How long did it take to sell 240,000 insurance policies online in 2017? Most insurance leaders across Asia guess “at least a few weeks.” The reality is that, in the age of digital, it only took one second. The record was set on Alibaba’s Tmall.com website on Nov. 11, 2017, by Zhong An, Chinese digital-first insurer and the most successful global insurtech so far. The total for that day was a staggering 860 million insurance policies sold online. The pace of Zhong An’s growth has given the much-needed wake-up call for the insurance industry.
Opening Act of Insurtech
Insurtech had emerged in 2012, and over the last six years the insurance industry has started to embrace it. While there’s been a lot of excitement about insurtech, most of the digital efforts so far have been largely incremental—insurance products are becoming slightly cheaper, their distribution becoming a little bit more digitally enabled and the back-office becoming marginally more efficient. The “opening act” focused on the low hanging opportunities that kickstarted the insurtech wave globally.
Now as opportunities susceptible to incremental tech solutions quickly dry up, many insurance managers are concluding that insurtech might have run its course, and, going forward, it will be back to business as usual for insurance. They will be in for a surprise!
The perfect analogy for the current stage of the insurance industry is a record label in the age before digital music. Record labels erroneously believed they were in the business of CDs, which drove them to focus on pushing pre-packaged products with a single feature that consumers wanted, delivered to customers via expensive and inefficient distribution music store networks.
The valuable lesson being that the full force of disruption did not come when records started selling CDs online but when Napster hacked through the oligopoly of record labels and force-unbundled their products. While Napster ultimately didn’t survive, it disrupted the status quo by pushing record labels to finally unbundle their products and make them available to digital-music distribution platforms such as iTunes and Spotify.
The latest trends coming out of China are pointing to an early shift in insurance fundamentals. So the current slowdown in insurtech is not an end, but the beginning of the ecosystem transition toward the “Spotify moment” for the insurance industry.
Main Act of Insurtech
The “Spotify moment” happens when a discretionary spending item, like music, gets transformed from an occasional luxury into a utility that millions of customers rely on as their trusted daily tool. The key trigger for a “Spotify moment” is a combination of frictionless customer experience, mass-customization that closely matches consumer’s needs, perceived value for money and access to wide variety of choices.
The “Spotify moment” will see insurance products simplified down to their core coverages and then embedded frictionlessly into digital ecosystem. This moment is now fast approaching, and it will bring with it the “main act” of insurtech.
In the main act, insurance will move closer to becoming a risk transfer utility and a seamless part of consumers’ day to day digital service consumption. Digital businesses will start to dynamically pick the coverages that are relevant to the specific “worry profile” of their users and allow users to add those alongside their core services.
Insurers have a narrowing window of opportunity to prepare or risk being sidelined into niche segments. Key strategic activities should include the following:
Product Sprints. Cross-functional teams will need to start executing rapid product unbundling and creation of digital-oriented stand-alone coverages. Currently, it takes insurers on average six to 12 months to launch a consumer insurance product. In the future, product design will need to happen in five-day sprints and become iterative, to identify best product-market fits within the digital ecosystem.
Opportunity Management. Evaluating digital opportunities by the same metrics as legacy business is a sure way to destroy any sign of innovation. Digital requires a strategic “VC” approach to opportunity selection and management. Placing many strategic bets will let organization learn and iterate quickly from both mistakes and successes.
Dedicating investment pool and digital P&L will keep accountability and ownership clear. Lastly, providing the best support for digital opportunities will maximize the probability of success. After all, would you rather lose your best resources to your self-disrupting digital team or to Amazon?
Startup Collaboration. Working with startups and approaching them as high-potential partners will give the organization the right cultural compass and position it well for the dynamic digital insurance ecosystem.
The future of insurance is digital; resistance is futile!
Growth rates remain robust but may be slowing a bit – are there issues on customer acquisition, or are carriers focusing more on underwriting profitability?
Gross loss ratios are generally stable or improving slightly but still unsustainable
Industry veterans are outperforming the newbies on loss ratio but not premium growth.
It will still take several years to become scale insurers
Reinsurers continue to subsidize losses
Executive compensation appears to be as expected – probably mostly in stock
The networking tips from the great Spanish swordsman Inigo Montoya got us thinking about the insurtech startups climbing the Cliffs of Insanity. While the lumbering incumbents are indeed powerful giants and have a head start on the climb, they are also carrying lots of weight. Violà, startup vs. incumbent.
The venture-backed, full-stack U.S. insurtech startups continued to gain in the second quarter through rapid premium growth and moderately lower underwriting losses. But they have yet to show the ability to win at a sword fight, battle of wits orROUS attack or to generate a sustainable loss ratio under 100%.
This is the third installment of our review of U.S. insurtech startup financials. Here are the 2017 edition and first quarter 2018 edition, which generated many social media discussions. For more information on where our data come from and important disclaimers and limitations, see the 2017 edition. Our scope is only property & casualty companies, so we don’t cover life, health (sorry, Mario), mortgage and title (sorry, Daniel). As before, we respect the management teams highly and admire these companies for earning the right to call themselves an “insurance company” — more on that below.
To date, we have tracked the three independent P&C startups most commonly associated with the label “insurtech”: Lemonade, Metromile and Root. This quarter we’ve looked at newly licensed Next Insurance (which wrote no premium) plus four subsidiaries of larger companies with a direct or insurtech focus.
For the real insurance nerds, here is a summary of the 2Q18 statutory financials of three venture-backed insurance companies. Only “insurance companies” have to file statutory results, not agents and brokers (i.e., most insurtech underwriters), which are not “insurance companies.” We present the summary here and quarterly details on each of the venture-backed companies at the very bottom.
And here are the four subsidiaries of big companies that are selling direct or have a claim on being an insurtech. These companies often depend on parents for reinsurance and infrastructure, so we show mainly the gross figures.
Growth rates remain robust but may be slowing a bit – are there issues on customer acquisition, or are carriers focusing more on underwriting profitability?
Absolute growth was led by Root, which nearly doubled its quarterly gross premium written in three months. Our composite grew at 37% quarter over quarter, but most of the companies had their slowest or second-slowest quarter in the last six.
Is this a slight slowing trend? Maybe. Some of the carriers may be seeing seasonal effects. If the pace of growth is really showing the first signs of slowing and not just a blip, the question is whether the slower growth is despite insurers’ efforts to grow or if they are deliberately focusing on profitability. The CEOs of Root and Lemonade have hinted that they are focusing more on underwriting (here, here), so is this affecting growth rates? Here is a point/counter-point. Decide for yourself and add your thoughts in the comments.
Point: Insurtechs are finding growth more difficult
Early adopters of direct insurance may already have been won; consumers with a high propensity to buy online may be located in the states that carriers chose first, and future customers may be harder to win.
It may be harder to sell the value proposition than expected, particularly if underwriting is being tightened and differentiation is narrowing (e.g. Lemonade’s giveback declined from 10% of premium in 2017 to a less-compelling 1.6% this year.)
Retention rates may be less than expected – either because customers defect or the carrier non-renews unprofitable customers.
Focusing on state expansion, team growth or fundraising distracts management.
Counter-point: Insurtechs could grow faster but are throttling growth to focus on profit
It is unlikely that companies with near-zero brand recognition have penetrated even a fraction of potential customers
Startups, their investors or their regulators may have realized that early customers were attracted to unsustainably low prices and produced high loss ratios. As they learn more about their customers, startups are being tougher on underwriting or are raising price in new state filings, meaning they turn away more potential customers through price or declining the application. Lemonade has admitted as much – see page 594 of its recent Oregon filling for this nugget:
The LCMF is a Loss Cost Modification Factor, and higher LCMFs may indicate higher pricing. In spot-checking some of Lemonade’s recent filings, we find that it is still filing a $5 minimum rate but is pricing higher than incumbents such as State Farm in certain zones, perils, etc. The company’s frequency being higher than average could be a function of (1) a bot-driven claims system inviting fraud, (2) having shlimazels for customers, (3) problems with the coverage or form or (4) the behavioral economics assumptions not working as intended. Recall Lemonade saying: “If you tried to create a system to bring out the worst in humans, it would look a lot like the insurance of today … We’ve spent recent years deepening our understanding of honesty and trust … Lemonade aims to reverse the adversarial dynamics that plague the industry, transforming both the economics and experience of insurance.”
What do you think? Tell us in the comments.
Status of the climb up the Cliffs of Insanity (direct premium written)
Focusing on the protagonists of our previous analysis Bigger and Redder, Root’s extraordinary growth means it has opened a big gap on Lemonade and is closing the gap with Metromile. This dynamic has helped Root achieve unicorn status, with the last $100 million round of funding at the iconic $1 billion valuation.
Root is not the first insurer to test a “try before you buy” (TBYB) approach based on an app, but it is the first insurer in the world to build a sizeable portfolio that way. Will Root succeed where others have abandoned their efforts or chosen different approaches such as usage-based pricing or discounts at renewal?
We commend Root for hitting the symbolic unicorn status so quickly. It appears to have a few years of runway to prove its model. By the time of an exit for the most recent investors, we believe that Root will be evaluated in greater part on the traditional KPIs that we look at in our analysis. A few weeks ago, Bain Capital – we are Bain & Co. alumni – offered $1.55 billion to buy Esure, a P&C insurer (mainly motor) selling online in the U.K. Esure wrote £880 million (annualized) premium in the first half of 2008 (or about US$1.1 billion) — and did so at a profit. Looking very simply at price-to-sales ratio (though we prefer ROE and price-to-book), Esure sold a bit over 1.4X, which simplistically corresponds to $700 million of premium for a valuation of $1 billion. Investors will need Root’s management to continue to grow rapidly – their 2Q18 run rate is $60 million. Whether they can do so, and achieve profitability along the way, will be a bellwether for demonstrating if current valuations are a bubble or smart bets on a rapidly changing industry.
Root’s $1 billion valuation (looking abroad, Chinese startup carrier Zhong An has a $7 billion valuation despite a 124% combined ratio in the first half) should cause companies in low-margin commodity lines like home/renters and auto that are operating as MGAs to consider becoming a carrier. One of the strongest arguments for being an MGA, not a carrier, is that MGAs are more highly valued because they trade on a multiple of earnings rather than book value. For the time being, the most valuable recent startups in insurance underwriting appear to be carriers, not MGAs.
Gross loss ratios are generally stable or improving slightly but still unsustainable
We prefer to look at gross loss ratio, i.e. before any premiums and losses are ceded to reinsurers, because sticking losses to reinsurers isn’t a sustainable long-term strategy. Eventually, gross loss ratios need to be sustainable. This quarter’s numbers are basically unchanged since last quarter, though Lemonade and Metromile have adverse development in this quarter, which raises the reported loss ratio. If our subject companies are shifting management attention toward profitability, it is not yet obvious in the figures. Improving underwriting results is like steering a slow-moving boat. You can turn the tiller, but the boat may not go the way you want, and it will take some time. Insurance policies last a year, rates are regulated by states and unsettled old losses can get worse if the legal environment changes.
Gross loss ratio evolution
Of the three venture-backed startups, Metromile’s figures have always showed the greatest profitability, and the company shows an improvement on the last quarter, shaving four points off the loss ratio.
Not all startups are experiencing unsustainable loss ratios. Hippo — a homeowner’s MGA — claimed to have produced better-than-market underwriting straight out of the gate, although we have no way to verify this.
Conference chatter is increasingly turning to profit, not just premium. We welcome these signs of maturity in the insurtech market, which were a big reason we started writing these articles and presenting at conferences.
Industry veterans are outperforming the newbies on loss ratio but not premium growth.
Two of the startup carriers sponsored by highly regarded underwriters are performing very well in terms of profit. BiBerk, which ultimately reports to Ajit Jain, recorded a respectable 70% gross Loss & LAE ratio in the quarter. Intrepid, where Rob Berkley sits on the board, turned in a 60% loss ratio (without LAE). Neither company has cracked even $4 million in quarterly premium, compared with Root at nearly $15 million, but is there something that Ajit and Rob know that the newbies don’t? Or are big public companies just less motivated to grow than venture-backed companies? Or is growth first really the right answer?
We’re not showing State Farm’s HiRoad entity because we’re less clear on how it reports and is managed by State Farm’s executives.
It will still take several years to become a scale insurer
All three venture-backed insurers increased expenses in the quarter. Root lost $11.6 million, a burn rate of $129,000 every day. That still gives two years of runway if the burn rate can be maintained. We get details on expenditures only in annual statements, so we cannot know for sure whether Root is spending on headcount, advertising or other overhead. LinkedIn pegs the company’s headcount at 117, with 30 people joining just in the second quarter. The company runs a referral program that has paid $860,000 to date. We speculate that $25 is the average referral bonus (so $50 because both parties get the bonus), which equates to 17,000 referrals. If the average premium is $750 (again, a guess; a bit below the national average), then the referral program has generated more than $13 million of premium at a CAC of $50, which would be an impressive 40% of all the premium in these first 18 months.
As the company expands exponentially to grow into its unicorn valuation, the question for investors is if the company can maintain exponential growth and bring down the loss ratio simultaneously, so growing without raising losses exponentially. It’s a difficult balance. In the meantime, investors added $45 million to the insurance company’s statutory surplus, but — because of losses — surplus stands at $43 million at the end of the quarter.
Root’s CEO says that the company is getting better at pricing and predicting the business, and that “conservativeness” in reserves means prior results were better than they appeared. We agree with Root that there is increasing evidence of conservative reserving, but not based on the figure it cited in the blog. Root says that only 66 cents on the premium dollar was paid as claims in 2017 (net) – which appears to exclude payments expected for open claims and losses incurred but not reported (“IBNR”). The more meaningful number, in our view, is that Root has recorded $344,000 of favorable development this year — meaning it has decided that its estimates of prior-year losses were indeed too high. The company earned $792,000 of premiums in 2017 and stated losses at Dec. 31, 2017, at $1.3 million, for a net loss ratio of 168%. If 2017 actual losses were in fact $986,000, as they are now estimated, then the developed loss ratio would be 124% — which is better but doesn’t greatly change the overall view of the year, which was small and volatile and hence of limited use to understand the company (but the best any outsider had at the time).
Root also deserves credit for being the only one of the three venture-backed companies to have made conservative loss picks. Lemonade continues to see its reserves be inadequate. The company had $2.1 million of reserves at the start of the year and has seen $245,000 of adverse development this year. Even a more experienced underwriter, Metromile, started the year with nearly $14 million of reserves and has recorded nearly $1.5 million of adverse development.
Stepping back from the noise of quarterly reserving, we still believe that the companies have to prove underwriting quality and do so with sustainable overheads and expenses. There’s still a long journey ahead, but the companies have the resources (in the form of cash at the holding company) to work on the challenge for years to come.
Reinsurers continue to subsidize losses
Lemonade continues to hand reinsurers $3.61 of losses for every $1 in premium in the quarter. Root handed reinsurers $1.41 of losses for every $1 in premium. Metromile — as with other metrics — is playing a safer game, and its reinsurers even made a bit of money in the quarter, getting $0.86 of losses for every $1 in premium.
Root disclosed that it changed its reinsurance program, reducing its quota share from 50% to 25% of premium effective June 1 through the remainder of 2018, meaning it will keep more premium (and losses) and possibly get less capital relief. The company retains a $1M xs $100K per-risk excess of loss treaty(*). Terms were not disclosed.
(*) Explanation of reinsurance basics: In quota share reinsurance, an insurer reinsures a percentage of its book – a fixed percentage of every dollar of premium and loss. The reinsurer pays the insurer a ceding commission to cover the insurer’s expenses and may assume unearned premiums (a liability), which may increase the insurer’s statutory capital. In excess-of-loss reinsurance, the reinsurer covers every dollar above a certain amount (the attachment point) up to a pre-defined limit. Excess of loss reinsurance can be written per event (such as a storm) or per risk. In Root’s per-risk reinsurance, the reinsurers appear to take each and every loss of more than $100,000 to the extent that the loss exceeds $100,000, up to $1.1 million. Here is a technical resource on the subject of using reinsurance for capital optimization.
Executive compensation appears to be as expected — likely mostly in stock
Many insurers are required to file an annual Supplemental Compensation Disclosure listing the name, title and compensation of their top 10 executives. The requirement was triggered by an investigation in 1905. (Here’s some trivia for a cocktail party at InsureTech Connect: That’s the same year Las Vegas was founded.)
The state of Nebraska will mail the information for all companies that operate in Nebraska to anyone who sends them $80. The hardest part is finding a computer with a CD-ROM drive. This is a sore point among insurers (the disclosure, not the need for a CD-ROM). Some insurers risk a fine instead of being transparent, such as by putting zeros for their compensation or putting a blank piece of paper over the data before mailing it. We like numbers, and there are reasons for the disclosure in an insurance context. Most insurers are subject to extensive regulation and disclosure of their rates, which need to be reasonable, which means not paying executives excessively and passing costs through in the rate. And, as Lemonade says, insurance is a business of mutual trust, which requires reasonable executive compensation practices, even if not overseen by shareholders. For more on the disclosure, click here.
Lemonade and Metromile are required to complete the disclosure, though Lemonade’s commitment to transparency doesn’t extend to putting the required names on the form. Their disclosures are below. The numbers are not huge — indeed, they are within what one would expect for a startup, where founders and early joiners get big equity grants with salaries that pay the bills but are often dramatically less than what a senior executive at an insurer typically earns. Interestingly, two of Lemonade’s founders sold shares in 2017, which is reflected under “all other compensation.” Metromile seems to have forgotten a few figures in its filing.
Note that both Lemonade and Metromile “allocate” compensation to companies within their holding company system, and in absence of information on how this allocation works, it is possible that these figures are materially understated because of the allocation.
Here is Lemonade Insurance:
One last note on compensation. Metromile filed its disclosure electronically, while Lemonade apparently walked down to the Post Office. We don’t know how to explain why a high-tech company like Lemonade would use snail mail. It mailed the disclosure on March 1, a Thursday, so it must have been #TBT in Lemonade’s offices.
Next Insurance U.S.
Digital small business insurer Next announced in May a plan to form a new carrier, and it has. The company was formed in September 2017, which indicates that the plan will have been in the works for a year before the carrier writes business. Next’s filing was all zeros except the surplus (or equity) in the company, which is more than $10 million. As of November 2017, the company’s business was described as follows:
“The Company will initially offer Contractors Insurance in three levels of coverage for 190 classes including Handymen, Carpenters, Electricians, HVAC Technicians, Landscapers, Janitors and Plumbers. All Contractor Insurance plans will include general liability ($5 million limit), professional liability ($3 million limit) and inland marine ($3 million limit) coverages. The Company will eventually write other types of small business classes including restaurants, daycares, personal training and photographers. These products are currently produced by licensed producers of Next Parent on other insurance carriers’ paper. … The company will eventually offer the following additional types of commercial insurance to small businesses with $3 million maximum limits, unless indicated otherwise: commercial property, commercial auto, director and officer liability, employment practices liability, business interruption, surety bond ($1 million limit), liquor liability, cyber, data breach ($5 million limit). The Company’s planned net retention for all lines will be 20% of the maximum limits.”
The remaining 80% of limits will be ceded to Munich Re Americas (MRAm).
The company’s directors are Guy Goldstein (the CEO), Nisim Tapiro (co-founder) and Dawn Puro. As of November 2017 (before the most recent $83 million fundraising), the company’s ownership was as follows:
What’s in a name?
A recent startup proclaims: “[Company name] Insurance is a [line of business] insurance company that provides [line of business] coverage to small businesses through a simple online experience. Offering A.M. Best A-rated insurance… direct to customers since 2018…”
That wording makes consumers think they’re dealing “direct” with an insurer, not an agent or broker, which is what this company is. Words matter in insurance, as illustrated in the first section of the California Insurance Code.
Insurer: “The person who undertakes to indemnify another by insurance.”
Broker: “A person who, for compensation and on behalf of another person transacts [insurance] … with, but not on behalf of, an admitted insurer.”
Agent: “A person authorized, by and on behalf of an insurer, to transact [insurance] … on behalf of an admitted insurance company.” [emphasis added].
“Congratulations, you’re innovating in a highly regulated industry”
Still on the subject of regulation, let’s have some fun with deficiency letters. Part of the joy of getting a new insurance program licensed in a new state is the exchanges with regulators. The insured makes a filing of a few hundred pages, the state reviews it and states its objections, and ‘round we go for, potentially, months. If you’re an insurance nerd, you might find these letters interesting. Particularly Lemonade’s, if only because of how the sausage-making of insurance contrasts with public statements about doing better for consumers.
A recent letter from Oregon to Lemonade had language like this: “Please explain why the insurer is choosing such broad exclusionary language; and if possible, provide an example of why this is necessary to have.”
A letter from Virginia last month listed nine pages of objections, even objecting to Lemonade’s definition of “hovercraft.” A sample of the objections:
“The Company will need to withdraw under the Special Limits, items (g), (h), (i), (j), and (k). The limitations the Company has outlined in these sections are more restrictive than the provisions in the minimum standards set forth in the [Virginia Administrative Code]. It is not permissible for the Company to place limitations or impose special limits that are more restrictive than the minimum standards set forth in the VAC. For items h and i, it is acceptable to impose a special limit or to exclude business property but it is not acceptable to impose a special limit or to exclude property used for business purposes. For example, if I take my laptop (business property) home to do some work, the business property can be limited or excluded. However, if I use my personal computer at home to do some Bureau of Insurance work, that is personal property being used for a business purpose and coverage cannot be limited or excluded.”
Score a point for the Virginia Bureau of Insurance for using human language.
All this, and we haven’t even gotten to Policy 2.0.
Maybe dealing with U.S. regulators is why Lemonade is now keen on international expansion?
The third quarter, which includes most of the summer, could be a big one for the companies in our coverage, because insurance often changes when people move. We are gratified by the increasing focus on insurance fundamentals in insurtech, and the lofty valuations recently seen in the sector will require satisfying both venture metrics as well as solid insurance fundamentals. The startups have the time and the resources but a long way to go to climb the Cliffs of Insanity. They are gaining on the incumbents, but will they make it to the top of the cliffs before running out of power? It’s not inconceivable. Tell us what you think in the comments.
This article was written by Matteo Carbone and Adrian Jones.
Blockchain is a revolutionary technology that is likely to have a far-reaching impact on business – on a par with the transformative effect of the internet. Not surprisingly, the huge potential promised by blockchain has prompted a flurry of research activity across different sectors as diverse organizations race to develop applications.
In this article, we’ll explore the many benefits that blockchain could bring to the insurance industry and the different challenges that will need to be overcome.
Blockchain has strong potential in the short and long term in several different areas, particularly where it links with emerging technologies such as the Internet of Things (IoT) and artificial intelligence (AI). But its potential for delivering new applications also depends on the development of blockchain technology itself. In the medium and short term, there are three categories where blockchain can be applied:
Data storage and exchange: Numerous data and files can be stored using blockchain. The technology provides for more secure, traceable records compared with current storage means.
Peer-to-peer electronic payment: Bitcoin (and other blockchain-based cash systems) is a cryptographic proof-based electronic payment system (instead of a trust-based one). This feature is highly efficient while ensuring transparent and traceable electronic transfer.
Smart contracts: Smart contracts are digital protocols whereby various parameters are set up in advance. When pre-set parameters are satisfied, smart contracts can execute various tasks without human intervention, greatly increasing efficiency.
Data storage and peer-to-peer electronic transfer are feasible blockchain applications for the short term. At this stage, the technical advantages of blockchain are mainly reflected in data exchange efficiencies, as well as larger-scale data acquisition.
Smart contracts via blockchain will play a more important role in the medium to long term. By that time, blockchain-based technology will have a far-reaching impact on the business model of insurance companies, industrial management models and institutional regulation. Of course, there will be challenges to overcome, and further technological innovation will be needed as blockchain’s own deficiencies or risks emerge during its evolution. But just like internet technology decades ago, blockchain promises to be a transformative technology.
Scenarios for blockchain applications in insurance
Proponents of blockchain technology believe it has the power to break the data acquisition barrier and revolutionize data sharing and data exchange in the industry. Small and medium-sized carriers could use blockchain-based technology to obtain higher-quality and more comprehensive data, giving them access to new opportunities and growth through more accurate pricing and product design in specific niche markets.
At the same time, blockchain-based insurance and reinsurance exchange platforms – that could include many parties – would also upgrade industry processes. For example, Zhong An Technology is currently working closely with reinsurers in Shanghai to try to establish a blockchain reinsurance exchange platform.
Scenario 1 – Mutual insurance
Blockchain is a peer-to-peer mechanism, via the DAO (decentralized autonomic organization) as a virtual decision-making center, and premiums paid by each and every insured are stored in the DAO. Each and every insured participant has the right to vote and therefore decide on final claim settlement when a claim is triggered. Blockchain makes the process transparent and highly efficient with secure premium collection, management and claim payment thanks to its decentralization.
In China, Trust Mutual Life has built a platform based on blockchain and biological identification technology. In August 2017, Trust Mutual Life launched a blockchain-based mutual life insurance product called a “Courtesy Help Account,” where every member can follow the fund. Plus, the platform reduces operational costs more than a traditional life insurance company of a similar size.
Scenario 2 – Microinsurance (short-term insurance products for certain specific scenarios)
An example of short-term insurance could be for car sharing or providers of booking and renting accommodation via the internet. Such products are mainly pre-purchased by the service provider and then purchased by end users. However, blockchain makes it possible for end users to purchase insurance coverage at any time based on their actual usage, inception and expiring time/date. In this way, records would be much more accurate and therefore avoid potential disputes.
Scenario 3 – Automatic financial settlement
The technical characteristics of blockchain have inherent advantages in financial settlement. Combined with smart contracts, blockchain can be applied efficiently and securely throughout the entire process of insurance underwriting, premium collection, indemnity payment and even reinsurance.
Blockchain has the potential to change the pattern of product design, pricing and claim services.
Parametric insurance (e.g. for agricultural insurance, delay-in-flight insurance, etc.):
Parametric insurance requires real-time data interface and exchange among different parties. Although it is an efficient form of risk transfer, it still has room for further cost improvement. Taking parametric agricultural insurance and flight delay insurance as examples, a lot of human intervention is still required for claim settlement and payment.
With blockchain, the efficiency of data exchange can be significantly improved. Smart contracts can also further reduce human intervention in terms of claim settlement, indemnity payment, etc., which will significantly reduce the insurance companies’ operating costs. In addition, operating efficiency is increased, boosting customer satisfaction.
Some Chinese insurers are already working on blockchain-based agricultural insurance. In March 2018, for example, PICC launched a blockchain-based livestock insurance platform. Currently, the project is limited to cows. Each cow is identified and registered in the blockchain-based platform during its whole life cycle. All necessary information is uploaded and stored in real time in the platform. Claims are triggered and settled automatically via blockchain. The platform also serves as an efficient and reliable food safety tracing system.
Auto insurance, homeowners insurance:
Blockchain has wider application scenarios in the field of auto insurance and homeowners insurance when combined with the IoT. There are applications from a single vehicle perspective as well as portfolios as a whole. From a standalone vehicle perspective, the complete history of each vehicle is stored in blocks. This feature allows insurers to have access to accurate information on each and every vehicle, plus maintenance, accidents, vehicle parts conditions, history and the owner’s driving habits. Such data facilitates more accurate pricing based on dedicated information for each and every single vehicle.
From the insured’s point of view, the combination of blockchain and IoT effectively simplifies the claims service process and claim settlement efficiency.
From the perspective of the overall vehicle, blockchain and IoT can drastically lower big data acquisition barriers, especially for small and medium-sized carriers. This will have a positive impact on pricing accuracy and new product development in auto insurance.
Taking usage-based insurance (UBI) for autos as an example, it’s technically possible to record and share the exact time and route of an insured vehicle, meaning that UBI policies could be priced much more accurately. Of course, insurers will have to consider how to respond in situations where built-in sensors in the insured vehicle break or a connection fails. Furthermore, insurance companies also have to decide whether an umbrella policy is needed on top of the UBI policy, to control their exposure when such situations occur.
Real-time information sharing of goods, cargo ships, vehicles, etc. is made possible with blockchain and the IoT. This will not only improve claims service efficiency but also help to reduce moral hazards.
In this regard, Maersk, EY Guardtime and XL Catlin recently launched a blockchain-based marine insurance platform cooperation project. Its aim is to facilitate data and information exchange, reduce operating costs among all stakeholders and improve the credibility and transparency of shared information.
International program placement and premium/claims management:
Blockchain-based technology allows insurance companies, brokers and corporate risk managers to improve the efficiency of international program settlement and daily management, at the same time reducing data errors from different countries and regions and avoiding currency exchange losses.
Coping with claim frauds:
Blockchain is already being applied to verify the validity of claims and the amount of adjustment. In Canada, the Quebec auto insurance regulator (Québec Auto Insurance) has implemented a blockchain-based information exchange platform. Driver information, vehicle registration information, the vehicle’s technical inspection result, auto insurance and claims information, etc. are all shared through the platform. The platform not only reduces insurance companies’ operating costs but also effectively helps to reduce fraud.
All insurance companies that have access to the platform receive a real-time notice when a vehicle is reported to be stolen. Insurance companies have full access to every vehicle’s technical information, which promotes more accurate pricing for individual policyholders.
Using a smart contract, the insured will automatically receive indemnity when conditions in the policy are met: Human intervention will not be needed to adjust the settlement. In the future, some insurance products will effectively be smart contracts whereby coverages, terms and conditions are actually the parameters of the smart contract. When the parameters are met, policies are triggered automatically by the smart contract and a record stored in the blockchain.
Business models like this will not only build higher trust in the insurance company but will also greatly increase its operational efficiency, reducing costs; it will also help to reduce moral hazard.
Internal management systems:
Internal management systems could be automated through use of blockchain and smart contracts, helping to improve management efficiency and reduce labor costs as well as the efficiency of compliance audit.
Decentralization strengthens information sharing and reduces the monopoly advantages that information asymmetry provides. Under such circumstances, insurance companies have to pay more attention to pricing, product development, claims services and even reputation risk. All this adds up to new challenges for the company management.
At the same time, every aspect of the insurance industry must be more focused on ensuring the accuracy of original information at the initial stage of its business. Knowing how to respond to false declarations from insureds will be crucial.
From a more macro perspective, “localized blocks” of data will be inevitable in the early phase of development in line with the pace of technical development and regulatory constraints.
In theory, it is impossible to hack blockchain, but data protection will be an issue for localized blocks. Therefore, higher cyber security protection will be required to protect these localized blocks.
The interaction of blockchain with other technologies could mean that existing intermediary roles are replaced by new technologies in different sectors. If the insurance industry wants to ensure the continuous development of the intermediary, it should address the possible disruptive risks to existing distribution business models posed by blockchain.
The necessary investment (both tangible and intangible costs) associated with adopting blockchain technology is a big consideration for many companies at this stage. Insurance companies and reinsurance companies operate numerous systems, and the decision to integrate blockchain-based technology/platform shouldn’t be taken lightly. At the current stage of blockchain evolution, this could be one of the biggest obstacles facing insurers.
Overall, blockchain is an inspiring prospect, and there is every reason to believe that this technological breakthrough will bring positive effects to individual insurers everywhere. But at the same time, we need to understand the mutual challenges that lie ahead and work together to promote our industry’s development in what promises to be an exciting new era.
This post, which describes recent news coming from insurtech and digital insurance in China, was written for Daily Fintech by Zarc Gin from Insurview from within China.
Happy New Year!
It has been a great honor for me to share insurtech developments in China since last November. I hope my posts here help you understand what’s happening in China, so you can either learn from the experiences or even develop businesses opportunities in China.
Today, I’m going to share the predictions we made about insurtech in China in 2018. They are a combination of opinions, ideas, trend analyses and hopes.
1. More funds, more IPOs
We have seen huge amount of funds pouring into digital insurance in China, and top startups are well-funded. Because of the successful IPO of Zhong An, investors are looking for the next big name in digital insurance. Top startups are also aiming for IPOs to catch up with Zhong An. So the fever of digital insurance will enter the next level, with huge funds and IPOs in 2018. My forecast is that Ping An Good Doctor, a Ping An Group subsidiary, will be the first insurtech IPO this year.
2. More digital health insurance
Premium income of health insurance has been growing quickly since 2011, with 404.25 billion RMB ($62.32 billion) income in 2016 and a 68% growth rate. Exalted Life was one of the most popular health policies from Zhong An in 2016. Ping An also launched E-home and E-life, which were well-received. The competition of digital health insurance got more intense in 2017 with the launch of Wesure. So, the competition will continue, and health insurance will be even more widely received in 2018.
Over the past two years, B2C startups were in fashion. But the digitalization of the whole insurance industry is far from accomplished, and the infrastructure of insurance is still in its early stage. Therefore, the potential for B2B startups will be big in 2018.
4. Rise of a new type of broker
CIRC has been trying to weaken bancassurance channels in China. This led insurers to seek the support from broker companies, and the insurance intermediary industry is expanding with this opportunity. Life brokers like Mingya and EverPro are growing quickly. Focusing on quality of individual brokers is their key difference from traditional broker companies. Digital broker companies like Tuniu are also growing rapidly with the help of e-commerce resources. We believe brokerage will have a new age in digital insurance, and both the life and property sectors will grow significantly in 2018.
5. New look on auto insurance
With regulation on auto insurance tightening, the combined ratios for auto insurers are increasing. To reverse the situation, auto insurers need to grab the digital opportunity and develop policies from the perspective of customers. We believe digital auto insurer will explore the possibilities in the digital age and make a difference to the current auto insurance.
6. Opportunity in data and information
Insurers are connected with their customers’ lives, so they will have access to all the data generated, such as health, habits and behaviors. Data can show insurers where the world is going, so there will be a huge opportunity in data collection and analysis.
The world is getting smaller thanks to the internet, both for China and for other countries. The interaction between China and the world is getting more and more frequent. Foreign insurtech companies such as Singapore-based CXA Group are exploring Chinese markets, and Chinese insurers like Fosun and CPIC are implementing their plans around the world.
8. Talent liquidity
Tencent, Alibaba and Baidu all entered digital insurance in 2017. They will heat up the talent liquidity in this industry. We will see an increasing combination between tech talents and insurance talents in the future.
The buying of insurance is going to change. The “sold, not bought” view of insurance distribution has run its course for many lines of business. Customer expectations have changed, and the inside-out approach to building silo-ed, exclusion-filled, fixed-term products just doesn’t cut it anymore.
For this month’s InsurTech Insights, let’s look at a new means of distribution that will fundamentally change the insurance supply chain, where insurance will be supplied through ecosystems as part of a wider proposition and not a solo purchase bought in isolation.
After all, people don’t set out to “buy” insurance per se. What they want is a safety net in case something untoward happens.
“Your fat margin is my opportunity”
The insurance supply chain is typically seen as a linear model. Insurance distribution starts with brokers, ARs and MGAs at the front end. Carriers underwrite risk and decide whether to pay a claim. And the buck stops with the reinsurers. Front to back, risk and premium move from one intermediary to another, each one taking its share. It’s a model that hasn’t really changed over the last century.
“Your fat margin is my opportunity” is the Jeff Bezos quote that defines the era of digital disruption. We now see tech-savvy entrepreneurs finding ways to “disrupt” established business models using digital and mobile to streamline out-of-date business models oozing with fat margin.
When you look at the world of insurance, it’s easy to imagine that Bezos was looking at the world’s largest industry when he made that quote. It’s no surprise that insurtech has become the new fintech.
The combination of many intermediaries in the supply chain, each one taking margin, together with the inefficient friction that goes with it has fueled the rise in insurtech. When you add in the shift in agency to the consumer (because of the likes of Bezos and how he built Amazon by putting the customer absolutely and unequivocally at the center), it is easy to see why insurance is a juicy target for digital disruptors.
As the insurance industry catches up and embraces the Fourth Industrial Revolution, we will see a redefining of the insurance supply chain. It’s started already.
It will evolve from the traditional linear model where risk and premium move front to back in a bi-directional flow. In its place, we see new supply chain models for insurance distribution at the front end with efficient management of risk capital at the back.
Of course, as a highly regulated industry, insurance faces a drag on change from the legislature. But just as regulators and lawmakers made adjustments to accommodate the fintech models for alternative finance, they will follow suit in insurtech. And why wouldn’t they?
In the new model for insurance distribution, the supply chain will co-exist with brands and within ecosystems unconnected to insurance.
Customers will be rated as individuals and not members of a risk pool. A greater share of premiums collected will be set aside to pay claims. Instead of sales commissions, there will be platform fees. Time to pay claims will become the KPI of choice for customers to rate their insurance experience. And as convenience replaces price as the key buying criterion, the way that insurance is distributed will change.
Automation is key for insurance distribution
In the new insurance supply chain, there will be fewer handoffs, less friction, less premium erosion. Just like with Amazon, the customer will be absolutely and unequivocally at the center of the ecosystem.
Trusted brands will own the customer relationship. These brands know the meaning of loyalty and will value these relationships highly. They also understand how expensive it is to build them in the first place, and how easily that can be lost.
Of course, someone will need to manage risk capital. This will be the domain of the reinsurers, with the role of the carrier becoming superfluous.
The reinsurers know better than anyone how to manage large pools of risk capital. They’ve been carrying the insurance industry for long enough. In the new insurance supply-chain, firms like Sherpa will own and manage the customer experience.
The Sherpa model is to charge a value-based annual fee to a customer in return for meeting all insurance needs. This removes sales commission from the equation.
The founder and CEO of Sherpa, Chris Kaye, explained to me, “Today, insurers pay sales commission for selling the insurance products that the insurers have created.
“We are turning that on its head and creating a membership organization that is unequivocally on the consumer’s side. No more commissions for products you don’t need, instead a flat fee to assure the risks that matter most are protected.”
How does this work in the Sherpa model?
On behalf of customers, Sherpa goes straight to Gen Re and buys insurance wholesale. Sherpa can distribute personalized insurance products to customers while packaging up parcels of risk at the back end.
This innovative approach is one example of how customer brands will be able to fine tune, personalise and price based on a whole set of new and different risk criteria.
So what? Well today, insurers create the products that they want to sell. Brokers do their best to find the best match of their customer’s needs to the fixed insurance products on offer. But customers end up paying for cover they don’t need. And they don’t always get the specific cover that they do want.
The new approach allows the brand, in this case Sherpa, to personalize the cover specific to the individual while packaging up modules of risk for the expert managers of risk capital.
Go west to see the future of insurance distribution
China’s ZhongAn epitomizes everything that is insurtech.
It is a 100% digital tech business with around 1,500 employees. More than half of them are developers, and none are in sales. The company also happen to provide insurance, and a lot of it!
In the first three years of trading, ZhongAn wrote more than 5 billion policies. It sold 200 million policies in one day alone last November during China’s annual online shopping fest!
The thing that makes ZhongAn the darling of insurtech is that 99% of all operations are automated. Quote, policy, premium collection and claims are all automated, which is why the company can process 18,000 policies a second.
But it’s ZhongAn’s approach to premium pricing and insurance distribution that really set it apart. First, the insurance business is built around retail ecosystems. The products are embedded in the customer buying process through retail sites. The company makes it super easy to buy insurance, simply by checking a box.
Next, the insurance is micro-priced, based on a personalized premium, unique to the individual customer.
ZhongAn does not use the law of large numbers to price risk premium. Instead, ZhongAn uses big data for dynamic and personalized pricing. There is no single price list for insurance products. Customers are risk-assessed individually and priced accordingly.
For ZhongAn, it is more important to build customer loyalty (aka stickiness) through speed and convenience.
A question I get asked a lot is: “Are these insurtechs an insurance firm or a tech firm?” It’s a great question, just like asking if AirBnB is a hotel chain or if Uber is a taxi firm.
Of course, there are many old diehards of the insurance industry who rail against that question and revert back the old mantra of “an insurance company is an insurance company.”
But the reality is that, in this rapidly changing digital world, the fundamental nature of providing a financial safety net is changing, too.
The old “insurance product,” designed by insurance companies to suit their own needs and aimed at customer segments that never claim, is on its way out.
In ZhongAn’s case, it is a tech company first, which is why it can take a fresh approach to insurance, unhampered by old ways of thinking.
When it comes to insurance distribution, ZhongAn’s business model is based on supplying insurance cover through an ecosystem partnership model. The company doesn’t pay broker fees or have to support a huge cost of sale. Instead, it has partnered with leading players that already have a customer base across many different market sectors.
This allows ZhongAn to directly embed insurance products into an online experience, making it really easy for the customer. Customers simply check a box to include the insurance cover. The premium is dynamically, real-time, micro-priced, unique to the customer at that moment. This is all about improving customer experience.
Insurance distribution is going to change, it’s just a matter of time
For many, it is hard to imagine a world where insurance could be any different than how it has been for the past 100 years. To them I say, cast your mind back to 1995.
It was only 20 odd years ago that people were talking about this thing called the World Wide Web and about how everything could change. A lot of it sounded science fiction and the stuff of fantasists at the time. Even so, nobody could have possibly imagined the full extent to which the world would change. And, over such a short span. All because of this thing called the internet.
Just as the supply chains of many industries have changed in the internet era, so will that of the insurance industry. It’s no long a question of “if,” but “when.”