Tag Archives: zhong an

Asia: Latest Source of Opportunities

We often get asked where you should go when you want to be inspired by insurance innovations. We always answer that people should look at Asia more seriously.

Think of giants like Ping An and Zhong An leading the way. Think of innovative solutions in the health sector such as Ping An’s Good Doctor and Tencent’s Waterdrop. Or ecosystem plays such as Rakuten, Grab and GoJek.

An important catalyst in developing the Asian insurance market is Invest Hong Kong. Hong Kong is one of the world’s leading fintech and insurtech hubs. Hong Kong has 165 authorized insurers (as of August 2020), and the total gross premiums of the industry was $74.4 billion in 2019 (9.1% growth compared with 2018). With 34 insurers having their regional headquarters in Hong Kong, the city serves as a breeding ground for fintechs and insurtechs that aim to conquer Asia. InvestHK plays an instrumental role in making all of that happen. That is why we sat down with Stephen Phillips, director-general of investment promotion at InvestHK, and King Leung, head of fintech at InvestHK, to have them share their thoughts on the flourishing insurance industry of Asia.

In your view, why is Asia taking the lead in accelerating digital transformation in the insurance industry?

Stephen Phillips: “The Asia-Pacific region is home to nearly one-third of the world’s population and several of the fastest-growing economies. Because of the sheer population size and growth, Asia is already playing a key role in shaping the future of insurance. More importantly, insurance penetration is less than 5% in India, Indonesia, mainland China and Malaysia, signaling a significant amount of unmet demand in Asia-Pacific’s developing markets. In Asia, the insurance industry is all about an inclusive growth mind-set, customer relevance and speed. Growth is established by expansion beyond the traditional distribution channels, product innovation and building new business ecosystems. Regarding customer relevance, in Asia, insurance is not seen as a compulsory product but as a primary product for savings and protection, playing a very relevant role in the lives of clients. Customer expectations in the Asia-Pacific region are the highest in the world, especially around digital interaction and experiences. Because of the growth mind-set, insurance markets in Asia are evolving quickly. To stay on top of fast-changing customer needs and market landscape, Asian insurers have learned to make decisions fast.”

Let’s talk about the Greater Bay Area, set up by the Chinese government to integrate Hong Kong, Shenzhen, Macau and eight southern mainland cities into a 72 million population market and a leading hub for innovation and economic growth. Can you share a bit more?

Stephen Phillips: “The Greater Bay Area (GBA) Initiative encourages further internationalization of China, where mainland Chinese customers can access more international financial products through Hong Kong. Likewise, overseas companies can access financial products and RMB assets from China. In May this year, the People’s Bank of China and the mainland Chinese regulators have announced an updated framework of four core areas and 26 specific segments of financial services where different extents of opening up and transformation among the 11 cities in GBA are encouraged going forward. With a GDP of $1.68 trillion in 2019, the GBA would be the 11th largest economy in the world, just behind Canada and ahead of Russia. There are endless possibilities in this exciting development!”

Which role will Cyberport play in the development of the startup ecosystem in Hong Kong?

King Leung: “Cyberport functions as Hong Kong’s digital technology community. It is home to about 1,400 digital tech companies, including more than 380 fintechs. It is the largest fintech and insurtech community in the city. This community also consists of many startups, including several of the newly licensed virtual banks, as well as established enterprises such as insurtech unicorn ZhongAn, AWS and Microsoft. These tech companies focus on several areas: AI, blockchain, big data, cybersecurity, insurtech, wealthtech, etc. Cyberport also runs its own Cyberport Macro Fund, where it co-invests in promising companies with other private investors.”

We’ve been there. It’s huge. Almost a city quarter.

King Leung: Yes – it’s a big business park consisting of four office buildings, a hotel and a retail entertainment complex. Cyberport is wholly owned by the Hong Kong government. The mission is to help youth, startups and entrepreneurs to grow in the digital industry. Cyberport is connecting them with investors and strategic partners such as local and international business partners, established insurance companies. Cyberport is Hong Kong’s flagship digital technology hub. It is committed to inspire innovation and accelerate digital adoption. We all believe in the importance of ecosystems. To develop and enhance the fintech and insurtech ecosystem, Cyberport provides local and overseas fintech companies a jump start to success, for instance, by offering full-range entrepreneurship support and value-added services.”

Apart from Cyberport, are there any other key stakeholders that help the overseas insurtech companies launching in Hong Kong?

Stephen Phillips: “The Insurance Authority (IA), the Hong Kong insurance regulator, has been closely monitoring the development and application of technology in the insurance industry and proactively assisting market participants to tackle insurtech-related regulatory issues. IA’s Fast Track program offers a dedicated channel for new authorization applications from insurers using solely digital distribution channels (i.e., without the involvement of intermediaries) to provide insurance products with a simple structure and high protection element. Between December 2018 and May 2020, IA has granted four digital insurance licenses (two life and two non-life). In addition, the IA launched an insurtech sandbox in September 2017 to facilitate a pilot run of innovative insurtech applications by authorized insurers to be applied in their business operations. In addition to IA, Hong Kong Science and Technology Park (HKSTP) also acts as an important facilitator to Hong Kong fintech businesses. Its Incu-App program, for instance, provides startup support to companies working on business innovation during their inception stage, with a full range of tailor-made support services and facilities that will help drive their business to the next level of development.”


How will China’s insurance industry benefit from the flourishing insurtech ecosystem in Hong Kong?

Stephen Phillips: “The Greater Bay Area will introduce more and more opportunities. In May 2020, the People’s Bank of China and the leading regulators announced an updated blueprint for opening up the financial services sector in the GBA across four core areas and 26 financial services segments, including insurance. As the population in the Greater Bay Area has one of the highest GDP per capita in China and are more aware of insurance, demand for insurance will naturally increase. This trend will lead to more insurance companies setting up and expanding their presence in GBA. As more international competitors enter the market, more choices are made available to the GBA customers. At the same time, the intensified competition will lead to more innovative digital features and better customer-centered solutions. To get a piece of China’s booming insurance industry, insurers must leverage technology. To ensure that insurers market growth and scalability, digital distribution channels become a crucial success element.”

The flourishing Asian markets are obviously attractive to fintechs and insurtechs …

King Leung: “Definitely. The Hong Kong fintech and insurtech scene has experienced incredible growth in recent years. As of 2019, more than 600 fintech companies have set up their businesses in the city, among which 53% see Hong Kong as a base for global expansion and 51% operate/plan to expand in the Greater Bay Area. The world-class capital and private investment market in Hong Kong also provide the necessary fuel to accelerate the growth opportunities. From 2014 to 2019, private investment in HK-based fintech companies reached a total of $1.5 billion. In addition, over $10 billion have been raised through fintech IPOs. In 2019, Hong Kong also invested $1.3 billion in nurturing local tech talent, and $64.1 million in attracting overseas tech talent. To support the fintech community on employment amid the COVID-19 pandemic and nurture talent, the government launched the Fintech Anti-epidemic Scheme for Talent development (FAST), where fintech companies will be entitled to a subsidy for talent recruitment. With a total funding amount of $15.4 million, the scheme is designed to create 1,000 fintech-related jobs. Hong Kong (and surrounding cities in the GBA) are home to a huge and diverse talent pool in finance and technology. The local education system is also internationally acclaimed; many universities and institutions have launched fintech-specific programs from BSc to PhD to online professional training in recent years. This talent pool equipped with the latest skills and knowledge in finance and technology provides Hong Kong with a strong foundation for further fintech development going forward.”

As a global city, Hong Kong is attracting people from all over the globe.

Stephen Phillips: “Hong Kong also enjoys an ideal geographical location in Asia. This enables businesses to seize opportunities in the Greater Bay Area and throughout the rest of the region. Many people are drawn to Hong Kong because of the vibrant lifestyle, beautiful scenery, convenience and welcoming international community. The international business community reflects this, allowing businesses of all types to thrive in the city. Hong Kong is also one of the safest cities in the world to live in due to its relatively crime-free society.”

Hong Kong has been recognized as one of the world’s most competitive economies. The ranking reflects Hong Kong’s consistent strides in building a favorable business environment. Can you describe the benefits of Hong Kong’s open business environment?

King Leung: “Opening businesses, for instance, is easy and remains inexpensive. Foreigners can be sole directors or shareholders in a Hong Kong company. There are no restrictions of nationality. InvestHK makes it easy for companies to open up their offices in Hong Kong with all sorts of free facilitation services. InvestHK assists with opening bank accounts, arranging work visas and work permits, helping you find the most optimal office space, etc. and introducing you to the key insurtech stakeholders. We also just kicked off a Global Fast Track program in mid-August for startups around the world as a key element of our flagship annual Hong Kong Fintech Week event on Nov. 2 to 6. We invite fintechs from around the world to participate in the FastTrack program, where we offer support from government funding for business matching with financial services institutions and private fintech investors. The Hong Kong government also encourages business development by providing one of the most tax-friendly systems in the world. And, most importantly, business opportunities can be maximized by taking advantage of the business infrastructure in place. People are open to do business. We’re more than happy to help make the right connections and help you succeed in Hong Kong.”

About InvestHK

Invest Hong Kong (InvestHK) is a department of the Hong Kong Special Administrative Region Government tasked with attracting foreign direct investment to Hong Kong and providing overseas and mainland companies and entrepreneurs with information, advice and services they need to succeed in the city. It works with companies of all sizes, from startups and SMEs to multinationals, and it supports them in every stage from planning, setting up to promotion and expansion.

The staff stationed in 32 offices in key markets worldwide reach out to potential investors and work to strengthen and promote Hong Kong’s status as Asia’s premier investment destination. All of the services are free, customized and confidential and based on the core values of passion, integrity and professionalism. InvestHK strives to provide the best customer service combined with business friendliness and responsiveness.

When the Hong Kong government decided to step up the focus on fintech and insurtech promotion, InvestHK set up a dedicated fintech team with physical presence in Hong Kong, Guangdong-Hong Kong-Macao Greater Bay Area, London and San Francisco to engage with fintech and insurtech companies to raise the profile of Hong Kong as a fintech and insurtech hub. With their vast network in the private sector, they are a conduit for business.

Written by Roger Peverelli and Reggy de Feniks, Founder of The DIA Community. Originally published here.

Insurtech’s Act 2: About to Start

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.

See also: Digital Insurance 2.0: Benefits  

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.

See also: Stretching the Bounds of Digital Insurance  

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!

Second Quarter in Insurtech Financials

Summary

  1. Growth rates remain robust but may be slowing a bit – are there issues on customer acquisition, or are carriers focusing more on underwriting profitability?
  2. Gross loss ratios are generally stable or improving slightly but still unsustainable
  3. Industry veterans are outperforming the newbies on loss ratio but not premium growth.
  4. It will still take several years to become scale insurers
  5. Reinsurers continue to subsidize losses
  6. Executive compensation appears to be as expected – probably mostly in stock

Context

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 or ROUS 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.

Overall results

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.

See also: The First Quarter in Insurtech Financials  

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.

See also: Can Insurtech Rescue Insurance?  

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:

Metromile 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].

#themoreyouknow

“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.”

Hmm…

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?

Meanwhile, the interviewers at Bloomberg TV have been reading our articles.

See also: Startups Take a Seat at the Table  

Looking forward

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’s Future in Insurance

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.

Overview

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.

See also: The Opportunities in Blockchain  

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

Macro level

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.

Micro level

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.

Cargo insurance:

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.

Claims settlement:

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.

See also: How Insurance and Blockchain Fit  

Challenges and problems

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.

Download PDF version for endnotes and further reading.

8 Insurtech Predictions for China in 2018

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.

See also: How Is Insurtech Different in Asia?  

3. Opportunities for B2B startups

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.

See also: Top 10 Insurtech Trends for 2018  

7. Globalization

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.

This article first appeared at Daily Fintech.