The Insurance Equation
The article was first published on: http://techcrunch.com/2016/04/03/the-insurance-tech-equation/
The last time that I decided to buy insurance with ease was at a casino’s blackjack table. Insurance policies can be complex and some policyholders may not understand all the fees and coverages included in a policy. People typically buy policies on unfavorable terms. In 2014, two major insurers Blue Shield and Cigna of California were sued for misrepresentation of coverage network and caused delays for their consumers in accessing needed health care. Yet, insurance should help societies and individuals to mitigate catastrophes’ impact through the way it changes who bears the cost of losses.
“There are 46 insurance companies in Fortune 500, with an average age of 95 years. Cumulative market cap is more than $1T”, said Spencer Lazar of General Catalyst Partners. However, according to Morgan Stanley/BCG consumer’s survey, half of policyholders have one or less interactions per year with their insurers. Less than 60% of those who made the contact are satisfied with the experience.
Underwriting and closing a policy may take several days, even several weeks. Once the policy is underwritten, claims management and customer service are cumbersome due to insurer centric and paper-based structure. The commission structure of the status quo is such that agents and insurers make the process a misalignment of interest between the insurers and policyholders.
Fortunately, it is not a lost war for insurer incumbents as they have their competitive advantages. Incumbents have the consumers’ trusted brand perception and existing coverage network, regulator’s policed compliance and licenses, as well as the most analytical actuarial talents. An insurance premium paid currently provides coverage for losses that might arise many years in the future.The financial stability and strength of an insurance company is a major consideration when buying an insurance contract.
In order to understand the insurance business better, it has to start from their business model. Insurers’ business profit can be reduced to a simple equation: Insurer’s profit = sum of earned premiums and investment income on premiums after underwriting cost and claim expenses.
With the dawn of the pension scheme and a changing workforce that has increasingly number of freelancers, startups are exploring the nexus of technology and insurance in an attempt to wake the dinosaurian industry. In 2014, insurance tech startups raised just over $740M in venture and equity funding. Just a year later, funding to insurtech companies rose by 350% to hit $2.65B in annual funding, according to CB Insights. These insurtech startups may open new streams of premiums, encourage investment income, find a leaner method to underwrite costs, or effectively manage claim expenses.
Earned Premiums
The emergence of digital first insurers has created new business model on delivering value to consumers. The world’s biggest insurtech startup is Zhong An valuated at $8 billion after being invested by three Ma (Alibaba’s Jack Ma, Tencent’s Pony Ma and China’s second largest insurer, Ping An’s Ma Mingzhe). It opened up new segment of insurances where traditional insurers did not touch: Zhong An partnered with Alibaba for coverage on returned goods’ delivery charges and even drone/mobile phone damage policies that tailored to new digital economy. Beside tackling new digital frontier, Zhong An is essentially innovating on distribution with a more integrated sales channel which is embedded as part of the e-commerce shopping process rather than depending on traditional third-party agent distribution model.
Anthemis-backed Trov creates customization of the home insurance by allowing coverage of individual key items rather than a predefined set with average payout. An app-based mobile platform that helps easily collect information about the things users bought through photos, market values, receipts and other product details. With Trov, users can always see the total value of the things they own and have stored on Trov and track their value over time. With detailed records close at hand, it can be used as information to decide on the level of insurance coverage with Trov’s partnered insurers serving in the backend. A one stop shop like this is able to capture a use case and add more value with protective insurance products.
Investment Income
Insurtech such as Friendsurance, Guevara and stealth Sequoia-backed Lemonade are banging big on P2P insurance models. Using a shareconomy approach, users are invited to form small groups of policyholders who pay part of premiums into a pool to use for small claims. Policyholders is able to get back remaining pool of money at the end of the year after claims. Claims-free policyholders are able to obtain higher cashback which is a clear financial benefit for fair behavior to reduce fraud and claim expenses. Most importantly, these P2P models can possibly rethink about how to make short-term liquidable investment on the pooled money and higher returns bet on the rest of the premiums across a longer time horizon.
Underwriting Cost
With distribution channel being increasingly digital, will insurance agents end up in the same fate as bank branch? Despite huge commissions, traditional insurance agents fail to provide significant added value. Thus, new intermediaries are welcomed especially online tools which are scalable. SaleMove brings in-person customer experience online by offering website surfers an option to talk to live representatives via video which aim to give potential leads more meaningful information than just poking around randomly. Furthermore, it allows insurers to mitigate the effects of not having the human touch in insurance sales and tailor products for possible completion of micro-insurance online.
“With Big Data and AI, there are lots of new opportunities with low cost through the use of technology on marketplace and micro-insurance models, especially in developing economy like Asia with growing mobile penetration,” said Dr. Lee Kuo Chuen, FinTech thought leader and 20 years investment visionary. The core competence of insurance is ready for a big leap thanks to all sorts of new technologies, such as machine learning and data analytics. AdviceRobo solutions make use of a machine learning platform that combines data from structured and unstructured sources to score and predict risk behaviour of consumers. For instance, it provides insurers with preventive solutions applying big behavioural data and machine learning to generate the best predictions on default, bad debt, prepayments and customer churn resulting in individualized risk assessment.
Claim Expenses
Insurers have to see themselves in the prevention business on top of the protection business that they already in. Data is going to drive healthcare which indirectly impacts insurance. Datacan be leveraged to individually underwrite and personalize insurance for people. Metromile innovates in the preventive business by rewarding car owners with lower premiums for less miles driven through a plugged-in car sensor. There are going to be more insurers leveraging on IoT devices such as fitness tracker Fitbit and environment sensor uHoo. Perhaps the speed and ease with which self-automating smart contracts could be changed within the blockchain could see more insurance policies that reflect actual personalized risk in a real-time manner. However, the industry has to make good strides in not creating sub sectors of the society that can’t buy insurance due to big data rendering them as less attractive risks.
Bauxy, Claim Di and Snapsheet are all about mobile solutions that help insurers to make a leap in customer engagement, to become much more effective in every step of the new digital journey. Claims adjusters obtain the tools to enjoy a much automated experience; a mobile solution enables consumers of insurers to settle a claim completely virtually. The solution simplifies claims, reduces the operation costs and increases touch points between insurer and customer leading to better satisfaction.
Gone are the days when insurers are the perfect intermediaries to underwrite decisions or owning the narrative of how insurance products get pushed to end-users. IoT with inexpensive sensors will have transformational impact on how insurance policies are underwritten. New digital entrants with strong customer relationships can formulate personalized policies and distribute more efficiently. According to World Bank, the global population is set to reach 9.7 billion in 2050 and 34% of global growth in worker population (aged 15–64) lies in South Asia. Although B2B insurtech CXA and many financial comparison sites are operating in the underinsured and uninsured region, much of the insurtech innovations and targeted consumers are still primarily located in Western and China markets.
I believe the next generation of Fortune 500 insurers will have to partner together with various stakeholders including the unmentioned regulators to drive cost low and premium acquisition high on the equation in a consumer-centric way as well as replicating successes to high-growth emerging markets.
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This article does not represent the thoughts, intentions, plans or strategies of my employer. It is solely my opinion.
