In Silicon Valley, the typical narrative around any innovation follows a similar pattern: [Insert industry] has not changed in [Insert arbitrary large number] years. They are still using [insert choice of antiquated technology: fax machines, excel sheets, mainframe computers] to conduct their business. Therefore, technology startups are poised to disrupt it — with a new approach, a new technology and a new attitude.
Insurance is no exception. Insuretech — the growing movement that applies technological innovation to disrupt insurance — is gaining steam. Last year alone, startups received over $2.0 billion in funding, (up almost 10x from the ~$250m in funding in 2012). The Insuretech narrative promises a large-scale shakeup of the industry, leveraging efficiency gains through automation, lower losses through better data and the disintermediation of antiquated players through new distribution channels and innovative partnerships. No doubt, there will be some of this.
However, the larger Insuretech opportunity lies in growing markets, rather than disrupting existing ones. This will happen in three ways: deepening legacy product categories, addressing emerging pain points, and targeting previously underserved customers.
Deepening access to legacy product categories.
Take the case of life insurance: in 1990, 83% of households had life insurance. Today, that’s 65%. The product has been on systemic decline over the last three decades. The traditional agent channel struggled to resonate with younger customer segments. For many, life insurance was left for dead.
However, new models are changing this paradigm. Companies like Ladder Life are looking to simplify the on-boarding process and reinvent the customer relationship. Already they have placed over a billion dollars in coverage. Tomorrow, another Insuretech, has taken a different approach. They offer a free tool for their users to plan their “tomorrows”, including will and trust software. Through this process, they help users determine how much life insurance is required and offer them a range of options.
Similarly, renters insurance has historically seen low market penetration and struggled in the agent channel. Companies like Lemonade are shaking up the industry through direct sales and experiments around behavioral design. Last year, they determined that while their overall share was only 1% of the market, it represented over 27% of customers purchasing renters insurance for the first time.
While these models remain early, they demonstrate the potential for new product design and customer relationships to deepen usage in mature product categories.
Solving emerging pain points.
A range of new challenges are emerging that require new types of insurance.
One of the fastest growing insurance sectors globally is cyber insurance. It’s not a surprise. Cybercrime is on the rise globally, and large-scale breaches have become increasingly prevalent and public. The Equifax breach in 2017 was a prime example. While only 15% of businesses currently have cyber insurance today, the market is $2 billion — double what it was in 2015. Some estimate it will reach $14 billion by 2022.
We believe that insuretechs are uniquely positioned. At-Bay for instance is rethinking the insurance model for this rapidly evolving risk landscape. They price policies by analyzing the strength and resiliency of their client’s technical systems. Since the threat landscape is continuously evolving, they offer a recurring risk evaluation and mitigation service for their clients to manage their loss exposure.
Other pain points emerge as industries evolve. For example, solar power is one of the fastest growing sources of energy globally. Yet, these new solar power plants are difficult to insure without a reliable actuarial model, which requires historical data on how they actually perform. Companies like kWh Analytics are aiming to become the data repository for this new industry. They recently teamed up with Swiss Re to issue customized insurance policies and are now protecting $250m of American solar farms. We will see much more of this across other industries.
Targeting entirely new customers
Globally, 1.7 billion people are unbanked. At least a billion more is underbanked. Many have never had insurance before.
This topic is close to my heart. I believe that Insuretech innovation offers a huge opportunity. At the upcoming Insuretech Connect conference in Las Vegas, I will be moderating a panel on the potential for technology to meaningfully drive financial inclusion, featuring Axinan and WorldCover.
The cost of distributing policies economically to the world’s underbanked remains a key challenge. Axinan for instance is looking to replicate ZhongAn’s success in China, for South East Asia. By cross-selling insurance products through their partners, including e-commerce providers and retailers, they are decreasing the cost of selling insurance (so far, they’ve provided coverage for five million transactions). In the long-term, they hope to bundle insurance into products themselves and are building their own direct to consumer mobile channel.
Similarly, WorldCover hopes to offer crop insurance to millions of farmers across Africa via mobile phones. To more appropriately price risk, their underwriting model leverages newly available agricultural datasets, weather patterns from low-orbit satellites, and a machine learning model on risk selection. They have over 30,000 consumers in multiple countries.
We believe Insuretech’s true legacy will be profitably growing the insurance pie while getting coverage to those that have been excluded. But startups won’t be able to do it alone. At Cathay Innovation, we are deeply focused on supporting these scaling startups through investment and advice. We also believe that incumbents have a role to play — that’s why we’ve created a network of global corporate partners & investors, including BNP Paribas Cardif Insurance, Valeo, Total and Michelin.
The Insuretech story too often concentrates on disruption. The larger opportunity lies in growing the market. By working together, we have the opportunity to fundamentally rethink products, solve emerging pain points, and ultimately better help customers manage risk and mitigate uncertainty.
This article was originally published in Insurance CIO Outlook Magazine here: https://www.insuranceciooutlook.com/magazines/October2018/InsurTech_Startups/