InsurTech: changing the world of risk

I haven’t blogged about InsurTech much, as this is a banking blog, but having started life in the insurance industry I guess it’s time to shine a light on this corner of the financial world.

My first hearing about InsurTech, or InsTech if you prefer, was in a US conference a couple of years ago where Progressive Insurance had re-engineered their home and auto website.  Most other insurers, you have to go through two or three screens of in-depth questions and form filling to get a quote.  This is because the online forms are a replica of the paper forms.   Progressive rethought that process and came up with the idea of entering your zip code or, if auto insurance, vehicle registration.  Using publicly accessible databases, they can then immediately give you a guideline quote before you fill in any other forms.

Easy-peasy, lemon-squeezy.

Another example was from Allianz, who were experimenting with smarthome technologies, with the idea that if your doors and windows are chip-embedded to the internet, then they can tell when you’ve left home and have any security vulnerabilities in real-time.

But these aren’t really InsurTech examples, as they’re from incumbents.  Probably my first visible InsurTech start-up that I spotted was Friendsurance in Germany.  Now six years old, the small peer-to-peer insurer has recently secured a $15.3 million funding round.  The way the model works is that everyone contributes to a common pool to mitigate risk, that’s the very nature of insurance.  However, in Friendsurance’s case any premiums left over in the fund at the end of year are paid back to contributors, as the risk didn’t happen.  Pretty cool, although it hasn’t been replicated in other regions yet, which implies this is a more difficult challenge than it appears.  In fact, Ryan Hanley at Agency Nation believes that peer-to-peer insurers like Friendsurance, Lemonade and InsPeer are just brokers and mutuals.  Take this interview with InsPeer founders, Louis de Broglie (LdB) and Emmanuelle Mury (EM) by BlueDun:

Q:   At its core, insurance all about pooling of risks. Are you simply boiling the mutual insurance company down to its essence, removing a lot of overhead, and passing the savings onto consumers?

EM:   Yes, completely.

LdB:   But mutual companies are so big that you don’t feel a sense of community. The idea is to use technology to help you leverage your local community – with all its positive aspects. So it is true that we are coming back to the original idea of the mutual company.

The peer-to-peer advantage is the fact that you band together with your community which creates more virtuous behaviour – a lower claims rate for instance. This can only be possible if people have a sense of community.

So not that disruptive after all.  But technology is allowing some InsurTechs to change the model.  Take the cool InsurTech Trov for example.  Trov gives people the power to insure just what they want, when they want for just as long as they want, entirely from their mobile app.  Here’s how it works:

Since then, a whole raft of start-ups worldwide are doing interesting things, such as these 14 companies:

• Cocoon makes an internet-connected security device for the home.
• Kasko provides a white-label option for instant insurance purchases on affiliate platforms.
• BimaAfya is connecting low income populations in sub-Saharan Africa with health insurance.
• Buzzmove provides price comparison for the removals trade; information that is important to insurers after a loss.
• Myfuturenow helps connect dormant pension accounts to holders.
• Roost makes a smart battery for smoke detectors and counts USAA among its investors.
• Augury makes sensors for heating, ventilation and air conditioning systems
• CoVi Analytics is a platform for insurers to use the required reporting from Solvency II data in their enterprise in other ways.
• Domotz is an Internet of Things management system that offers a platform for insurers to rate risk and manage claims.
• FitSense helps life and health insurers leverage data from wearables.
• Quantifyle allows users to "shop around" their wearable and other health data to insurance companies and find the best price.
• MassUp uses APIs to connect insurers to retailers so people can quickly and easily add coverage to new purchases.
• Rightindem is a self-service total loss claims platform that claims to reduce insurers workload and leakage while improving customer service.
• Safer is designed to help millenials identify what kind of insurance they need by tapping into their social data

Equally, we must not forget firms using distributed ledgers, like Everledger, who are guaranteeing the provenance of rare items for insurance purposes.

And what can an insurer learn from an InsurTech?  Well, here’s six things that Tim Kunde, Co-Founder and Managing Director of Friendsurance believes they could note:

6 things that insurance companies can learn from insurtechs in 2016

Digital innovation in insurance is in its infancy, compared to other industries. It’s so far driven by a small number of so called “insurtechs”. These companies, usually startups, have only just begun their journey and given the size of the industry, their impact is still modest. I would like to share some thoughts about what insurance companies can learn from insurtechs already now, based on 6 years of running an insurtech startup and closely interacting with over 100 carriers in Germany and beyond.

1. Taking risk as an organization

Big organizations don’t like taking risks. They have a working business model and any deviation from it is usually judged by the potential downside, not the upside.
In a startup, this is different. The whole undertaking by definition is risky, and the reason to exist for a startup is to endorse that risk and be prepared to make mistakes, learn and improve – all of that at the fastest pace possible, on a company level as well as on a personal level.

2. Rewarding risk on a personal level

The reason why big organizations usually don’t take risks is that, while it would make sense for the organization, it doesn’t make sense for the individuals behind it. Too easily can your career take a bad turn if you are the guy who screwed up a project.  So, implementing the right culture is the key to getting more innovative, far more important than the usual announcement to “invest 100 Million Euros in digitization in the next 5 years”.  In very rough terms, I suggest to distinguish two steps in getting to the right culture.

Step 1: Don’t punish failed experiments

Imagine a researcher getting fired because a set of new experiments failed– science wouldn’t get very far. The same is true in corporations. If top management wants people to try new things, the career of those people shouldn’t be at jeopardy for it.

Step 2: Encourage intrapreneurship

While step 1 can happen on a case by case basis, step 2 needs a broader shift in corporate culture, where experimenting, failing and improving become more generally accepted, ultimately getting mindset and incentives closer to that of innovative startups and thereby creating “intrapreneurs”.

Startups usually attract the right kind of people for taking risk. They come not because the startup name is great for the CV, or because the job is secure for the next 20 years, they come because they want to change stuff.

The startup’s job is to foster this mindset, and that’s one of my most important tasks at Friendsurance. Apart from implementing the right culture, we also give share options to every employee to make sure everybody can participate in the company’s appetite for risk.

3. Thinking digitally

What insurtechs do is to look how people and digital services can work together to provide the best overall products and services imaginable. We have a more less precise understanding what people are capable of. But the things that machines are capable of change on a daily basis. Only an organization with a digital mindset will keep up with these developments and make sure they are translated into a better experience for your customers.

4. Working digitally

For some things, there is no debate whether a human or machine is better. Sending data is such a thing: a machine is just so much better and faster. And yet, it is incredible to see the mountains of paper that reach us every day, mountains of policies, invoices and other documents that could easily be sent via an API.

Working digitally in insurance is challenging …

Traditional carriers neither have the technical resources, nor the general conviction to change this very soon. We even know of a number examples where APIs do exist, but the people in charge just don’t see the need to use them, because the current paper system is working somehow.

Insurtechs are building up their organizations and their processes digitally from the start. This will become an enormous advantage in the future, not only in terms of cost, but also in terms of service quality and ultimately in customer satisfaction.

5. Focusing on the customer

Whether it’s a service delivered by a person or a machine, the ultimate purpose is always to serve your customers. If you want to understand if you are doing a good job in that, who else should you talk to than your customers themselves.

Friendsurance started its journey with a great idea: Peer-to-Peer insurance. But it wasn’t until we started to systematically turn to our customers that we really started being successful, everything before that was theory.

And that is why:

• We run user tests on a weekly basis.
• We design our processes around a set of ever-evolving personas.
• We measure the NPS (net promoter score) along the customer lifecycle.
• We have an inter-departmental team that meets every week to discuss the results of these efforts, potential solutions and open questions.

In insurance companies, services and products are often produced in the silos of the different departments: actuaries, product managers, sales people. There is no holistic view for the customer. The result: according to a representative study by Emnid in Germany, insurance is seen as the least customer friendly industry of all.

6. Solving problems in iterations

The core of Friendsurance’s Peer-to-peer approach is still the same as it was in the beginning: people connect in small networks to support each other in case of a claim.

Everything around this concept, however, has evolved …

• how we communicate our concept,
• how we build up customer relationships,
• how we integrate with our insurance partners.

If we had continued with the original set-up, we’d long be gone. It’s only because of continuous iterations and problem solving that we got to where we are today.
This is often different in big organizations: a project is planned with a certain setup and resources, it’s executed according to plan, and then it’s evaluated. Depending on the result the topic is continued or not. The problem with this is that throughout the project phase, not a lot of adjustments are possible, so unless the setup was close to perfect in the beginning – and it rarely is – the chances of success are slim.

The “lean startup” method

With smaller test setups and faster iteration cycles, the chances of producing a minimum viable product (MVP) become much higher. This approach is known as “lean startup” method, and there is a bunch of literature around it. While from my experience, sticking to the exact methodologies is less important, the general mindset is of incredible value.

My conclusion: Insurtech startups do not have all the answers but are best positioned to find them

This list could easily be expanded. The general point is this: the digital transformation has reached insurance, as one of the last big offline industries. There are big barriers to entry, but they are not insurmountable. And while insurtech startups do not have all the answers and the solutions yet, they are best positioned to find them.

We have only seen the beginning of the amount of talent and money that will pour into this industry. Companies who think they can still wait a couple of years until they start to embrace digital innovation will cease to exist 10-15 years from now.

And while of this sounds very dramatic, the overall picture is very bright: new markets will be discovered, new products and services created. There is a huge potential to do more business and at the same time create a much more customer friendly industry.