insurance

INSURTECH: Breaking down how technology seeks to transform the $5 Trillion Insurance industry

When it comes to insurance, the $5 Trillion global industry is often deemed to be a slow-moving conservative sector resistant to change. Innovation is thought to be achieved by merely repackaging existing products into flavorsome marketing wrappers with re-bundled cost structures. Breaking down the variables that impact the need for change such as changing demographics and consumer behavior, enhanced connectedness through digital mediums, the emergence of the shared economy, and shift from asset ownership into renting or fractal ownership, we see a profound effect on the sector as a whole. These variables are enabled by the likes of artificial intelligence (AI) applications, internet of things (IoT) ecosystems, and decentralized ledger technologies (DLT) which help accelerate the insurance sector to respond to new trends, the streamlining of operations, reduction in costs, creation of new revenue models and evolution in innovative products and solutions across the value chain. Let's take a look at some examples.

The core to any insurance product is the back-office process of underwriting, which is leveraging AI to extract insights from various data sources, using IoT devices as the collection mediums, and cloud infrastructure to instantaneously update data to models used to improve risk profiling and thus pricing. US-based Flyreel developed an AI-enabled underwriting system replacing the need for professional insurance inspections. It achieves this via an app on a mobile device which is used to scan a property. The image content is then run through computer vision algorithms to automatically identify items relevant to the customer's policy, enabling property owners to improve underwriting efficiency. Very cool.

The reduction in fraudulent claims losses -- estimated to run the US $80 billion per year -- and improving claim settlement efficiency are crucial areas in which technology is sought to address. Inscribe.ai is a San Francisco-based fraud documents detection platform that uses a combination of natural language processing (NLP) and computer vision to scan documents to identify fraudulent claims. In terms of improving claim settlement efficiency, State Farm is testing a permissioned DLT powered by smart contracts in auto claims subrogation -- a process by which insurers settle claims losses amongst each other -- to significantly speed up the process with immediate automatic payment disbursement as soon as liability determination is completed.

Lastly, a combination of DLTs, advanced driver-assisted systems (ADAS) or other telematics installed in consumer's vehicles to collect real-time data on driver behavior and driving patterns have been essential to create more accurate real-time dynamic risk assessments and pricing models. These include pay-as-you-drive (PAYD), pay-how-you-drive (PHYD), and on-demand just-in-time insurance pricing models, spearheaded by insurers such as Cuvva, Trōv, Metromile, Insure the box, Root Insurance. On the topic of auto insurance we would be remiss if we ignored self-driving cars. Although the argument is that such vehicles will potentially reduce insurance premiums by 85-90%, new risks such as software and hardware failure, as well as cyber attack will play a major part in formulation of new premiums. Needless to say that startups such as Avinew are already offering policies to cover semi autonomous vehicles using telematics, AI, and machine learning to help build comprehensive risk assessments and policy pricing models.

It is without a doubt that not that far in the future, we will see the emergence of decentralized autonomous insurance organisations that will leverage IoT, AI, and DLTs to enable Peer-To-Peer (P2P) insurance and eliminate the need for middle men. We will see a state of the industry in which customer engagement, policy underwriting, claim filing, inspection, claim settlement, payments are customized and fully automated. And we cannot wait.

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Source: Flyreel, Forbes (State Farm And USAA See Stark Increase In Efficiency When Testing Blockchain Subrogation), Trōv, Insure the box, Avinew

INSURTECH: Softbank's $300 million double-down on digital insurer Lemonade

Last week we saw Softbank double-down on its backing for Lemonade - the renter's insurance company built for Millennials. In its Series D funding round led by Softbank and supported by Allianz, General Catalyst, GV, OurCrowd, and Thrive Capital, the poster child of disruptive InsureTech innovation, raised an additional $300 million. This latest cash injection, coupled with revenues of $60 million in 2018 and potential $100 million in 2019, puts the company at an estimated $2 billion valuation, and is set to help fuel further growth in the US and with expansion into Europe. We will remind you that Lemonade uses artificial intelligence and analytics to replace the front-office function of incumbent carriers. Simply, their mobile app can chat with users and onboard them without much human involvement. Last year, this was personified in an attempted smear ad run by competitor - StateFarm, who ridiculed the usage of bots and technology in insurance, mentioning “a knockoff robot created by a rival insurance company.” Needless to say that the digital insurer took that lemon and made...well...lemonade - sponsoring the ad across social media, essentially because it promoted Lemonade's AI tech. Last year, we mentioned that Softbank's portfolio of millions of American financial services companies with modern technology stacks and cool brands, spread across different verticals, requires only one of them to be a Goldman Sachs. Could this news be a sign?

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Source: DigitalInsuranceAgenda (Lemonade), Lemonade (2018 Results), Youtube (Lemonade - StateFarm Ad), Twitter (Daniel Schreiber)

INSURTECH: Haven and Lyft make Insurance into a Feature, not a Product

In today's monolithic, financial incumbent world, manufacturing financial product is the highest honor. Picking investments, underwriting insurance, extending credit, powering payments -- these are the best-paid and most defensible careers in finance. Yet we are in a multi-decade transition that rotates the orientation of all industries away from manufacturing product that is "pushed" at consumers, to aggregating consumers that indicate the features to be built and "pulled" from a platform. Looking at the most powerful insurance companies, nearly all are organized as product-first corporations with extensive distribution and intermediation value-chains, protected by sticky rent-taking along the way. And on top of that, insurance companies get to run third party capital through massive, captive asset management businesses as a side-hustle.

Steve Jobs (and likely others) defined a key distinction that stuck with many entrepreneurs. Is your company a Product or a Feature? It's bad to be a feature -- you are just one widget in someone else's platform. It's good to be a product -- you fit into many environments and use-cases. What we are observing now is that the insurance product, historically standalone, is being transformed into a platform feature by non-insurance players. Take for example Lyft and Uber. Both firms have launched captive insurance units in Hawaii, which is a friendly, low-tax jurisdiction for such activity. While these ride-sharing companies have relationships with third party insurers, building insurance product as a feature of the transportation platform buttresses the business model with a lower cost alternative. 

Another example is Haven, the joint venture between Berkshire Hathaway, Amazon and JP Morgan. The venture has a not-for-profit structure and an explicit mission to reduce costs and improve healthcare outcomes for consumers. Let's put aside the point about America's failure to agree on a sane public solution for health insurance. Instead, notice that this medical finance product is being offered to the employees of the three companies in the joint venture. The first takeaway is that this is the core Amazon playbook: become your platform's first customer. The second takeaway is that this offering is a feature of being employed in these organizations, and nowhere else. Insurance is not a product to be bought separately, but something these companies are building for themselves out of necessity in their course of business.

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INSURANCE: Porsche and Mile Auto to cut premiums 40% using AI for pay-per-mile insurance.

Insurance is the holy grail for Artificial Intelligence and the Internet of Things in finance, because it requires a messy interaction with the physical world, rather than living merely in a spreadsheet, database, or blockchain. To this end, we like the news of Porsche partnering with Mile Auto on pay-per-mile insurance. There is a reasonable demand-side argument: owners of Porsches don't drive the car as a primary automobile, and would prefer to only pay insurance for the time they are actually on the road. The second argument is even more fun -- owners of Porsches don't want to be tracked via GPS or a black-box by something like Cambridge Mobile Telematics ($500MM from Softbank) or Metromile ($90MM from VCs) because they are fancy and private people. No tracking please!

How does the thing work? You pay a cheap base rate to Mile Auto, and once in a while take a picture of the speedometer's reading in the app. The picture is translated to numbers via a machine vision algorithm, and your per-mile variable insurance rate is calculated on the spot. The company claims this will lead to a 40% reduction in premiums for the average user. For what it's worth, we hear that the growth of renter's insurer Lemonade is similarly fueled by people who are forced to get coverage (e.g., by the landlord) but are looking for the most discounted, easy to manage product. What does that mean? It means that the low risks self-select out of the insurance pool, driving up the price for unsophisticated non-techies that don't drive a Porsche.

Let's take the argument to an absurd extreme. On the developer website Programmable Web, there are 59 separate APIs that developers can use to build insurance apps and connect into underwriting engines and carrier capital. From Clearcover (affordable car insurance in your app!) to Haven Life (term life insurance on any website or application!) to Lemonade, OCBC Materntity, Qover and a plethora of others, developers have real choice in how to weave these more digital insurance products into the attention black holes in your phone. What happens when the tech-forward customer considers only these options, and the conservative customer considers only insurance sold by agents and direct mailing? Could there be a bifurcation of risk profiles that fundamentally injures the risk-pooling function of the industry? Perfect information about risk collapses the value of hedging. Half of us will know and live in a predicted future, while the other half will pay for the ignorance.

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Source: PR Newswire (Porsche), Company websites, Programmable Web (Insurance)

INSURTECH: Rage Against the Machine and $500MM telematics Softbank investment

Let's start off with the ridiculous, and get more ridiculous. SoftBank has a lot of money to invest in category killing fintech businesses, and one of the latest such players is Cambridge Mobile Telematics, which just received $500 million from the investor. What is it? A widget attached to a car windshield, and then used to collect data about the quality of a particular driver -- from speeding to breaking. This data is then tied to the purchasing of insurance, where "good" drivers have access to lower cost financial products. This is an interesting, and pioneeing, example of how edge computing will create orders of magnitudes more digital data that then feeds the manufacturing of finance. 

A sneaking suspicion in the back of our minds is that driving data is really good for training robots how to drive. Meaning, Google and the rest of the big tech companies are all running experiments with self-driving cars on the road to collect driving data. Something simple from a telematics device certainly is not equivalent to major machine vision and radar data. But it does paint a straight line towards how self-driving car insurance should be priced. Let's repeat that. If a widget in a car tells you insurance prices based on driving performance and you combine that with an AI car, you could compare humans and machines on an apples to apples basis.

The ridiculous part is the human response to tech-first transportation companies. In London, Chinese bike-sharing company Ofo is pulling out of the city because people steal and destroy their untethered bikes. In California, aspiring freedom fighters keep throwing scooters from Bird and Lime into oceans, lakes and rivers. Public service employees are straining to fish out these venture capital funded wonders out of the water. In Phoenix, self-driving Waymo cars are getting their tires slashed and assaulted by gun-wielding road-ragers (Mad Max style, we assume). All that to say that the human element in this story is allergic to being entirely prodded, measured, and automated away. Can politics catch up with SoftBank's Vision Fund, which could build Trump's wall 20 times over? We hope so.

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Source: DigIn (Softbank), Gizmodo (Ofo), Slate (Bird), Business Insider (Waymo)

INSURANCE: Monopoly gains to Amazon's platform from Travelers Insurance channel

Travelers, the home insurer, has partnered with Amazon to sell smart home and security devices. The company is getting its own digital storefront (amazon.com/Travelers) on the Amazon site, where channel customers can get SmartThings water sensors and motion detectors, Wyze cameras, as well as Amazon's Echo Dot. For Amazon, this is a proprietary hardware and marketplace sale. For Travelers, it is a home insurance sale, bundled with the telematics. Additionally, Travelers has integrated two skills into Amazon Alexa, rationalizing to some extent why you need all this technology to interact with your insurance policy.

This is a powerful symptom. On its face, it may look merely like a new marketing channel for a web-first demographic with a few gimmicks thrown in. Couldn't Walmart, Overstock, and the rest launch some product pages and cross-sell financial products? Here's the distinction: Amazon is a marketplace platform, whose value increases if it can grow two sides of its network: (1) manufacturers of stuff, and (2) retail customers. The manufacturers could make financial or physical objects, which don't matter. In order to win the platform game over traditional retailers, Amazon can throw in bleeding edge tech for free (or at cost). Walmart makes no phones, tablets or Artificial Intelligence-based assistants. Amazon does, and it has Big Tech leverage over all the aspiring startups in the space that want its consumer pipe.

Relative to other Internet companies, Amazon has the luxury of being post search intent. The Web is not a free-market endless bazaar, but a few walled gardens with monopoly-like attention ecosystems. Google sits in the pre-intent part of the funnel. People search "home insurance" into the box and get third party websites formatted according to their own logic. These results are driven by two markets: (1) bidding against keywords and (2) optimizing search engine results against a global, non-discriminating algorithm. Amazon is fundamentally different -- a king-maker that can select who wins business within its platform, and which has no need for an open web for Prime customers. This means insurance companies should race to claim their own custom channels on Amazon's version of the web (i.e., Amazon On Line?), which incidentally ends up selling Amazon hardware. This leads to a dynamic similar to that which Apple had on the music labels with iTunes and the iPhone. No competitors in sight.

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Source: Company Websites (AmazonTravelers), Media (DigInWSJ)