TX Zhuo
For those who follow technological innovation, it can often seem like certain areas of investor enthusiasm come out of nowhere — suddenly and with huge momentum. The wave analogy is often used, and not incorrectly — fevered investment propels increasing interest and drives new opportunistic entrepreneurs into a specific industry area, building until it inevitably crashes as certain companies underperform and interest moves elsewhere.
There’s been a lot of discussion this year that insurance tech is driving to the peak of a similar cycle, and it’s understandable why: Fintech has seen a huge amount of investor attention, and dollars have flown into some bold, high-profile insurance companies. Many entrepreneurs are waking up to the fact that insurance is arguably one of the most old-fashioned, analog consumer services in existence, and they are creating companies to upend this premise.
As a fund, we have invested in companies attacking the insurance industry from very different angles. We’ve seen that across the industry there is huge opportunity for reinvention, and we believe that innovation and investment in this area is far from being a temporary trend. Below we’ve outlined a few of the areas of opportunities we see, as well as some considerations for any entrepreneurs looking to get into the space.
Why is insurance so interesting?
Well, for one thing, it’s an enormous market, and an old one. The $1.1 trillion in insurance premiums recorded in 2013 by the U.S. Department of Treasury represented approximately 7 percent of the U.S. GDP. And, as everyone is fond of pointing out, it’s an industry dominated by very old institutions. Processes at the carrier level have, for the most part, been relatively unchanged by recent technology innovations, and many can seem almost comically dated.
Companies are personnel heavy, with agents, adjusters and analysts comprising more than 2 million jobs and using legacy systems built around paper documents. The average age of life insurance agents is 59 years old, and it’s estimated there are an average of three duplicate processes in each customer sale. It’s not out of the realm of possibility that your insurance company will at some point ask you to fax them something.
This has created a time-consuming, costly and often opaque system with which consumers are increasingly frustrated in the digital present. It’s estimated that auto insurance companies spend a combined total of $6 billion in advertising each year, but customer satisfaction is low. Take a look at some of the NPS scores for a selection of the biggest players in health and car insurance:
- Travelers (car insurance): 23
- Liberty Mutual (health and life): 13
- Kaiser Permanente (health and life): 31
Today’s consumers want to be able to get educated, get a quote and buy a policy from the comfort of their home (or cell phone) in less than 15 minutes. The industry is seeing the effects of this; for many “optional” insurance products that used to be widely embraced, new generations are opting out in droves. A perfect example of this is life insurance. In 1960, 59 percent of U.S. adults owned an individual life insurance policy; now only 36 percent of U.S. adults do. An estimated four in 10 U.S. adults own no life insurance policy at all, even though 70 percent of households with children under the age of 18 say they would be financially challenged if the primary earner died.
What are the opportunities?
Every problem we just outlined is an opportunity for disruption, and it’s important to note that “insurance,” much like finance itself, is a broad ecosystem that both startups and incumbent carriers will participate in changing. But there are certain areas for innovation that we are especially excited about from a concept and market timing perspective.
Today’s world is driven by data, and there is a huge opportunity for insurance to leverage data platforms to help improve their operations in everything from sales to underwriting. Real-time and near real-time data streaming — everything from environmental sensors to connected devices and wearables — will allow insurers to better manage risk, improve subscriber loyalty and optimize sales opportunities.
Customer relationships used to be managed solely through human interaction with an agent, but moving forward, relationship management must be primarily digital. And more so than simply replicating existing human processes, companies need to think in terms of a 360-degree view of social media engagement, mobile app interaction and even being mindful of geo-awareness from IoT sensors. Leveraging the cloud for the types of IT activities that don’t directly add value to the ultimate customer experience will continue to be a focus area for insurers in 2016.
And both for agents and customers, more intuitive user interfaces are needed, allowing for real-time access to policy and claims information and updates. Real-time access to data, combined with a digital interface, also presents the opportunity for reaching new customers with new product types in a way that is sustainable for insurers. A perfect example of this are the micro-insurance policies for agriculture in countries like Kenya that utilize real-time weather data and mobile money transfer to create affordable and accurately priced micro-insurance policies for farmers.
Smarter incentives
The Internet of Things (IoT) and wearables have already seen rapid adoption for insurance applications, with carriers offering discounts to customers who provide data from wearables, like Fitsense or car plug-ins. This has led to a positive incentive structure, rewarding lower-risk customers for good behavior, and financially incentivizing average customers to improve their healthy habits or driving safety. We feel this trend is just at the beginning, with logical extensions into everything from healthy eating habits to commercial applications for larger-scale insurance products.
Startups like Safesite, for example, are building tools for the construction industry to incentivize more diligent adherence to safety practices on build sites, and, in doing so, are lowering insurance premiums for these projects in the process. Trends like connected homes and smart buildings will continue to propel this market forward, and open opportunities for tailored incentives and more efficient pricing.
Commercial insurance
We have seen a few different insurance startups, like Next Insurance (small business insurance) and Lemonade (peer-to-peer online P&C insurance carrier), raise large rounds recently, which has garnered a fair amount of attention for some of the unique challenges of starting a new insurance carrier in the U.S. Regulation is complicated and costly to navigate, and it requires a considerable amount of financial resources to maintain appropriate balances.
That said, we believe there is huge opportunity still existing for carriers looking to provide commercial insurance. McKinsey recently estimated that almost 40 percent of sole proprietorships in the U.S. don’t carry small commercial insurance coverage. This presents a real opening for companies that can access this market.
New products + new risks = new opportunity
We have spent much of this article focused on the potential benefits that come from IoT, big data and digital-first communication. These same systems, though, present a unique and fairly new set of risks fin which insurance is still figuring out its role. Cyber insurance policies for companies at risk of cyber attacks or data leaks, drone delivery, new auto policies for the world of autonomous vehicles — both for consumers and in industry — as well as issues like identity theft all present very tangible risks in our society and opportunities for legacy (but also upstart) insurance companies. How do you smartly quantify risk, how do you price it for the consumer used to a particular insurance paradigm and what are the tools you need to be competitive?
What should companies wanting to enter the space think about?
Ensure you have a profitable business model if you’re building a distribution platform
If you are building a distribution platform for insurance products, you will be taking only a fractional amount of the value of the insurance contracts you originate. Because of this, it’s important to focus on insurance products with high LTVs and low churn.
Be mindful of the trade-offs you face when originating transactions, especially the trade-off between “customer servicing” and owning the end customer. Will it be valuable enough for you to bear the cost of servicing a customer regularly if you can own the relationship, or are you going to build a platform based solely around volume?
Understand and stay compliant with regulation
Like many ambitious startups trying to disrupt highly regulated industries, there can be a temptation to trailblaze first and check on regulations later. This puts your business at risk of setbacks, as companies like Relay Rides, now Turo, discovered. Turo faced an uphill battle with New York for not being compliant with insurance regulations necessitating licenses for the sale of third-party insurance policies, and faced a suspension of service because of it. Zenefits came under similar scrutiny and threat. Staying on top of regulations can be especially challenging — but important — when scaling a company quickly.
Luckily, Washington is beginning to call for more simple and consistent requirements for insurance regulation across the state and federal levels, but, for now, insurance is regulated on a state by state basis. This can increase the cost of expansion considerably for new entrants into the insurance space.
When evaluating entrepreneurs in this space, we look for deep industry knowledge and a recognition that there’s little opportunity for one-size-fits-all innovation. Know all of the stakeholders for your product or platform, especially if you’re trying to innovate on the policy side. It may be a big market, but it isn’t an easy one.
Know where you want to be in the value chain and maximize impact
Do you want to be an agent or a carrier? It’s easier to get started as an agent, but, over time, there are greater margins to be made from being a carrier, especially at scale. For either option, how do you put your company in the best position to own the customer relationship? Being strategic around this increases your company’s leverage and defensibility.
Web apps have historically been 10-100x worse agents at cross-selling other products, and we believe this is because they have a hard time building a relationship with the customer. Even with a digital interface, when you own the relationship with the customer, you can have frequent but non-intrusive interactions that allow you to be there at important life events and capture “opportunity-driven” customers at a low CAC.
Recognize, also, that there are many access points along the value chain for innovative solutions for some of traditional insurance’s stickier and more costly problems. Application of blockchain technology for insurance is a perfect example of this, and will be hugely lucrative for companies that can create solutions for insurers, even though they won’t be a part of the agent versus carrier dichotomy.
What should carriers be thinking about?
Traditional carriers, as well as entrepreneurs, have an important role to play in improving insurance for consumers. Many are already taking steps to improve their processes, and those looking to stay relevant and keep customers should be thinking ahead.
Online is quickly becoming the primary channel of choice for shoppers, but it is still a small channel for most carriers. Embrace new forms of communication — social media, mobile-first apps, and preemptive communications — for customers. Embrace the new technologies that will help you adapt to a shrinking insurance workforce.
Drones can play a role in augmenting the work of traditional insurance adjusters, IoT devices can provide automated data and blockchain technology can be used to battle costly issues like fraud. And, finally, get creative when thinking about new categories for insurance products before they become ubiquitous. As we discussed above, there is huge opportunity to be a first mover in areas like autonomous vehicles and commercial drone usage.
Insurance innovation is here to stay, and there is an opportunity for existing players, investors and aspiring entrepreneurs to shape this change. We believe the disruption — far from being a passing fad — has barely scratched the surface.
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