InsurTech is Transforming the Industry, Not Disrupting It

In the second quarter of 2017, InsurTech investments totaled a whopping $985 million, according to a recent report from Willis Re, Willis Towers Watson Securities and CB Insights.

That’s a 248% increase from the same time period the previous year—and considering investments totaled $1.7 billion for all of 2016, it’s clear that InsurTech is not going away.

Why are venture capitalists so eager to help these startups succeed? And what,
exactly, are InsurTechs hoping to accomplish?

Where’s the Fire?

Hundreds of InsurTechs are focusing on developing innovative solutions in the following key areas:

1) DIGITAL EXPERIENCE. InsurTechs with this focus offer “a very simple interface and a very simple business model,” explains Bernhard Klein Wassink, partner, Global Insurance Customer & Growth Offering, EY. “They provide a digital experience you can’t get with a legacy carrier or through an agent interacting with the legacy carrier.”

Consider how Lemonade now allows any company to add the Lemonade renters insurance widget directly to its website, points out Laird Rixford, president of the Insurance Technologies Corporation. “That makes it so that people buying cars, people buying coffee, people buying anything out there can just tack on a renters policy,” he says. “That’s transformative.”

Examples: Lemonade, Slice, Embroker


2) MICRO INSURANCE.
“Let’s say you have a Jimmy Choo purse, and usually you keep it home in the closet, but on occasions you’ll take it get on a trip or to a nice event,” says Richard Kerr, CEO of MarketScout. “You get on your app, buy the coverage, 11 bucks, done. Or maybe you’re traveling for a couple weeks—11 bucks a day, then you come home. You don’t need to pay $500 a year for that purse, because you never carry it.”

“These are items that would usually go uninsured otherwise, so these companies are trying to capture that business,” Klein Wassink says. Also known as episodic, on-demand or parametric insurance, “this is a segment that’s ignored by current agents and carriers because they can’t make enough money from it.”

Examples: Trov, Verifly


3) PEER-TO-PEER.
“This concept is similar to all the peer-to-peer lending you read about, but for insurance,” Klein Wassink explains. “It goes back to the old-fashioned way of being a mutual where you share risks, but with a social flavor.”

Examples: Friendsurance, Darwinsurance


4) USAGE-BASED INSURANCE (UBI).
“This is in auto insurance where you pay by the mile—there’s no concept of a fixed monthly premium, which is disruptive to both carriers and agents,” Klein Wassink says.

With the rise of ridesharing and driverless car technology, Kerr predicts that on the rare occasions when people want to actually drive a vehicle, they’ll buy a day’s worth of coverage, or enough for a week or a month.

And don’t forget that the Internet of Things (IoT) will expand potential applications of UBI beyond the auto realm.

“As homes and commercial properties start getting monitored with IoT devices that are attached to everything, that starts to change the whole nature of how we manage risk,” points out Mark Breading, partner at Strategy Meets Action. “Instead of just looking back at history and loss experience and doing the actuarial calculations and ultimately pricing that risk for the next six or 12 months, now you’ve got real-time data and insights on those things that are being insured.”

Examples: Metromile, Cocoon


5) SOCIAL COMMUNITIES.
These types of companies piggy-back off another InsurTech concept, such as UBI or telematics, within a particular demographic.

U.K. company Carrot, for example, capitalizes on the concerned parents of new teen drivers by using a telematics device to provide reports and educate families about safe driving. InsurTech company Swoop, meanwhile, is the Uber of tow truck dispatching—a community of independent roadside assistance providers that targets insurance companies.

Examples: Carrot, Swoop


6) COMPARISON SHOPPERS.
“Here, it’s all about transparency and it’s all about price,” Klein Wassink says. “I’m not in love with this model. You basically end up competing on price only, and that’s not very good for carriers, it’s not very good for agents and I would argue it’s also not very good for customers—this model doesn’t do a great job of helping customers figure out what coverage they need, yet.”

Rixford is similarly unimpressed with these types of InsurTechs. “All they’re doing is meeting the demands of consumers by giving them a quick and easy way to bind, research and purchase insurance,” he says. “Agents have had the ability since the mid-2000s to place a fully comparative rating experience upon their website and offer comparative quotes. This is the same old game—the only difference is marketing scale.”

Examples: Insurify, Coverhound


7) COVERAGE CONFIGURATION AND DATA-BASED MODELS.
These companies use public data and social media accounts to answer questions about “who you are, things you own, people you care about, how you make a living,” Klein Wassink says. “In a way, they’re really doing what the agent is supposed to do—the interview piece.”

Data is an area big-name directs are already heavily invested in, Rixford notes—and many InsurTechs “are finding ways to make that data accessible by parties that don’t have the resources of a GEICO or a State Farm,” he points out.

Examples: Allianz1, Digital Fineprint


8) ADVICE ENGINES.
These InsurTechs take the previous category a step further by not only configuring coverage options, but accompanying them with quick, convenient advice and guidance. They’re tech-based, but not necessarily artificial intelligence (AI)-driven, Klein Wassink explains—at least not yet.

Examples: Policy Genius, InsureScope


9) AI.
Klein Wassink recalls taking AI classes in college in the early ’90s. “At that time, it meant rules-based systems—if this, then that,” he recalls. “A lot of advice tools start there, with experience-based rules—if a client has these characteristics, they ought to do XYZ. Most of those robo advisers out there are going through the rules-based phase and are beginning to explore AI.”

But eventually, “you’re going to have AI bots using microservices to understand every single little question and underwriting guideline,” Rixford says. “Traditionally, that required a trained underwriter who’s been there for 30-40 years, and even they might miss that one little factor. A computer never forgets. If it ever gets anything wrong, you just program that system and the system will never get it wrong again.”

Examples: SPIXII, Tyche

Where’s the Threat?

As you try to figure out your agency’s place in the future of insurance, remember that disruption doesn’t necessarily mean disintermediation—just change. And change is usually a good thing.

“The narrative of, ‘Ooh, you need to be scared’—that’s stale,” Klein Wassink says. “We’re well past that. It’s not a wipe-out. It’s a transformation.”

“It’s less about disruption and disintermediation, and more about just the evolution of the channel,” Breading agrees. “There will be some disruption, but even if you forget about InsurTech altogether, there’s already a lot of change going on in the first place in terms of distribution.”

Rixford doesn’t believe the next generation of “insurance winner” is out there yet—“the one that’s going to take over the insurance market like what happened with Expedia and Kayak in the travel industry,” he says. “I don’t see any specific company as the biggest threat. The threat is what the general mindset and the leveraging of technology—that’s what is going to disrupt this industry as a whole.”

Think about all the problems InsurTechs are trying to solve, and it becomes clear that the ultimate goal of the movement is not to kill the independent agent—it’s to make consumers happy.

“Consumers are asking for this, just like consumers were asking for a platform like Netflix or Amazon. They wanted the ability to one-click buy something and have it show up on their doorstep four hours later,” Rixford points out. “These InsurTechs are chasing consumer demands to make it easier to transact business with the people they buy stuff from.”

And just like the dot.com boom, “most of them won’t work—maybe 5% will survive,” Kerr predicts. “At the end of the day, you’ve got to make some premium. Once you get through all the user eyeballs, the click-throughs, what did you sell? Did the underwriter make a profit? If they did, you survive. If they didn’t, you don’t.”

Jacquelyn Connelly is IA senior editor.

Personal vs. Commercial

Many InsurTech solutions are focusing hard on the personal lines space. “If you’re an agency where most of your book is personal auto, and you just keep renewing with a customer acquisition and sales focus without a lot of value add, that’s not going to be a winning proposition in the future,” says Mark Breading, partner at Strategy Meets Action.

But as Richard Kerr, CEO of MarketScout, points out, “there aren’t that many true personal lines insurance agents left,” anywaywhich means you don’t have too much to worry about when it comes to the Lemonades of the world, because for the most part, the type of personal lines customer who will be attracted to that type of company is probably already insured with a GEICO.

The biggest threat, instead, is actually flying far below the radar: If you look closely, many InsurTech concepts can apply just as easily to commercial lines as they do to personal linesespecially small commercial.

“The InsurTech influence on the commercial side is going to be less of an evolution and more of a revolution,” says Laird Rixford, president of the Insurance Technologies Corporation. “Personal lines has grown up with technology over the past 30 years. With commercial, that never happened.”

“There’s no question that commercial lines is a really hot area, especially small commercial,” Breading says. “In the industry in general, lots of insurers are trying to figure out how to go capture more of that market, and so are lots of InsurTechs.”

And within the next few years, “every single company that offers BOPs and small commercial, every one of them is trying to go direct,” Kerr predicts. “There are so many InsurTech plans coming out of this commodity BOP space. That deal’s already bakeddistribution is done there.”

Bernhard Klein Wassink, partner, Global Insurance Customer & Growth Offering, EY, urges agents who think commercial business is immune to InsurTech to consider what happened to small business banking. “That same customer that agent is talking about already banks online and gets a commercial mortgage online,” he points out. “A commercial mortgage is not a small deal, and they’re willing to do that online.”

Although the majority of commercial lines “is still an under-covered, feet-on-the-street type business, pricing and margins have already come down, and now there’s a need to be low-cost,” Klein Wassink explains. “That always invokes direct, streamlined models. Sure, it’s not the first area to get disrupted. But I wouldn’t be resting on my laurels.” J.C.