The Duck Takes Flight: InsurTech in 2018

by Will Thomsen and Arjan Schütte

At Core Innovation Capital we back dynamic founders of early stage companies across financial services. We look for teams building scalable businesses that democratize prosperity by saving people time and money or by increasing earnings. Broadly, we’re excited about innovation in financial health and security through insurance. The InsurTech landscape has changed dramatically since our 2014 whitepaper, Slicing Up the Gecko. Here’s a four year recap along with our take on what’s changed and where we might be headed as the InsurTech ecosystem continues to swell.

Distribution 2.0

The early waves of InsurTech were dominated by startups creating value by finding digital distribution advantages. Across most consumer and small business lines, digital quoting and comparison were all the rage.

For a few reasons distribution was the natural entry point for startups. First, it was familiar innovation for Silicon Valley where digitizing highly manual customer experiences was already a well-traveled path. Beyond that, there was (is) a regulatory advantage; while regulation reaches all corners of the insurance value chain, those who handle distribution typically have an easier time. Capital efficiency in distribution (whether as aggregator, broker or MGA) too gave nimble startups with small balance sheets a natural point of entry.

With a growing InsurTech ecosystem marked by a proliferation of corporate venture arms, insurance accelerators and roadmaps for navigating the regulatory landscape, are innovators focusing on other areas? As it turns out, targeting distribution is just as popular today. That said, the current class of distributors looks quite a bit different. Here are two trends we’re seeing:

• companion software— particularly in the MGA segment, we’re increasingly observing startups deploying ancillary software products to accompany coverage. The strategy has several potential benefits including an enhanced ability for brokers to sell (and earn), an additional customer engagement point, risk mitigation and renewal intelligence.
• application shortcuts — streamlining the quoting and binding process through the use of connected services, APIs or known information. In term life, we’ve even seen reinvention of the insurance product itself as a means to reduce hurdles associated with quoting.

Data Asymmetry

Insurers have long known that loyalty is good for business. Over the last few years, engagement optimization has become a rising trend across InsurTech. New underwriters try to differentiate by delighting policyholders with streamlined applications, easily understood coverage and swift claims processes. While the goldilocks engagement experience begets trust (and thus loyalty) in our new insurance paradigm, there’s another opportunity: empower customers to more fully understand individual risks and coverage needs.

Coverage

Consumers are at a distinct disadvantage when selecting coverage. Not only must humans fight their own behavioral biases when making policy decisions, but many must also work with agents or brokers that have limited or no fiduciary duty. Here are a few examples:

We believe technology is well-suited to fix suboptimal coverage decisions, and believe improving data transparency is a natural first step towards doing so.

Pricing

Compared to many other financial products, underwriters hold an outsized information advantage over their consumers. Take lending for example. Today, the FICO score is widely available and its building blocks generally understood. Over the last decade both incumbents and new entrants have launched customer engagement solutions built on increasing accessibility and understanding of the primary score driving customer pricing.

By and large, policyholders lack access transparent pricing information. Inputs are fairly easy to come by (e.g., driving record, location, make & model), but the model largely remains a blackbox from a consumer’s point of view. We’re fascinated by systems that 1) enable customers to understand how their risk (and thus price) compares to peers more generally and 2) shed light on actionable ways for consumers to affect pricing.

Interconnected Infrastructure

As FinTech infrastructure matured, we began to see a proliferation of programmatic access to data and services, unlocking the potential for new innovation. In FinTech today we see modern personal finance managers, challenger banks and new lenders all relying on infrastructure built by incumbents and new entrants alike. We see insurance mimicking the approach.

Rise of Point of Sale

One additional evolution in distribution we’re observing is the rise of point of sale insurance. With ZhongAn an early pioneer, we’re beginning to see the proliferation of APIs delighting developers who in turn delight customers with automated quoting and binding platforms.

Through these APIs and other more bespoke partnerships, we’ve seen:

• homeowners insurers partner with mortgage platforms
• renters with apartment agencies
• auto with manufacturers and dealers
• SMB lines with business merchants like office supply stores and domain registrars
• other personal lines with e-commerce players

Blockchain

It wouldn’t be a 2018 trends report without mentioning the solution to all of the world’s problems, the blockchain! Irrational hype aside, we’re optimistic about distributed ledger potential in the insurance landscape. Successful adoption would dramatically change interconnectivity across all stakeholders in insurance. Early on, we think adoption occurs in full stack vertical disrupters and horizontal back office enablers (streamlining subrogation, for example.)

Segmentation at N-of-1

It’s estimated that more than 90% of the world’s data was created in the last two years. With this abundance of data, underwriters are unlocking new ways to more acutely price risk. As sophistication grows same-risk groups are divided into smaller and smaller numbers. Generally, this is viewed as a positive outcome–policyholders are more accurately priced, reducing freeloading and incentivizing behavior change to lower risk profiles.

But, what happens when pricing is so exact that an individual is only in a risk pool by herself? At N-of-1 she is no longer protecting against imperfect knowledge in the likelihood of a claim, but solely the uncertainty of the future (cash flow considerations aside.) Also some marginalization may occur if behavior change is unachievable (or unwarranted) by high risk members facing radically elevated prices. We wonder if these factors could meaningfully shift demand, perhaps in a spiral, leading to an existential insurance crisis.

If so, what’s next? Regulatory intervention is a possibility. Looking at mutuals as inspiration we also see a huge opportunity for technology to build innovative insurance structures, creating group affinity and realigning incentives.

Losses: The Land of Opportunity

Finally, the loss ratio remains the largest piece of the premium dollar. It’s more difficult to disrupt, but given its sheer size we remain excited.

In the micro, we see innovators using sensors and alternative data to more accurately price risk, building a relative advantage over competitors. In the macro, companies are focused on fraud reduction, risk mitigation and severity reduction. A few ways we’ve seen this take shape include:

• wearables & engagement — workers comp insurers are utilizing wearables and mobile applications to predict and treat workplace injuries sooner, reducing the cost of treatment. Parametric and biometric sensors offer similar benefits
• data analysis, computer vision & machine learning — across all lines data is leveraged to fight fraud. Additionally data can be used as a prediction tool to prevent incidents that result in a claim. These efficient solutions often accrete value on the expense ratio side, too
• brand/group affinity — created multiple ways (e.g., user experience or incentive alignment through mutual/p2p structures), brand affinity deters soft fraud and frivolous claims

The InsurTech landscape has dramatically more breadth today than it did four years prior. If you’re building something that is pushing the boundaries of InsurTech, we’d love to hear about it. Please reach out.