Insurance innovation: the current state of play
Compared with the banking industry, relatively little innovation has taken place in insurance. With an average age of 95 years, incumbents have struggled to adapt to the digital age. In many cases, they have chosen to maintain manual underwriting operations and make incremental improvements, rather than investing in disruptive ideas. Insurers typically still have little direct contact with their customers and perhaps this goes some way to explain why online satisfaction lags behind utility companies, airlines, banks and even government services.
That being said, in the last two years ‘InsurTech’ has been compared with the wave of FinTech that hit in 2009 and we have seen a dramatic acceleration of developments, investments and partnerships across the industry.
The parallels are such that many of the questions we ask about our banking clients now apply to insurers. Will they be disintermediated? Can they find new value-add activities to add to their core proposition? Can they justify their existence in the face of nimble, disruptive, customer-centric players?
These questions are complex, but the insurance market offers a huge opportunity for those that can overcome the ‘innovator’s dilemma’ and forge a new path. With global insurance premiums totalling $3.7 trillion, new technology and big data has the potential to enhance every element of the insurance value chain – particularly for personal, commercial, reinsurance and life & pensions insurers – from the back office all the way through to underwriting and claims.
“The most imminent effects of disruption will be felt in the banking sector; however, the greatest impact is likely to be felt in the insurance sector”. The Future of Financial Services Report, World Economic Forum 2016
An increasing quantity and quality of data offers new opportunities to enhance the relationship between insurers and the insured. New technology, business models and products can improve insurers’ ability to acquire and service customers. The exam question our clients ask us every time: how can we survive the inevitable disruption coming our way?
As with many industries, well-funded startups are increasingly capable of taking a larger and larger chunk of the pie. We think that unless insurers start collaborating with the best and most relevant of these, they run the risk of decline.
Increase in quantity & quality of data
Historically, loss data was an insurers main asset. But new sources of data are improving underwriting decisions and enabling them to deploy capital to risk more efficiently. We’ve heard a lot about telematics startups such as Insurethebox – where driving behaviour data affects premiums – and insurers like Vitality Life, who use the data from wearable devices to offer personalised and incentivised health insurance.
Similarly, American Family Insurance’s partnership with Google’s Nest gives home insurance customers a monthly discount if using a Nest Protect smoke detector. And America Insurance’s partnership with Understory – a startup that develops smart weather stations – enables them to more accurately predict claim volume and payout costs for clients following extreme weather events.
Such an influx of real-time data – now inclusive of social data via startups like Social Intelligence – is also driving improvements in transparency, pricing decisions and how insurance policies cover segments of risk. An increasing adoption of artificial intelligence tools will only heighten the possibilities here in the near future.
“Real-time data from an explosion of sensors enables parametric insurance products, like usage-based car insurance. New industries, like ridesharing and home rentals, need new insurance products that are pay-per-use, not pay-per-year. And the food of new data can empower insurers to mitigate risk for their policyholders — resulting in fewer claims and happier insureds”. Core Innovation Capital
Changes in customer acquisition & distribution
The impact of innovation on insurers isn’t limited to data. New technologies are touching customer acquisition and distribution too. Particularly for personal cover, distribution costs are significantly higher than all other non-claims costs combined – in many cases insurance is still distributed through expensive broker networks that insurers are tied in to.
But in addition to early insurance comparison engines such as MoneySuperMarket and Comparethemarket and new price comparison sites like Coverhound and Policy Genius that pride themselves on simplicity and objectivity, mobile-first direct distribution models are emerging. Soon to launch UK startup Brolly and Swiss startup Knip are two examples: mobile-first insurance concierges that aim to become a user’s trusted insurance advisor by bringing all personal policies into one place.
“Insurers will be Uber-ised unless we find new ways to add value”. Inga Beale, CEO Lloyds of London
Innovative technology also offers insurers new routes to market. Kasko, a white label platform for digital businesses, sells timely and relevant insurance products and services at the point of demand. And Simplesurance, who cross-sell insurance for high value items at point of purchase, are helping insurers to acquire ‘opportunity driven’ consumers at the same time as reducing acquisition costs.
“A lot of the next wave of the businesses that are in the insurance space are going to be about finding the customer at the moment when they are interested or open to the idea of buying insurance”. Christian Jensen, Accel Partners
Improved customer experience
At the other end of the value chain, smartphones are also optimising personalised experiences, particularly when it comes to settling claims. Examples include Snapsheet, who help settle claims and autorepair estimates virtually, Spex, who digitise the property inspection process for adjusters, and InterResolve, who provide a fast, personal service for medical claims.
Across the board, insurers are under pressure to become much more supportive of their customers, both in the event of a claim and to prevent the need for a claim at all. In the US market in particular, digital health is a huge area of interest, with companies such as Omada Health (a diabetes prevention startup) attracting large funding rounds.
New business models
Yet, maintaining customers requires more than a smooth customer experience. Increasingly, we seek personalised insurance products that service complex and inconsistent needs, both in terms of cover and usability. This is where startups are likely to play a prominent role. CB Insights reported that $2.6bn of investment was made into InsurTech globally in 2015 – three times more than 2014 – and Q1 2016 saw the strongest ever quarter of deals, with 53% in early-stage investment.
Perhaps the most disruptive impact has been the rise of peer-to-peer reinsurance by companies like Lemonade, Friendsurance and Guevara. Here, premiums – paid by online communities that share similar characteristics – cover claims made by the group, resulting in improved fraud detection (due to approval by consensus) and reduction of overhead and acquisition cost (due to word-of-mouth referrals). On-demand, mobile-first insurance startups are also adding value here too. Cuvva and Metromile offer hourly and by-the-mile car insurance that is intuitive to purchase at the exact moment it is required. And Trov, a personal insurance startup, customises policies by allowing users to insure specific household items when they buy them and track their value over time.
Yet, although a raft of InsurTech startups suggest demand for innovative data, customer acquisition and product offerings is high, new entrants still face two key barriers. Firstly, insurance is a highly regulated industry, with significant time and money needed to ensure compliance. In addition, balance sheet requirements are notoriously high. Alongside a specific set of accounting standards and terminology, new entrants need to prove that they have the balance sheet to pay for claims in any eventuality – an amount of capital that could impede many startups from scaling quickly.
What does this mean for ‘traditional’ insurers?
From our work with UK and US-based insurers and our conversations with leading VCs and VC-backed InsurTech startups, we think that the time is right for traditional insurers – particularly in commercial lines – to change the ways and frequency that they connect with, learn from, and collaborate with new entrants.
In recent years, large companies have tended to invest in or buy the technology, customer acquisition tools and services required to maintain their market dominance. Indeed, the appetite from insurers to toe this line is evident, with MetLife, Prudential, Fidelity and Aviva making significant investments in technology and InsurTech startups over the last two years. Yet, we believe that taking collaborative routes, such as licensing software as a service, utilising APIs to ‘plug-in’ new or advanced capabilities and forming mutual partnerships with innovative startups can offer more than traditional M&A or investment activity. Even smarter collaboration with other corporates – think telecoms firms, or search engines – could provide insurers with a trove of new data with which to better understand and predict customers’ adapting needs, behaviours and risk profiles.
“Picture the Carrier effectively plugged in to the external world via data sources, plugged to the customer in myriad of ways that were not possible in the past, plugged in to third-party providers, all of this in real- or near real-time. No more old linear prosecution of the main insurance processes – customer acquisition, underwriting, claims management”. Pascal Bouvier, Route66 Ventures
Will insurance companies follow in the footsteps of banks and other financial services firms, and realise tangible gains from collaboration? Or will they stand still, and run the risk of decline?
Arguably, the jury is still out. But, judging by the way in which UK insurers have embraced Startupbootcamp’s ‘InsurTech’ programme we know where we’re putting our money . . .