Brendan Dickinson
We have entered a golden age for fintech. LendingClub and OnDeck recently exited through massive IPOs, and global investments in the fintech space hit $3 billion last year. This outpouring of innovation and investment has spread across the financial sector, spanning mobile banking, small business lending, financial advisers, credit scoring, savings and more.
Given all the money flowing into fintech, it might seem that the biggest, most glaring problems have been solved. And yet, despite the unbelievable amount of financial innovation and technological progress that have transformed other sectors, there are entire swaths of the financial industry that have not changed. The opportunities are still ripe for the picking.
Insurance represents a huge opportunity that has yet to see real innovation. The U.S. insurance industry is the largest in the world in terms of revenue, with net premiums surpassing $1.2 trillion. At the same time, the major players have some of the lowest Net Promoter Score (NPS) ratings of any industry, meaning the companies do not inspire satisfaction or loyalty in their customers.
People do not like or trust insurance companies. And it’s no wonder why, with headlines like “9/11 Responders With Rare Cancer Denied Insurance Coverage” and “Sandy Homeowners Systematically Denied Insurance Claims.” The industry is notoriously rife with moral hazard and fraud.
Add to all of this the antiquated way insurance products are delivered to consumers in a world where almost anything can be procured with a few taps of a smartphone screen, and it’s no wonder that most Americans are underinsured. Less than half of “middle market consumers” aged 25 to 64 have individual life insurance coverage, and 40 percent of those Americans who do have life insurance coverage think they do not have enough. And, 64 percent of American homes are underinsured.
The insurance industry is begging for disruption.
Challenges And Opportunities
Outside of the Affordable Care Act, next to nothing has changed in the insurance industry for years. Why has it been so slow to change? To start, there are high barriers to entry. The insurance industry is complex and expensive from a regulatory standpoint.
New carriers are required to have unencumbered stores of cash to satisfy the regulators, and have to grow those unencumbered assets in proportion to the amount of risk they have underwritten, which is ever-increasing.
This challenge is far worse in insurance than in lending. In addition, for some lines of insurance, pricing is regulated at the state level, with regulators controlling how much a company charges for a given product. For all these reasons, it is a difficult and slow process to bring a new insurance product to market in the U.S.
Then there is the adverse selection problem — the first people who need a new product often are the highest risk, and thus you run the risk of seeing much higher claims than the industry average once you launch. For a startup, this is just when you are the youngest and most vulnerable.
A few brave souls have taken an early crack at this market and seen success — most notably, Oscar and Metromile. Oscar is “a better kind of health insurance company” that aims to use technology and design to improve the experience. The company is now valued at a whopping $1.5 billion, just a year-and-a-half after its launch. Metromile sells pay-per-mile car insurance, which appeals to the 70 percent of people who drive under 10,000 miles a year, and thus probably overpay for car insurance.
Both companies offer intuitive and accessible (mobile) user interfaces, consumer-friendly business models and greater transparency. This is just the tip of iceberg — every line of insurance needs to be “millennialized,” and I expect we’ll see huge disruption in home, life and P&C, just to name a few.
However, the biggest opportunities for startups will be in four areas: new products for a new economy, better insights from better data, new ways of managing risk and funding regulatory capital and new structures for acquiring customers.
With the rise of Uber, Airbnb and others, our economy is moving away from owning assets to renting them. Existing policies offered by big insurers don’t handle these new use cases and will have to be replaced. But the bigger shift is that in this new world, the concept of insuring an asset over many periods is outdated; instead, we will move to a more transactional consumption model: just-in-time insurance delivered on mobile and underwritten in seconds. One upcoming company in this area is SURE, which is going to deliver consumer-facing insurance products at the push of a button.
There are also reams more data available today than 10 years ago, which means new ways to underwrite risk. For example, Apple watches and FitBits provide information and insight into people’s daily activity that can be extremely useful when making health assessments.
And in the auto industry, a huge risk is how far and through what geography an individual drives to work each day. While accelerometers have been around for years, every cell phone now has a GPS, which provides far more accurate and detailed data.
New insurance companies are tackling the capital requirement challenges in a number of interesting ways. Oscar raised a huge first round of capital, and has continued raising large rounds — driven in part by the need for regulatory capital.
Others are taking a page from online lending and adopting peer-to-peer models to try to provide the requisite capital for regulators. We’ve seen a lot of folks take this approach internationally (Friendsurance in Germany, for example) and others are taking the same approach here — I’m interested to see how regulators react in the U.S.
Finally, the insurance industry is begging for new ways to acquire customers. Millennials are shockingly underinsured. This is partly because they simply do not want to talk to someone on the phone. The channels they like to use and those with which they are most comfortable are not the channels on which insurance companies try to reach them. As a result, a huge target demographic is underserved.
PolicyGenius is already showing that they can convert this previously un-convertible population by providing better information and education online.
I am bullish on the future of insurance startups. Yes, there are challenges, but every problem worth solving comes with challenges, and the insurance industry is crying out for change. People were skeptical at first that consumers would ever trust startups, rather than banks, with their financial needs, or that startups would be able to affect change in such a conservative, entrenched and powerful industry. That turned out to be wrong, and incumbent banks are now realizing that they have to innovate to stay alive, making acquisitions and partnerships left and right.
Similarly in the insurance industry, I don’t think the innovation will come from within. I think that startups will create the opportunities, and force insurance companies to turn their slow wheels of change.
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