InsurTech: Innovation in the P&C insurance space

“InsurTech” is the mash-up term denoting initiatives at the intersection of insurance and technology, which tend to attract large amounts of both money and hype. The money? According to research firm CB Insights, investors poured nearly $1.7 billion into insurance technology startup deals globally in 2016, with the number of funding deals rising from just over two per month in 2011 to nearly 15 per month in 2016. The hype? It’s hard to find an insurance trade magazine without a cover story on InsurTech and headlines posing intriguing questions such as “Will Technology Make Insurance Obsolete?”¹ To determine what may be the height of the hype curve for InsurTech, it may be valuable to pause and survey the current landscape.

What is InsurTech?

“InsurTech” or “InsTech” is the insurance-related offshoot of “FinTech,” the term used to describe the combination of financial services, such as banking and investments, and advanced technology. While most commonly used to describe start-up ventures, it can also be applied to initiatives within an established company, such as the recent deployment of artificial intelligence (AI) in claim processing initiated by the Zurich Group. Zurich is using AI to review paperwork, such as medical reports, for personal injury claims and believes its use has significantly sped up claim processing time.

InsurTech startup entities tend to have several key common characteristics:

• Use of faster/smarter technology: As the name implies, InsurTech companies are largely defined by their use of advanced technology in the drive to redefine the insurance/risk management process. These companies are not anchored to antiquated data and processing systems as are many legacy insurers. InsurTech companies tend to rely on smartphone apps, AI, bots, and cloud computing.
• A culture of innovation and creativity: The creative leaders forming and driving most InsurTech companies are innovators and entrepreneurs who are not bound by (and may not even be aware of) accepted precepts of the insurance industry. They are eager to try new approaches and are not afraid to “fail fast.” They have broken the rules before in other industries and have found that it often leads to success.
• Dedication to improving customer experience: InsurTech companies are often hyper-focused on improving the customer experience. They grew up and live in a connected world driven by near instant gratification enabled by technology. Google search, Amazon Prime delivery, Uber car service, and Apple product design provide these experts with high expectation levels in regard to customer experience, which they intend to bring to the insurance industry.
• Cool one-word names: InsurTech companies tend to brand themselves with simple one-word names that are meant to be memorable and to resonate with customers. What could be more refreshing than some “Lemonade?” In the health insurance field, who can be more reliable than your friend “Oscar?” Gone are the days of National Reliable Trusty Insurance Company. Trust and reliability are inferred from the efficient and pleasing technological experience the new startups offer. “We are smart,” these experiences imply. “We can make this easy and understandable—so you can trust us.”

Why is interest in InsurTech exploding now? The big Ts...

The current interest in InsurTech is driven by a perfect alignment of four key elements, the “big Ts”—technology, talent, treasure, and a tempting target.

• Technology: Many of the ideas behind InsurTech startups are not new. It’s just that they were not feasible previously because of shortcomings in technology—even for the technology available as recently as four to five years ago. The improvements in faster, cheaper, smarter computing power, greater storage capability, and large blocks of external but “usable” big data have allowed many seasoned ideas to come to fruition.
• Talent: Many of the entrepreneurs behind today’s InsurTech initiatives migrated to insurance from other industries where they successfully implemented technological innovation. As these other industries get more crowded and mature, innovators are bringing their playbooks to more wide open spaces—the insurance industry. Visit the websites or read the backstories of many InsurTech startups and you will likely find references to prior successes in FinTech or at least a Stanford or MIT pedigree.
• Treasure: At the end of 2016, policyholder surplus in the U.S. property and casualty (P&C) industry stood near record highs of $700 billion. According to the Insurance Information Institute, the industry now has $1 of surplus for every 77 cents of net written premium, close to the strongest claim-paying status in its history. While this is good news from an insurer solvency perspective, the abundance of surplus relative to premium is driving a sustained soft market with low return on equity. Many insurers are responding to these conditions by merging with or acquiring competitors, buying stock back, or raising distributed dividends. It has proved difficult to put any excess capital to work directly in company operations. This had led several insurers to invest in internal technology and digital innovation initiatives as well as starting their own corporate venture capital funds to invest in InsurTech startups. More and more of the investors in InsurTech ventures are the investment arms of legacy insurers and reinsurers. Because of the lack of attractive standard alternatives, these investments may be the best options.
• Tempting target: The insurance industry is huge, with over a trillion dollars of net premiums written annually—over $500 billion in the P&C industry alone. Couple the size of the industry with a reputation for risk aversion and conservatism, and you have a tempting target for innovators, disruptors, and entrepreneurs.

What are InsurTech companies actually doing?

Most InsurTech startup deals to date have focused on P&C insurance within the U.S. market and in particular on non-risk-bearing aspects of the insurance industry such as:

• Front-end policy services: Front-end policy services focus on making the finding/applying/purchasing/paying part of the insurance transaction easier, faster, and more understandable. InsurTech companies often quote how fast they can provide or bind quotes or the high number of options they can provide. They try to avoid having users input too much information manually by relying on external public databases to gain the necessary information. A major goal is to reduce the expense of “high touch” underwriting. This approach is more effective in personal lines or for small or medium commercial entities, where there are similarities among risks. Insurify is an example of a virtual insurance agent that relies on consumers answering a small number of questions and texting a photo of their license plates to receive personal auto insurance rate quotes in under two minutes.
• Back-end claim services: Startups in this area focus on claim resolution services—making it easier to submit, adjust, and pay claims, usually while applying advanced fraud detection algorithms. SnapSheet, for example, allows insureds to settle claims virtually. Claimants send photos of their car damage to SnapSheet’s appraisers, who work with insurers and body shops to settle the claim in an expedited manner.
• Customer experience: While InsurTech companies focused on front-end services seek to make policy acquisition faster with minimal interaction, other companies are focused on the opposite—keeping policyholders more “engaged” with their insurers to encourage loyalty, retention, and loss mitigation. For example, this can include efforts to turn risk mitigation into a game through “gamification.” Driving behavior can be monitored through mobile phone apps that award scores for each driving session and offer rewards of lower premiums or tie-in merchandise for scores reflecting better safer driving.
• Business intelligence: Companies focused in this area primarily seek to develop new sources of data relevant to the insurance industry or unique tools to analyze data already available. New sources include smartphone auto telematics, connected home data, data from wearables, and data from “smart objects.” Mnubo provides analytics that generate insights from sensor-based data and external data sources.

Exceptions to the rule?

While most InsurTech startups focus on areas that avoid “insurance risk” (the responsibility for paying a claim if an insured event occurs), there are some startups functioning as full insurance companies. Some examples of these exceptions include:

• Lemonade
  Lemonade is a new “peer to peer” (P2P) insurer that invites users to form small groups of policyholders who pay premiums into a pool to pay claims, with each member’s designee (a charity, school, etc.) receiving a share of any profits at the end of the policy period. Proclaiming “instant everything,” Lemonade uses AI bots to power its app, which can insure you in 90 seconds and pay a claim in three minutes. First licensed in New York, Lemonade’s initial focus has been on homeowners and rental insurance policies.
• Metromile
  Metromile is a “pay per mile” or usage-based personal auto insurer that charges policyholders a flat monthly fee plus a per mile fee, which varies based on location, years driving, and other factors. Besides its unique approach to pricing, its new automated claim service allows policyholders to file a claim entirely from their mobile phones or an online dashboard, with some claims resolved in under an hour. Metromile started off as a managing general agent partnering with legacy insurers before establishing Metromile Insurance Company in 2016, which is now licensed nationwide.

Why aren’t there more startups looking to take on insurance risk?

The key obstacles to more InsurTech entities seeking to bear insurance risk are regulation and capital requirements. Insurance is regulated through a system that can be confusing to new entities, which is due to rules and regulations that vary by state. Becoming licensed to sell insurance in each state and keeping up with compliance in this system can be time consuming, expensive, and drain resources.

Insurance regulators also require material amounts of capital or surplus to be held by entities that choose to take on insurance risk as they are selling a promise for potential future payments and need to have adequate funds to do so. Most startups do not have large amounts of capital at their disposal. As startups in any field tend to be risky (they fail more often than they succeed), investors try to avoid concentrating their money in any one startup entity and prefer to diversify across multiple entities, hoping that one will be successful. This funding approach limits the amount of money available to startups for use as surplus.

How are established legacy insurers reacting to all the InsurTech hype?

According to a recent survey by PwC, 90% of insurers fear they will lose business to a tech startup. One of the main advantages of established insurers has always been large amounts of detailed risk data collected over many years that can be used for underwriting and pricing. However, as the type and amount of alternative data relevant to insurance continues to explode, it is possible and likely this advantage will not be sustainable.

Many legacy insurers, however, are now shifting their view of InsurTech entities from competitors to partners. These insurers are teaming up with startups and players outside the insurance sector to speed up digital innovation through in-house incubators, accelerators, and innovation labs. These labs typically provide technical support, guidance, and connections to industry experts. State Farm, for example, fosters innovative research through its “485 Think Lab,” which focuses on “collaborative ideation.”

Other legacy insurers are putting their capital to use by forming corporate venture capital arms to invest in tech startups. Entities such as USAA Ventures, AXA Strategic Investors, and XL Innovate not only invest capital but also provide strategic support to startups. Investing relatively small amounts in multiple startups gives the legacy insurers supporting these funds access to potential breakthroughs in numerous areas of interest to them.

While many legacy insurance companies are jumping into InsurTech investments, many are not. Some companies, such as many small- to mid-size insurers, may not have the funds to invest and may have to wait until the innovations are proven and more widely available. By then, of course, it may be too late for them to gain any advantage. Some larger insurers have been silent as well on their efforts, which may be strategy, skepticism, or inertia. It is difficult to know if they are prudent in their patience or if they are the next Blockbuster Video.

What does the future hold for InsurTech?

While the number of InsurTech deals may have peaked in the first quarter of 2016 (59 deals for $783 million), the market still appears to be very active (38 deals for $283 million in the first quarter of 2017). There are several existing corporate venture capital funds with investible capital to spare, and new independent funds are currently forming specifically to invest in InsurTech ventures. As a result, it is likely there will be material amounts of funding available for investment in new InsurTech ventures over the course of at least the next three to five years.

In regard to InsurTech entities that have already received funding, each successive wave of new entrants brings potential competitors with newer ideas and potentially “fresher” technology, seeking to address many of the same issues but in different ways. While the insurance space is a large one, there are bound to be more instances of startups bumping into each other as the numbers increase. Who wins the competition among the startups will ultimately be decided by their target markets.

When will we know what success looks like for InsurTech? Some experts project at least a three-year lag between technological innovations and an industry’s ability to properly digest and put that technology to use in a meaningful way. In 2016, S&P Global Ratings wrote that the material effects of InsurTech may only start to emerge in 10 years’ time. The time horizon for determining financial success for InsurTech startups may likely be four to five years—the typical time frame expected for a “liquidity event” such as a strategic sale or initial public offering by venture capital investors. This time frame would be consistent with the time frame for many InsurTech entrepreneurs who, based on their histories, prefer to build, sell, and exit to the next challenge as quickly as possible.

While there is a real fear of potential financial disruption from these startups in many insurer boardrooms, the feeling may be overblown in the short term due to the current small size, limited data sets, and limited financial resources of the startups.

The lasting long-term impact of the InsurTech movement will likely be an overall better, more efficient risk management experience. Greater focus on loss prevention will result in fewer claims along with easier, faster, and cheaper access to any remaining necessary insurance coverage—an overall better policyholder experience.