SECTOR SPOTLIGHT is a monthly series on FinTechtris that explores a specific sector within the expansive FinTech space by defining its history, frameworks, business model, leading companies, and outlook.

The insurance industry is still using legacy processes and business models — making this field ripe for innovation and disruption. Similar to what we’ve experienced in the financial services industry, technology is changing this area for the better — however, regulation, legacy standards, and compliance requirements are reducing the pace and depth of improvements.

The InsurTech (insurance technology) sector of FinTech (financial technology) is addressing the current challenges and largest opportunities in the insurance industry. Following a similar pattern towards disruption, legacy insurance companies are concerned of an onslaught of innovation changing their industry (74% of insurance firms believe part of their business is at risk, according to a Global FinTech Survey by PwC). Changes in economic models (from the “sharing economy”) and technology (such as machine learning and artificial intelligence) are ushering in new ways the industry operates. This month’s SECTOR SPOTLIGHT focuses on InsurTech disrupting the insurance industry, discussing its beginnings and new business models, and which top companies are paving the way for innovation.

SUMMARY:

• InsurTech emerged from FinTech, leveraging similar frameworks and trends to disrupt the insurance industry;

• Dynamic changes in consumer preferences and technology spurred the growth of InsurTech companies;

• Goals of incumbent insurance providers focus on adding minor features, not embracing industry trends;

• Innovative insurtechs have emerged in all subsets of insurance (home, auto, health, and life insurance);

• There are 10 major industry influences to look out for in this new decade — all being led by InsurTech.

What is InsurTech?

Insurance is one of the most historic industries in the world, dating back to the times of merchant traders over 2000 years ago. Developed as a method to manage risk against financial loss, it has evolved to all activities of business, work, and life. Traditionally, actuarial tables were used to assign prospective customers a risk category and group. Each group is risk-adjusted accordingly to confirm that the group policy as a whole is profitable. The gap for consumers in this grouping model is that some policyholders pay more than they should. Established insurance companies have no need to change as revenue is tied to the financial success of this model, growth in monthly premiums, and overall market experience.

Back in 2010, Friendsurance (a startup based in Berlin) was one of the ‘first-to-market’ in combining technology and insurance. The company launched the first peer-to-peer (P2P) insurance community based on individuals supporting one another in the event of a loss. The premise was to combine small groups into a large pool and offer added services such as bonuses or discounts. A few other companies emerged at this time as well, such as Trov (on-demand property insurer) and CoverHound (a price comparison tool).

InsurTech is the use of technology to drive efficiency and cost savings in the current industry models of insurance. Evolving as a sector within FinTech, its the fusion of insurance and technology — an area that industry insiders and venture capital teams believe is ready for dynamic change and restructure. Themes that are parallel to both InsurTech and FinTech:

• Outdated business models that favored institutions’ bottom line over a customer’s well-being;

• Customer demand for improved access and features, and customized advice from providers;

• Newly available technology that optimized existing business frameworks by removing the need of legacy infrastructure.

InsurTech companies grow in popularity as their innovative models and processes have been tested and proven, while established institutions cautiously wait on the sidelines and maintain their customer base with nominal upgrades.

The demand for insurtech

Established insurance companies seek the customer-centric focus of startups as a response to disruption. However, this reactive approach creates a gap in responding to trends in this new era of insurance. InsurTech companies have a foundation on being customer-first with a focus on changing everything that’s slow and inefficient in the industry.

Similar to financial services, insurance isn’t a shopping journey that customers look forward to, or a choice that comes up regularly. It’s often viewed as a difficult, dreadful process full of aggressive tactics and sales associates hungry for commissions and bonus. Don’t forget about the documents that need to be reviewed and signed off! Looking back 15 years ago, a thorough review of an insurance carrier would take weeks of manual research and comparison, usually through phone calls, meetings with agents, or mailed materials. It’s no wonder that people would delay buying insurance and resist switching providers — it was too painful! This pain can be summarized in three opportunities:

• Making coverage more accessible and convenient: conducting research, comparing options, and the ability to purchase anywhere (via online or mobile devices). This saves time for customers to take a closer look at coverage details and choose a provider that best meets their needs;

• Lowering costs for insurers and policyholders: leveraging actual data on users and analysis leads to customized pricing. Accessing GPS trackers and other IoT (Internet of Things) based devices provides real-time data to better assess risk. If risk can be specified, pricing can be lowered accordingly;

• Expediting the issuance of insurance coverage: based on the type of insurance, applications would take days or weeks. A customer on a deadline would have to apply at multiple providers at once and hope one would approve them at a reasonable price.

Unbiased comparison sites and streamlined online application processes were a welcomed first step for InsurTech, with much more innovation on the horizon. Venture capitalists are looking closely at start-ups dedicated to reinventing the way people buy insurance, and how insurers manage risk and bring new solutions (for trends like shared economies). The next level of innovation is focused on further improving how insurance meets new needs, leverages better data, and enhances underwriting.

INSURTECH driving INNOVATION

Due to the speed of social and technology developments, non-insurance specific trends (such as shared economies, self-driving cars, robotics and medical advances) have the potential to disrupt the market earlier than expected. The potential impact and depth of these trends forced insurers to start exploring opportunities now and position themselves as front-runners:

1. Shared and on-demand economies: Insurers are becoming familiar with the implications of shared economies, especially when it comes to car-sharing and short-term property rentals. Car-sharing memberships are expected to reach 26M by 2020, with revenue growth of 23% from 2013 - 2025. More consumers are becoming low-frequency drivers or choosing not to own cars at all. The insurance landscape is focused on alternative structures to maintain existing customer relationships.

2. Self-driving – over the next 5-10 years, driver-assisted and self-driving will become mainstream and drivers will have the option of switching from “hands-on” to “hands-off” driving. Companies will assign different risk profiles for each driving trip, slicing the risk and pricing for customers. Models similar to usage-based coverage will develop based on driving mode.

3. Risk reduction/elimination – as tech in autonomous vehicles undergoes further testing to reduce accidents, the rollout of enhanced awareness technologies results in smaller margin of accidents (or none at all). Google’s autonomous vehicle in self-driving mode had a ratio ~0.7 accidents per million VMT (vehicle miles traveled), less than half of the US average of ~2.0 per million VMT. Lower accident rates will reduce the need for comprehensive (and expensive) coverage.

4. Artificial intelligence enhanced improvements – AI is already improving efficiencies in customer interaction and conversion ratios, reducing resolution times, and increasing a new product’s speed-to-market. Improvements are being made to convert prospects to customers, refine risk assessment and risk-based pricing, enhance claims adjustment, and assess risks for individuals, corporations, and lines of business.

5. Connected health to boost life insurance - P4 Medicine (Predictive, Preventive, Personalized and Participatory) and connected devices are helping life insurers to generate deeper insights. This will address the most relevant needs of affordable solutions for underserved segments with chronic illness. New data sources allow new approaches for life underwriting by leveraging data from health, financial transactions, and daily activity to score individuals appropriately without any in-person testing. Gene sequencing is also being explored to identify risks before they become long-term, expensive health problems.

Insurers understand blockchain the least from the whole financial sector. However, several areas of opportunity emerged for blockchain across the insurance industry and insurers should continue to explore them all.

insurance and blockchain

One headwind of innovation within InsurTech is being driven by blockchain technology, the infrastructure behind cryptocurrency and digital assets. Startups are implementing new frameworks focused on blockchains (public and private ledgers), smart contracts (computer programs to enforce terms of contracts), and DACs (Distributed Autonomous Corporations) — leveraging industry knowledge to assess emerging use cases. Blockchain has the power to transform insurance processes by bringing new approaches that rely on decentralized systems.

A few insurance providers are already using blockchain technology for P2P and on-demand insurance – in some cases even coupled with IoT solutions to enable specific services. Applications have been developed exclusively for InsurTech to improve key functions in verifying identity, managing claims, and detecting fraud.

Customer identity verification: Similar to financial services, insurance must also fulfill “Know Your Customer” (KYC) requirements on all users (consumers and businesses). This data collection includes personal information (e.g. name, address, SSN, government ID). Manual reviews and background checks created a time-consuming process. Blockchain is used to securely store and access records of validated documents from authorities (such as the IRS and state departments) AND verified identities, to expedite this review to resemble real-time.

Claims management: Blockchain is also being used to create a single (master) version of claim documentation that can be viewed and edited by multiple parties (e.g. agents, underwriters, customers) instantly. All documents being available speeds up the entire claims process and reduces administrative costs.

Smart contract formulation: InsurTech companies have developed paperless smart contracts (blockchain-based contract between two or more parties). Automated blockchain protocols then facilitate, authenticate, and enforce negotiation or performance of these contracts. Once the conditions (such as verification of death on a life insurance policy) are satisfied, payouts from an insurance company to policyholders can be made programmatically. This complete process increases efficiency as most steps are implemented and enforceable without delay or risk of human error.

Fraud detection and risk prevention: Fraud represents roughly 10% of the insurance industry’s annually incurred loss expenses. By establishing and maintaining a central depository, InsurTech verifies authenticity of policyholders and claims. The likelihood of fraud is minimized, duplicate transactions become avoidable, and the need for 3rd parties (verifying public records) can be eliminated. This depository would be a public ledger that encrypts and stores personal data.

Companies (by subset) in insurtecH

InsurTech has become such a force within FinTech that it made a new category within Forbes FinTech50 list of 2020. Companies such as Lemonade and Metromile (which cater to auto coverage), are being joined by others in the life, home, and health insurance subsets.

LIFE INSURANCE

• Ethos created a platform that can quote term life insurance in minutes through its app, based on predictive analytics and an applicant’s data (both self-reported and medical) without a health exam. The company’s policies have level premiums for 10 - 30 years with a cap of $1.5 million coverage, and are available in every state but New York;

• Haven Life offers a streamlined online experience for purchasing high-quality, reasonably-priced term life insurance. The company is wholly owned and backed by an established institution, Massachusetts Mutual Life Insurance Company (MassMutual), which has over 160 years of industry experience;

• Bestow allows users to purchase life insurance products online, and leverages prognostic analytics to instantly establish a risk profile and grant customers access to comprehensive life insurance solutions;

• Ladder is a California-based insurtech company that caters to young customers who need life insurance, but find the current options too complex and expensive;

HOME INSURANCE

• Hippo Insurance has a streamlined application and claims process that relies on public data, satellite imagery, and smart home devices. The company acquired Sheltr in November to perform home maintenance inspections twice per year, and is live in 21 states;

• Lemonade is a New York-based company that offers renters and homeowners insurance powered by AI and behavioral economics. Lemonade guarantees a paperless and flawless process by substituting brokers with bots and red-tape with machine learning;

HEALTH INSURANCE

• Stride is a California-based startup that aggregates health insurance providers and policies. It connects users with the best health plans at the lowest price as quickly as possible;

• Oscar offers health insurance plans to individuals, families, and couples who reside in parts of New York, California, Texas, and New Jersey that don’t have coverage from their employers;

AUTO AND BUSINESS INSURANCE

• Root was founded on the principle that rates shouldn’t be based on demographics, but rather by driving behavior. Three years after its launch, Root became the first insurtech company outside the healthcare industry to become a unicorn (valued over $1B);

• Metromile is a pay-per-mile insurtech focused on making auto insurance as affordable as possible. It uses a device plugged into the onboard diagnostic port of the car to measure mileage, and is currently available in Arizona, California, Illinois, New Jersey, Oregon, Pennsylvania, Virginia, and Washington;

• Next Insurance is a mobile-first insurance carrier for small businesses that bundles services, such as general liability, professional liability, commercial auto, and worker’s compensation. These packages are then customized to specific business trades (such as contractors) and available in all states but New York.

insurtech CHALLENGES

As one of the longest-standing fields in financial services, the insurance industry and its incumbent leaders are resistant to change the status quo. With tightly-held regulatory standards, there are multiple layers of jurisdiction that all companies must adhere to. Staying as conservative as possible, established institutions tend not to work with startups and the innovative change they bring.

Regulation will continue to be a hurdle for startups passionate about making a dent in an industry that’s risk averse to business model changes.

For customers, insurance lacks the excitement and sizzle of other products and industries. Subsets within the industry, such as life insurance, suffer a greater lack of appeal with young professionals who aren’t eager to start long-term planning or compare options.

Similar to FinTech startups and banks, InsurTech startups still require traditional insurers to underwrite and manage catastrophic risk. This is a mutually beneficial opportunity for partnership as older companies seek the efficient models and user-friendly experience that InsurTech delivers. Finding other areas for partnerships would enable insurtechs to team with legacy providers to bridge the gap towards industry acceptance.

THE NEXT DECADE OF INSURTECH

Regardless of the responses by insurance companies and insurtechs, or changes in regulatory landscape, industry trends will continue to shape growth and market share in the larger ecosystem in this new decade. The following lists the top ten influences expected to drive the most change, most being adopted by InsurTech companies:

• Ride-sharing solutions;

• Usage-based insurance (pay-as-you-go);

• New models of holistic advice (robo-advice);

• Self-directed services;

• Connected health and medical advances;

• Connected/smart car solutions;

• Shift from probabilistic to deterministic model;

• Granular risk and/or loss quantification;

• Robotics and automation in core insurance;

• Blockchain.

The insurance industry enters a new era with technology and changes in consumer behavior deciding what’s most important. It’s uncertain if the leaders of this change will be insurance companies, insurtechs, or hybrid partnerships from both. What is clear is that InsurTech will continue to grow as a sector within FinTech, impacting how consumers and businesses protect against risk in their daily lives and operations.

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