We’re about five years into the insurtech boom, but we’re also in the middle of a pandemic. Excitement around emerging technology and startup innovation has taken a backseat as the insurance industry shifted its focus to COVID-19.
Yet startups have not failed as quickly as the industry might have predicted. It’s possible that some startups will begin to outrun their funding and close their doors in the next year or two. But for the time being, the insurtech market and funding remain relatively stable. What’s driving this?
COVID-19 and Insurtech Partnerships
The pandemic has altered insurers’ approach to insurtech investment. Insurers appear to be focused on tactical initiatives that can produce more immediate results. This contrasts with the R&D that was more prominent pre-pandemic.
Yet it turns out that startup activity and the global pandemic are not necessarily mutually exclusive. Insurer priorities most notably changed focus to cloud computing and digital strategy — with digital covering both external channels and internal workflows. Cloud and digital are two areas in which almost every insurtech excels and have led to additional opportunities in many cases. Insurers expect that these areas will continue to be prioritized even when the pandemic is over.
Lemonade’s IPO and What It Means for Insurtech
Lemonade’s IPO cemented one of the most notable insurtech players as a certified unicorn. IPOs validate the potential returns of insurtech and will help attract more investment dollars into the space, whether from venture capitalists or insurer investment arms. Few other startups have gained the investment attention that Lemonade has, but others — like life insurance startup Ethos or property insurer Hippo — have received funding over $100 million. Each of these startups’ successes helps attract dollars for the rest of the insurtech ecosystem.
Many insurtechs, especially startup MGAs, are exploring new revenue streams. For some, this means selling a wider variety of coverages directly online or embedding at different points of sale. Some MGAS are also moving to become full-stack carriers, like Buckle and Clearcover. Still other startup carriers, like Slice, Trov and Metromile, have gotten into the software business and are licensing their platforms out to other insurers.
Platform and analytics players are also finding success proving value to insurers in the current environment. Atidot, for example, partnered with Pacific Life to analyze product and pricing changes to help optimize market penetration for the insurer. In addition, Principal is licensing Human API’s medical records platform to circumvent paramedical exams for disability insurance during the pandemic.
Many startups have interesting ideas but haven’t thought through long-term financial or regulatory hurdles. The goal of many startups is to validate a business model first, then work out the details later. It’s possible that some startups will start to outrun their funding and eventually close their doors. But it will be interesting to see how insurtech evolves in a post-pandemic world, especially as new realities cause insurers to rethink processes that were manually intensive. For startups that can show value to insurers, this new normal may be an opportunity.
That was the question I recently asked myself while hiring a rental car to visit the infamous “White Line” mountain bike trail in beautiful Sedona, AZ.
When I discovered the full Hertz insurance cover was going to cost me double the price of the actual car hire, I couldn’t help but relay my shock to the salesperson. She proceeded to tell me about customers’ typical reaction to the accompanying insurance cover purchase, and three things, from the conversation, stuck in my mind:
Many customers opt not to take the liability cover even though it leaves them quite exposed.
A surprisingly high percentage of customers ask for a refund on their insurance payments, at the end of the rental period, if they didn’t need to make a claim!
Customers are generally verydistrustful of the insurance product they are buying. Customers are often unsure whether it will actually cover their needs if they have to make a claim.
To my mind, this random conversation captured three big problems the insurance industry currently faces:
Problem #1: Consumers often don’t value insurance
Insurance is quite an unusual product. Except for maybe a coffin and a fire extinguisher, it’s the only purchase I can think of that you make but hope to never have to use.
Let’s face it. Buying insurance is usually an uninspiring “grudge purchase.” Tedious paperwork, arcane questions, having to think about what can go wrong in your life. Is it any wonder that the experience is up there with a visit to the dentist? Of course, the reality is that should your home be destroyed in a storm or should you be involved in a car accident deemed to be your fault (especially with third-party injury) insurance can be the saving grace preventing potential financial ruin.
Problem #2: Consumers don’t always understand insurance
After going through the pains of considering the potential financial impact of personal tragedy, you are rewarded with the product: a paper contract. Not just any old paper contract, but a long-winded, very conditional and often confusing document. How exciting! Again, is it any wonder that insurance customers can’t or don’t want to take the time to understand the precise nature of what some deem to be the world’s most boring product?
Problem #3: Consumers generally don’t trust insurance companies
To highlight the trust issue, I turn to the most popular definition of “insurance company” from the crowd-sourced Urban Dictionary:
Insurance Company: “An affiliation of pirate-gamblers who accept bets called premiums. The dollar amounts of the premiums are non-negotiable, but the amounts of the claim settlements, should the company lose the bet, are rarely delivered without argument.”
While the quoted source may be a parody, I believe the underlying inclination signifies the typical level of distrust that consumers have of insurance.
Don’t get me wrong. I believe insurance plays a critical role in our lives, and insurance companies can provide a great service as well as a very rewarding career path. But, when it comes to the general consumer view of insurance, there seems to be an issue.
Ask 10 random people on the street to describe “insurance” in three words, and you can be nearly sure at least one person will allude to issues of distrust
Insurtech to the rescue?
So what is the industry doing to solve these problems?
It appears that the nimble insurance technology startups (insurtechs) are playing a large part in leading the way in attempting to overcome these issues.
Below are three insurtech companies focused on addressing these issues and arguably changing the insurance world for the better:
Solution # 1: Improved Value – Metromile
Telematics has been around for a few years now, particularly in Italy, the U.K. and the U.S.
Onboard car technology is used to monitor and potentially assess the driving behavior of each individual driver, thus moving insurance from a pooled pricing model to a more individual specific model, one where the underlying policyholder risk is more closely monitored.
These telematics technology devices (also known as a “black box”) are able to pick up a number of diverse driving metrics such as:
time of day
behavior around hazardous zones
rates of acceleration
This information can then be considered in a more accurate and individualized pricing model, one that potentially allows the previously trapped (i.e pooled) policyholder to break free from his or her age or gender (non-EU) status, etc. and prove worthy as a safe driver that is a good risk and unlikely to have an accident and hence claim.
Low-mileage drivers, as well as young male drivers, can benefit, and this is the market that Metromile has targeted.
The usage-based customization of insurance certainly seems to be keeping customers happy, with policyholders reporting they feel like they are getting a fairer deal. After all, should a low-mileage, safe driver really be subsidizing a riskier driver just because they share common old-school rating factor characteristics?
Metromile has been forging ahead with this lifestyle app-based continuous digital engagement model since 2011. And the company shows no signs of slowing down. In late 2016, the company raised a further US$150 million in funding through which it acquired a carrier enabling the company to now underwrite its own policies.
Solution #2: Simplicity and Understanding – Trov
The Trov promise:
“As simple as Tinder and as beautiful as Airbnb” — Scott Walchek: CEO of Trov
Trov provides on-demand insurance for personal items that can be toggled on and off via a few simple taps from your phone. The company aims to give the mobile generation easy protection that they can enjoy “without worrying about rigid policies and confusing fine print.”
In addition, Trov seems to be jumping on the personalized cover bandwagon – treating policyholders as individuals instead of an average risk within a cohort. The flexible app gives customers the option to tweak their cover toward their own personal circumstances. As one customer put it: “Why pay for an expensive insurance plan designed to cover your worldly belongings when all you really care about is your mountain bike and your laptop?”
“Protect just the things you want – exactly when you want – entirely from your phone” — Trov website
This simplicity and flexibility seems certain to appeal. I personally like the idea of being able to quickly and easily protect my mountain bike by getting temporary insurance for the times when I do actually take it out and use it. And if a claim is required, it’s all handled via an in-app chatbot. Insurance for the smartphone generation indeed!
While I do wonder how Trov counters fraud (given the ability to so easily turn the cover on and off), as we are living in the age of convenience, it would seem that this model is sure to appeal beyond just tech-savvy millennials.
Solution #3: Enhanced Trust – Lemonade
Lemonade is the poster child of insurtech, or at least the king of savvy insurtech marketing. When the company shouts about paying a claim in three seconds, using AI not actuaries and bots not brokers, it certainly makes one stand up and take notice. Lemonade began selling insurance nearly two years ago and has now amassed a sizable level of funding and following. The companyy promised to bring trust back into the insurance world – the way it should be and how it was in the beginning.
The tools of their trade: behavioral economics and artificial intelligence.
The promise to the customer: simplicity, convenience and affordability.
But back to the trust issue. How is Lemonade approaching it? The business model attempts to disrupt the cycle of distrust between the insurer and the insured. This is done by separating the pool of risk capital from the company’s own 20% flat fee. Essentially this model aims to remove the incentive for the insurer to minimize claim payouts on the basis that doing so will not affect its bottom line (the remaining 80% claim pot gets paid out to small peer groups under a giveback scheme, after some unavoidable expenses such as reinsurance cover).
Basically, the deal is: Trust us to pay out your claim quickly, with minimal fuss and without any sneaky “catching you out in the fine print” shenanigans, and we will trust you to only claim if it’s genuine.
“Knowing that every dollar denied to you in claims is a dollar more to your insurer brings out the worst in us all… Since we don’t pocket unclaimed money, we can be trusted to pay claims fast and hassle-free. As for our customers, knowing fraud harms a cause they believe in, rather than an insurance company they don’t, brings out their better nature too. Everyone wins.” — Dan Ariely, chief behavioral officer at Lemonade
The behavioral implication, with the removal of potential conflict, is that the enhanced two-way trust will drastically reduce fraudulent claims. This, combined with the operational cost efficiency savings from AI and technology will allow the company to have happy customers and still make a sustainable profit.
Now, while I love what they are doing, I’m not entirely convinced their model is altogether different from some of the smaller mutuals, especially those that still maintain some level of social bonds. Maybe I’m biased because Lemonade doesn’t seem to like actuaries, but I also wonder whether the company’s pricing, underwriting and risk management will allow its loss ratios to stay low enough to not affect their 20% flat fee over the long term. It takes some time for reality to test the theory, in insurance. So I, for one, will be watching the Lemonade space with interest.
So is insurance really broken and in need of fixing?
Let’s not forget what insurance is all about. In essence, insurance is about the pooling and sharing of risk. Swapping an uncertain, and potentially large, outgo for a small(er) more certain outgo (the premium). This is unlikely to change, and insurance companies obviously already do this.
But, I do believe, there is a need to modernize, especially in relation to the customer experience. I don’t see insurtech companies causing a complete revolution. But they are likely to play a big part in the evolution of insurance.
What do you think? Does insurance need to evolve? Is insurtech the answer to the customer experience issues? Are these insurtechs all marketing talk and lacking substance? Will the asset-rich insurance incumbents ultimately lead the way in the unfolding tech world evolution?
This post first appeared on the ProActuary blog here.
I included all the foundations of my insurtech thoughts; the elaboration of many discussions I have had since I published my article “Will fintech newcomers disrupt health and home insurance?” in August 2015; and a review of my five insurtech predictions from a year ago. Here is that look back, followed by a prediction on the hottest discussion at the start of this year: whether Amazon will enter the insurance industry:
Not everyone will prosper. Although many amazing insurtech companies are seeing great results and scaling up—and many will continue to enter the field—some will surely leave the game, as well.
I was dreaming of an insurtech unicorn’s exit. Well, dreams become reality sometimes: Well Zong An – the Chinese full stack insurtech – made its IPO with a $10 billion evaluation in fall 2017. Also, Travelers acquired Symply Business for $400 million.
On the other hand, Guevara left the game in the second half of the year. This winnowing down, a Darwinian “survival of the fittest,” should ultimately strengthen our industry.
This is the other side of the moon. I saw many initiatives doing a great job putting together a fantastic team and a sexy equity story, and some raised relevant capital, but their business models look (to me) not sustainable from an insurance perspective. I don’t want to claim that no one of them could succeed, and history has already shown how skepticism can be wrong. But I’m expecting to see some players use their great skills and the funding raised to change radically their business models.
In spring 2017, Trov did a round of financing of more than $40 million with a valuation higher than $300 million, but, from what we heard from the CEO at different conferences, the company is focusing its efforts on a back-end system that insurers can use on their customer base rather than on growing its customer base and portfolio of on-demand risks. Also, Zenefits went through a difficult 2017, stepped back from the brokerage business and started to license its technology as an SaaS (software as a service) player.
Prediction: Connected Insurance
My two cents are on any insurance solution that uses sensors for collecting data on the state of an insured risk and on telematics for remote transmission and management of data on the insurance value chain. A crazy prediction: Let’s consider the most mature use case, auto insurance telematics in Italy, which represents one of the best practices globally. In the country, I’m forecasting more than 7.5 million cars connected with an insurance provider by the end of 2017 (compared with 4.8 million cars connected at the end of 2015).
In line with the expectations, Italy’s insurance telematics policies had reached 7 million by the end of third quarter 2017, according to the IoT Insurance Observatory.
Prediction: Culture Shift
Incumbents are becoming always more interested in debating innovation and concretely testing new approaches, including collaboration with startups. I expect to see this new breeze surround old-style insurance institutions, with a growing awareness on how all the players in the insurance arena will be insurtech players.
A board member at one of the largest global reinsurers recently summarized the essence of insurance as assessing, dealing and accepting risks using the latest technologies. That’s one sign that the industry is coming around. We saw 3,800 more signs at InsureTech Connect, the world’s most prestigious insurtech conference. In 2016, the conference had 1,200 participants; in October 2017, it sold out with more than 3,800 attendees. Andrea and I were there on the stage and witnessed the incredible energy of those insurance professionals, regulators and startups.
Many value propositions are bundling risk covers and services, thus allowing the insurer to influence behaviors and prevent risk, contributing to the sustainability of the sector. In the next months, I expect to see some insurers becoming more relevant in the life of their clients and act as partners and not only as claim players.
The speeches of top insurance executives show the sector’s ambition to go in this direction. A slide projected on a wall is just that, however: in the field, we see very few examples of implementation.
What will happen in coming years?
Unfortunately, I damaged my laptop a few days ago so my crystal ball for the 2018 predictions is also not working…but I want to provide my middle-term view about the issue most-discussed at the end of 2017: Amazon activity in the insurance sector.
I predict Amazon will not disrupt the insurance sector. I believe it will do something – especially around insurance coverages on the products it sells – but will not be able to touch the core of the insurance profit pool on either commercial lines or personal lines (auto, property, life, health). My view is based on two main beliefs:
One of the key elements to be a successful insurer is underwriting discipline, as highlighted by Mario Greco recently or some famous Warren Buffett sentences in the past. Well, I believe that underwriting discipline conflicts with the culture of any tech giant. Amazon could buy an insurance company or hire talented people to close the gap on insurance knowledge, but the corporate culture doesn’t fit with the insurance business fundamentals.
In insurance, each market has its particular characteristics. One size doesn’t fit all — the opposite of how things work in social media or in internet businesses. I’m speaking about what the customers want (need) to buy in the different markets and how they want to buy it. In life insurance – the usual push product, which needs to be sold – digital channel at global levels represent less than 1% of new sales. But even look at auto insurance. The U.K. auto insurance market is controlled by online distribution, and, 10 years ago, insurance executives assumed that all Western European markets would follow the U.K. path within a few years. But auto insurance distribution in Europe continues to be dominated by traditional channels. You can argue that local carriers executed poorly, but even branches of U.K. insurance groups, with their great expertise, couldn’t duplicate the success that was had in the U.K.
I don’t think things cannot be changed. In fact, I believe there are a lot of opportunities to do things in a different way. But “one size fits all” doesn’t work, and I’m skeptical about the tech giants’ ability to deal with those local insurance characteristics. A tech giant based in Silicon Valley or with a European hub in Dublin will dirty its boots on insurance distribution (or other steps of the value chain).
It is an interesting time to be in the insurance sector, but I’m pretty confident GAFA (Google, Amazon, Facebook, Apple) and BAT (Baidu, Alibaba, Tencent) will not disrupt this sector.
Insurers are full of economy-speak these days. We have the gig economy, the digital economy, the data economy and the sharing economy. There is the economy of one, the economy of the many, the service economy and, of course, the experience economy. These concepts are all real and vital considerations for insurers, yet most deal with the implications of external impact, asking, “How will the world affect our business?”
In one striking case, however, we are faced with an alternative question: How will our operations affect our world? We are in the midst of the digital age race where survival and winning will require rapid adaptability and innovation. The digital age represents a seismic shift in the insurance industry, pushing a sometimes slow-to-adapt industry by challenging the traditional business models and assumptions of the past 30-50 years. The business models of the past will not meet the needs or expectations of the future for digital insurance. So insurers will be drawing upon the strengths of a new type of economy that will provide internal energy to the organization and competitive drive to the industry.
This economy is the platform economy.
Cloud platforms are the future because they are the core of revolutionized business models. They are proven. They are intelligent. They combine sought-after technologies. Best of all, they fit an industry that has been trying to become consumer-centric.
Of course, there is an issue. The cloud-based, digital-ready platforms within the platform economy are easiest to plant in uncultivated environments. Most established insurers are in the thick of modernization of a different type and scale. When faced with the options, many will choose digital answers that are painted over modernized frameworks. At the same time, they will be flirting with the idea that a real platform shift may represent a hyper-jump into insurance’s agile future.
The Rise of the Platform Economy
In our new thought leadership, Cloud Business Platform: The Path to Digital Insurance 2.0, we note that the use of big data, artificial intelligence and cloud computing is changing the nature of work and the structure of the economy. Companies such as Apple, Amazon, Netflix, Facebook, Google, Salesforce and Uber are creating online structures that enable a wide range of activities. They have opened the doors to radical changes in how we work, socialize, create value in the economy and compete for profits. This is why a digital platform economy is emerging.
Cloud business platforms represent a new era of impact and industry upheaval. A cloud business platform is one that can run key business applications and services to match the reality and requirements of the current business environment. That environment is characterized by constant disruption, heavy competition and growing market demands. Insurtech entrants are embarking upon business and technology initiatives that exploit untapped markets and address under- or un-met needs. Incumbents with outdated technologies are at a huge disadvantage because they are unable to respond with the flexibility, agility and speed that has become the hallmark of companies that are digital natives.
With investments in this market subset being tracked at just under $16 billion since 2010, insurers need to immediately take notice. Successful companies across all industries leverage technologies such as mobile, social and cloud to make better decisions, automate processes, strengthen their connection with customers/partners/channels and pursue innovation. They do all of this at an increasingly rapid pace, positioning them as “digital first” companies. The acceleration in the uptake of digital technologies and cloud foundations is a crucial first step to entering into the platform world and the shift to a new era of insurance we call Digital Insurance 2.0.
The implication from all this is that the digital age economy is powered by the platform revolution.
Digital Insurance 2.0
Traditional insurers must have digital daydreams now and then. What if we could have started like Amazon instead of like a traditional insurer? What if we had a digital native architecture like Netflix? Why couldn’t we have turned an app into a multi-billion-dollar business as Uber did? Google was disruptive because its framework and model were created to meet the future head on. How do we do what they have done while we are shackled to the constraints of insurance? The advantages these companies enjoy compared to the challenges faced by insurers can make digitalization of insurance seem like an impossible task. The reality is, however, that insurers now have every opportunity for freedom within traditional insurer constraints utilizing a Digital Insurance 2.0 framework.
What are the attributes of Digital Insurance 2.0? In every aspect, digital platforms are driving toward business models with fewer barriers and greater data access with improved flow. Digital insurance platforms share these traits:
Maximized effectiveness across the entire customer journey with deeper, personalized engagement;
Process digitization that improves operational efficiencies and customer experience;
The ingestion and use of digital data-driven insights for better decision-making and to actively identify customer needs;
The ability to rapidly roll out new products and capabilities while expanding into new markets or geographies; and
Quick adaptation to rapid changes.
The crucial technology underpinning digital insurance platforms is cloud-based. The idea that a 10-year old technology like cloud computing could provide new opportunities for insurers seems far-fetched.
Cloud platforms, however, have become the option of choice for Greenfield or startup operations that are offering digitally-enabled traditional insurance products — like Lemonade, Slice and TROV. Cloud platforms are the basis of a new generation of core systems based on a micro-services architecture that is needed for innovative new insurance products like on-demand and micro-insurance offerings.
Shifting from Products to Platforms
Since the beginning of automation, the insurance industry has seen fundamental design, architecture and technology shifts in insurance core software solutions. First, we had the monolithic solutions running on the mainframe from the 1960s to early 2000s. This was followed with the best of breed components in early 2000s for policy, billing and claims based on J2EE and service-oriented architecture — but with each still using different business, data and technology architectures. Next, beginning in the early 2010s, came the loosely coupled “suites,” inclusive of the policy, billing and claims components but with a consistent and common business, data and technology architecture.
Yet, through these transitions, they maintained a product-focused business architecture view, emphasizing policy and billing and claims capabilities and with implementation primarily on-premise or in a private hosted environment, often a “pseudo cloud environment.”
Today’s digital shift will require cloud-based platforms that provide a great promise to address new challenges and opportunities that enable insurers to disrupt their markets before they are disrupted. This requires a new thinking of our solutions… one that makes the transition from products to platforms and is underpinned by three key attributes: ecosystem-friendly, centered on customer experience and enabled by cloud computing.
Unfortunately, too many insurers are taking a page from their old business transformation playbooks and are expecting it to work in today’s digital age. They are forging a new path by “paving the old cow paths,” which is simply creating greater complexity while moving in a direction that will not serve them well in the future. Instead, insurers need to look outside their companies to a new cadre of digital leaders and imagine the art of the possible. What can insurers do now that they could not do before because of technology, customer and market boundary changes? Today’s emerging new competitors are answering these questions ahead of traditional insurers, positioning themselves as the new generation of market leaders in a time of significant disruption and change.
Fundamentally, to succeed in the digital age, an insurer’s strategy must focus on the following attributes:
Customer experience and engagement is priority No. 1 (People)
Business innovation is mandatory (Technology)
Ecosystems extend value (Market Boundaries)
Speed-to-value is the differentiator
For an effective digital transformation, it is important that core, data and digital capabilities are broken out into micro-services. They are then integrated back into the platform to provide a digital experience. Innovative, “digital-first” companies like Google, Amazon, Salesforce, Workday, Uber, Airbnb and Netflix have successfully used this architecture and technology that is disrupting industries. In the case of insurance, digital experiences are enabled by cloud economies of scale — an advantage that many digital-first companies do not have.
Why is this important? Because it will allow insurance companies to more rapidly position themselves in the digital era of Insurance 2.0 and enable them to:
Accelerate digital transformation to become digital era market leaders;
Accelerate innovation with new business models and products;
Accelerate ecosystem opportunities and value; and
Avert disruption or extinction by new competition within and outside the industry.
At the heart of this disruption is a shift from Insurance 1.0 to Digital Insurance 2.0 and a growing gap where innovative insurtech or existing insurers are taking advantage of a new generation of buyers with new needs and expectations and are capturing the opportunity to be the next market leaders in the digital age.
The path to a cloud business platform will evolve differently for each insurer undertaking it. Being open to operationalize around the cloud platform’s promise as a new business model paradigm acknowledges the role innovation will continue to play as insurers encounter future insurance ecosystems. The time for plans, preparation and execution is now — recognizing that the gap is widening and the timeframe to respond is closing.
Will established insurers suffer at the hands of tech-savvy, culture-savvy competition, or will they turn their digital daydreams into dynamic realities?
In a rapidly changing insurance market, new competitors do not play by the traditional rules. Insurers need to be a part of rewriting the rules, because there is less risk when you write the new rules.