Insurance, Tokio Marine Holdings, XL Catlin and the Zurich Insurance Group) to incorporate and evaluate the use of blockchain technology in the insurance industry. The Blockchain Insurance Industry Initiative (B3i) hopes to educate insurers and reinsurers on the employment of the blockchain technology in the insurance market. It serves as a platform for blockchain knowledge exchange and offers access to research and information on use case experiments. As of yet, there have only been individual company use cases in the industry. B3i is working to facilitate the widespread adoption of blockchain across the entire insurance value chain by evaluating its implementation as a viable tool for the industry in general and customers in particular. The initiative envisions efficient and modern management of insurance transactions with common standards and practices. To this end, it has developed a smart contract management system to explore the potential of distributed ledger technologies as a way to improve services to clients by making them faster, more convenient and secure.

Blockchain network: Ethereum

Deployment: B3i was launched in in October 2016. On Sept. 7, 2017, B3i presented a fully functional beta version of its blockchain-run joint distributed ledger for reinsurance transactions. On March 23, 2018, the B3i Initiative incorporated B3i Services company to continue to promote the B3i Initiative’s goal of transforming the insurance industry through blockchain technology.

Sofocle – Automating claim settlement

HQ: Northern Ireland, U.K.

Description: Through smart contracts, AI and mobile apps, Sofocle employs blockchain technology to automate insurance processes. All relevant documents can be uploaded by customers via mobile app, thus minimizing paperwork. Use of smart contracts allows for a far more efficient and faster settlement process. Claims agents can verify insurance claims, which are recorded on the blockchain in real time. The smart contracts allow for verification of a predetermined condition by an external data source (trigger), following which the customer automatically receives the claims payment.

Blockchain network: Bitcoin

Dynamis – P2P Insurance

HQ: U.K.

Description: Dynamis’ Ethereum-based platform provides peer-to-peer (P2P) supplementary unemployment insurance, using the LinkedIn social network as a reputation system. When applying for a policy, the applicant’s identity and employment status is verified through LinkedIn. Claimants are also able to validate that they are seeking employment through their LinkedIn connections. Participants can acquire new policies or open new claims by exercising their social capital within their social network.

Blockchain Network: Ethereum and Bitcoin

Deployment: The goal of Dynamis is the creation of a decentralized autonomous organization (DAO) to restore trust and transparency in the insurance industry. Its community-based unemployment insurance employs smart contracts and runs on the Ethereum blockchain platform. Using social networking data and validation points, Dynamis verifies a claimant’s employment status among peers and colleagues. It also depends on Bitcoin-powered smart contracts to automate claims.

Conclusion

Recognizing the benefits of blockchain and smart contracts, the insurance industry has begun to explore their potential. With the traditional insurance model, validating an insurer’s claim is a lengthy, complicated process. Blockchain has the ability to combine various resources into smart contract validation. It also offers transparency, allowing the customer to play an active role in the process and to see what is being validated. This fosters trust between the insurer and the customer. Despite the obvious benefits of blockchain for insurers, reinsurers and customers, the industry has yet to adopt blockchain on a large scale. The primary reason for this is that blockchain adoption has until now required in-depth knowledge and skills in blockchain-specific programming languages. The limited number and high cost of hiring blockchain experts have rendered the technology out of reach for many businesses in the industry. Without access to the technology, exposure to blockchain and the ability to reap its benefits will remain limited for insurance companies.

How can these obstacles be overcome? The key is accessibility to enable all parties within the insurance ecosystem to reap the benefits of blockchain and smart contracts. There is a dire need for a bridge between the blockchain technology and these industry players. This is the role that the iOlite platform fulfills. iOlite provides mainstream businesses with easy access to blockchain technology. iOlite is integrated via an IDE (integrated development environment) plugin, maintaining a familiar environment for programmers and providing untrained users simple tools to work with. The iOlite platform thus enables any business to integrate blockchain into its workflow to write smart contracts and design blockchain applications using natural language.

How it works? iOlite’s open-source platform translates any natural language into smart contract code available for execution on any blockchain. The solution utilizes CI (collective intelligence), in essence a crowdsourcing of coder expertise, which is aggregated into a knowledge database, i.e. iOlite Blockchain. This knowledge is then used by the iOlite NLP grammar engine (based on Stanford UC research), the Fast Adaptation Engine (FAE), to migrate input text into the target blockchain executable code.

See also: Blockchain – What Is It Good for?  

The future of blockchain in insurance

With a clear direction of blockchain adoption for the future, insurance companies will be forced to adapt or be left behind. The adoption of blockchain by the insurance industry is no longer a question of if but how.

Reinsurance: Dying… or in a Golden Age?

Much has been said about the challenges facing the reinsurance industry, to the point where the industry and a few of its major players have been characterized as being in a potentially terminal decline. However, to focus on recent results is to overlook fundamental changes in the nature of risk in the 21st century that could benefit the world’s major reinsurers, with opportunities unlike any seen before in the modern history of reinsurance.

A difficult financial backdrop for reinsurance in 2017

Financial results for major reinsurers in 2017 saw substantial contractions from prior years, driven by large catastrophe losses from hurricanes and California wildfires. These results have been followed by cost reduction in the reinsurance industry, which has elicited surprise in two conflicting ways. For some, the surprise was that the cost-reduction efforts could affect reinsurance, given that such exercises were more common for their cedent primary carrier clients. For others, the surprise was that it had taken so long for a focus on cost to come to the reinsurance market.

Concerns about the future financial performance of the reinsurance industry are held at the very highest levels of leadership among major reinsurers. In response to questions about the company’s 2017 performance, Swiss Re CEO Christian Mumenthaler commented on the state of the property catastrophe market that “we need to get used to a world where margins are much lower.” Given that property catastrophe profits have been one of the best-performing segments, not just in reinsurance,but in the entire insurance industry, according to McKinsey, this is an unwelcome development for the medium-term profitability of reinsurance firms.

Bearish commentators do not blame recent poor results on an unfortunate confluence of large-scale U.S. property losses, excess capital in the reinsurance industry or a temporary soft market. Rather, global advisory firm EY points to “clear signs that reinsurers face a long-term structural phenomenon rather than a short-term fluctuation of the insurance cycle.” EY goes on to warn in a report on the reinsurance industry that there is “compelling evidence that reinsurers are inexorably moving toward a ‘dead end’ with their legacy business models.”

The potential for reinsurance, with a longer-term lens

Such pronouncements about the potential for the reinsurance industry to perish are, however, overblown. Far from the rapidly changing risk environment undercutting the role of reinsurance, changes in the nature of risk have the potential to unlock a golden age of reinsurance where reinsurance institutions could play an even more important role in the future of the global economy than ever before. Two megatrends affecting society in the 21st century could bode very well for the reinsurance industry.

The shift from physical to non-physical assets on balance sheets

First, the emergence of non-physical assets fundamentally alters the nature of risk, which will require major changes in the P&C insurance industry.

According to Ocean Tomo, in 1975, more than 80% of the market capitalization of the S&P 500 was derived from physical assets and infrastructure. Property insurers, therefore, had a key role in insuring the most valuable assets of the business community. However, by 2015, property assets made up a relatively small share of the value of businesses, with 87% of that value being tied to intangible assets. For centuries, the P&C insurance industry was focused on the protection of property, but in the space of a generation the relative importance of physical property has declined precipitously. Risk to assets hasn’t gone away; there has just been a shift from physical to non-physical assets.

See also: The Dawn of Digital Reinsurance  

The shift toward digital risks as a driver of risk to a company’s income statement

Second, the emergence of digital risk is fundamentally changing the potential causes of loss for businesses. When you move beyond a balance sheet perspective, where physical property has declined in importance, and look at the income statements of contemporary businesses, you also see an increasing reliance on digital technologies with substantial potential for business interruption when these technologies are disrupted. These losses are already being witnessed today with the recent NotPetya attack illustrating that many major businesses can lose hundreds of millions of dollars from a single cyber event. It is, therefore, no surprise that cyber risk has skyrocketed in importance from the #15 item on the minds of risk managers in 2013 to the #2 item on the minds of risk managers in 2018, according to a report from Allianz.

What is remarkable is not just the meteoric rise in importance of cyber risk over the past five years but the fact that we are just scratching the surface of a megatrend that promises to have an even greater impact in the years to come. Changes in technology are fundamentally changing the nature of risk due to the digitization of the economy, the automation of entire industries and the explosion of Internet of the Things (IoT) devices. As the economy shifts from having 10 billion Internet of Things (IoT) devices to more than 200 billion IoT devices, sources of digital risk are set to skyrocket, along with the potential for cyber losses.

The foundation for any financial risk transfer product – where is the financial loss?

Estimating the financial impact of cyber risk is a difficult endeavor. A recent piece of research conducted by RAND, supported by the CyberCube unit of Symantec and the Hewlett Foundation, estimated that cybercrime today costs the global economy at least $275 billion to as much as several trillion dollars. When you layer on the emergence and deployment of new technologies, this number will only increase over time.

Not only will these losses due to cyber events rise, but cyber catastrophe modeling research undertaken by CyberCube suggests that there will be a shift from attritional day-to-day losses affecting individual to firms to more and more large-scale losses affecting multiple companies simultaneously from global aggregation events. Such events were once deemed somewhat theoretical, but the last 18 months have revealed a series of cyber aggregation events that have shown that cyber events have the potential to lead to simultaneous losses from many companies, and we are just at the beginning of a major technological change.

In many cases, the absolute level of risk for the global economy will decline. For example, with the emergence of new safety features in automated cars, the incidence of property and casualty losses from automobiles will decline.

However, new sources of catastrophic risk emerge as the potential arises for mass losses from the simultaneous failure of the technology affecting thousands of companies simultaneously. CyberCube has identified more than 1,000 technology “single points of failure” that could pose sources of aggregation risk to insurers, and this number will only grow as the years go by and new cloud-connected technologies are rolled out. To draw an analogy to the property insurance market, you can expect far fewer one-off damages from one-off fires burning down a single home and far more wildfires destroying entire towns.

Implications for reinsurers

So what are the implications for reinsurers?

1. The foundation for any financial risk transfer product – where is the financial loss?

Changes in the nature of company assets, technology and the emergence of connected digital risk are reducing absolute levels of risk to the society overall but concentrating the potential for financial losses in a smaller number of catastrophic events. This is precisely the type of risk and financial transfer that the reinsurance industry can provide.

2. Emerging cyber risk is so complex that the largest and most sophisticated reinsurers stand to gain the most from this shift in the risk landscape

Given that cyber risk is not geographically constrained, the ability of smaller and less sophisticated reinsurers to participate in a large number of geographically diversified natural catastrophe treaties is diminished. The nature of cyber risk is so complex and dynamic that only reinsurers with a critical mass of expertise in connected digital risk will be able to effectively understand, monitor and model cyber risk. There will be more differentiated insight in cyber risk than in natural catastrophe risk.

3. Investment from reinsurers is needed to understand cyber risk today, in advance of catastrophe events that could create tremendous financial opportunities for reinsurers in the future

It is a cliché to say that it is just a matter of “if not when” for cyber attacks on individual companies. What is becoming increasingly apparent is that the same can be said for catastrophic cyber aggregation events that cause material damage to many companies simultaneously. When this happens, insurance history suggests that demand for coverage will increase, capital will flee the market and prices will harden. The reinsurance market for cyber as a peril might be small today, but reinsurers that have taken the time to invest in their own capabilities ahead of these events, with informed capital to deploy when market demand spikes, will benefit tremendously.

See also: Mamas, Tell Your Kids to Sell Reinsurance  

Conclusion: Terminal decline or golden age?

The nature of risk is fundamentally changing, which means the nature of financial risk transfer also must change. 2017 may have been a bad year for the financial performance of the reinsurance industry, but this is a market where time horizons need to be considered over many decades and certainly not over the results from one financial year alone.

Far from the reinsurance industry being in a potentially terminal decline, changes in the nature of risk in the 21st century, stand to benefit the most sophisticated players in the reinsurance industry if they can take advantage of digital trends and understand new risk concentrations.

Reinsurers that invest in understanding the nature of cyber risk, and the sources of catastrophic losses, not only stand to benefit in outsized ways relative to other insurers, but they also stand to help society reap the tremendous rewards of new technology by mutualizing financial risk when technology inevitably goes wrong.

The reinsurance industry as a whole is neither in terminal decline nor at the beginning of a new golden age. It is the action of individual reinsurance companies, and their efforts to understand, quantify and model digital risk that forms the basis of whether they will thrive or falter in this emerging digital age.

Why Is Insurance Industry So Small?

Small? According to Swiss Re, the global insurance industry generated $4.6 trillion in direct insurance premiums, or 6.3% of the global GDP in 2016. Without insurance, flights would not take off, ships would not set sail and you would not be allowed to drive your car. Insurance is a key enabler in the global economy, and, without it, the economy would quickly grind to a halt.

How then can the global insurance industry be called small?

Over the last few decades, the overall size of the insurance industry has not grown at the same rate as the other major financial markets, and it has struggled to increase its coverage, especially in new and emerging markets. It is a depressing statistic that ClimateWise (a global network of leading re/insurers, brokers and industry service providers) believes the gap of uninsured or under-insured assets had increased fourfold over the past 30 years.

So why has the growth in the insurance industry been so sluggish, and what has constrained it?

While there are differences between insurance and other financial markets, the growth of the foreign exchange (FX) market was undoubtedly fueled by the creation of an electronic marketplace. Up until the 1970s, the FX market was a very traditional, heavily intermediated, paper-based market. The high costs and length of time needed to complete a FX transaction limited the number of parties that were able to participate.

See also: The World Is Flat; Insurance Is Round  

Reuters, acting as an independent third-party provider, laid the groundwork for the first electronic FX marketplace in the 1970s by enabling parties to insert FX rates into their system, making them available on-screen to recipients. The electronic marketplace really took off in 1981 when Reuters enabled dealers to instantly communicate with each other to buy, sell or lend money through the same screen.

The effect this had was that costs were greatly reduced, market liquidity grew, new participants were attracted to the market and it became possible to create a raft of innovative products. The FX market is now the world’s largest financial market, with more than $5 trillion changing hands daily.

Although it may seem far-fetched to call the insurance industry small, it is fair to say that the insurance industry is nowhere near its potential size yet. As so many other industries have done, the creation of an electronic marketplace for the transfer of insurance risks would help drive growth, create efficiencies and stimulate innovation across the insurance market, benefiting the industry as a whole.

AkinovA is building such an electronic marketplace for the transfer of re/insurance risks with the support and collaboration of some of the largest market participants. By taking an inclusive approach, AkinovA is bringing together all parts of the insurance value chain to enable the creation of a truly electronic marketplace.

Cyber: The Spectre of Uninsurable Risk?

It’s been an awfully eventful start to the New Year. In case you’ve missed the news, two major security flaws have been discovered in the processors that power nearly all of the world’s computers. The two techniques discovered to exploit these flaws, nicknamed Meltdown and Spectre, could allow hackers to steal data and secrets from any vulnerable computer, including mobile devices. Because the flaws are with the computer processor itself, any software platform running on top of an affected processor is potentially vulnerable.

If by this point you’ve tired of hearing about technology vulnerabilities, this one is different (but also mostly the same, as I’ll get to a bit later). For one, this isn’t a software bug like you might find in your operating system or browser. Nor is it a physical defect in the processor itself. Meltdown and Spectre aren’t really “bugs” at all. Instead, they represent methods to take advantage of the normal ways that many processors work for the purpose of extracting secrets and data. More important, though, is the magnitude of the impact. By comparison, the WannaCry and NoPetya ransomware attacks wreaked global havoc exploiting vulnerabilities that are believed to have affected ~400,000 computers versus the estimated 2 billion computers susceptible to Meltdown and Spectre.

See also: New Approach to Cyber Insurance  

The timing of these events could hardly come at a more interesting time for the cyber insurance industry. Only a few days prior, in an interview with the Financial Times, Christian Mumenthaler, CEO of Swiss Re, one of the world’s largest reinsurers, wisely questioned the very insurability of cyber risk due to the possibility for accumulation risk—the possibility that a cyber event could hit many insurance policyholders at the same time, by the same attack, resulting in huge potential claims payouts.

Sound familiar?

Cut the FUD

As we’ve discussed before, we now live at a time where a cyber attack, technology failure or human error can cause everything from data theft to supply chain disruptions, hospital shutdowns, hotel room lockouts, blackouts and even nuclear centrifuge explosions—literally the entire spectrum of known risk. That these events could even theoretically occur on a massive scale, and all at once, is certainly cause for alarm—it would indeed pose a serious accumulation risk and eliminate one of the core pillars of insurability.

However, it would be mistaken to assume that such a scenario, as in the case of Meltdown and Spectre, is anything more than FUD (fear, uncertainty and doubt). This is hardly to say that the discovery of these security flaws is much ado about nothing. On the contrary, they pose a very real threat and may well open the door to serious cyber attacks. However, as with the headline-grabbing ransomware attacks of 2017, there are many reasons to believe that subsequent losses will be relatively contained.

Hierarchy of Cyber Security

To understand why, it’s helpful to understand the hierarchy of cyber security. At the base are vulnerabilities in all their forms (software, humans, even processor architectures). That the base is bounded is misleading because, in reality, there are an infinite number of vulnerabilities that can and will exist. However, vulnerabilities only matter if they pose a threat to an organization. This combination of threat and vulnerability is generally the risk an organization faces. Even then, threats don’t matter unless someone proceeds to attack you. And that someone at the top of the pyramid is, 10 out of 10 times, a human actor. Why does this matter?

It matters because cyber attacks are really just forms of cybercrime, which itself is merely a form of crime—it is the people, not the form, that matter. There are costs for criminals to launch attacks, and not just the risk of being caught (which for the moment is abysmally low). Criminals require time, infrastructure and money to fund their enterprises, enumerate targets and move through the kill chain toward the realization of their desired outcomes. All the while they must also factor in the uncertainty of achieving the outcome.

Exploits for security flaws can accomplish many things, but few produce cash.

Every step in this chain takes effort. Although cyber criminals are becoming more numerous and sophisticated, they are still limited in how much damage they can cause and profit they can reap. As a result, even though an entire population may be vulnerable, the economically optimal strategy for an attacker is nonetheless to focus on a relatively small set of victims.

Cyber insurance is dead. Long live cyber insurance!

Although there is little doubt that certain accumulation scenarios exist, limiting the insurability of certain cyber risk exposures, this is not one of them. Absent an expertise in hacking and cybercrime—and the economics thereof—it is no surprise that many insurers offering cyber insurance struggle to understand, much less manage, accumulation risk. It’s high time they woke up.

See also: Cyber Insurance Needs Automated Security  

Insurers must come to realize the role that insurance plays in protecting companies from all forms of risk that accompany the digitization of everything. It also means thinking about cyber insurance as more than just coverage for data breach and response. The most recent devastating attacks have resulted in business and supply chain interruption, and even physical property damage. It is hardly a stretch to imagine exposure to nearly every other form of known risk, including bodily injury or even pollution. Of course, with new exposures come new challenges in underwriting and management of accumulation.

Overcoming these challenges won’t be easy. It will mean using data in an entirely novel way to not only assess the risk of an individual policyholder, but an entire population of policyholders, and doing so on a continuous basis. It will also mean measuring diversity, and particularly technological diversity, to manage accumulation in novel ways. How many insurers today know which cloud service provider their clients use, much less which versions of software they are running? Or whether their clients’ passwords have been compromised in a third-party data breach? If you don’t know these answers, you’re in trouble. Gone are the days when accumulation will be managed by geography, industry and revenue size. Are we up to the challenge?

Long live cyber insurance.