2019 was an interesting year for InsurTechs and insurers alike. We estimate that since 2014, 3,600 InsurTechs entered the insurance market with new business models and emerging technologies aimed at redefining the sector. $25Bn of investment were poured into these new ventures so far. Still there is so much more to do. With over 55,000 FinTechs and promising ventures receiving $100Bn in investment, we must admit that the 6.5% new tech volume that InsurTechs represent is a drop in the water.
This year felt like a little pause with insurers recalibrating, transitioning and re-assessing their innovation strategies. Only 60 new ventures were launched this year. The lowest number of any InsurTech year. Funding is still expected to be one of its highest though at an estimated $7bn, with more mature startups receiving larger rounds.
Many insurers grappled with finding ways to drive tangible impact and measurable outcomes from collaborating with these young ventures by moving from test labs and proof of concept factories to real production level implementations. While we delivered on this exact outcome this past year working closely with a number of our insurance partners, the process itself is not easy to deploy when corporate innovation cultures and disciplines are slow to adapt, up hazard and not well-defined. The internal change required in mindset, goes beyond a few reassignments, welcoming design thinkers or data scientists. The process also demands some level of humility accepting that the chaos and speer headed approach from entrepreneurial environments can also break at the seam If the basic principles for long-term growth are not observed.
As I talk to insurers, partners, collaborators and friends in the sector, the main question still remains how to make returns sustainable in an unpredictable and uncertain world by tackling the issues that affect us all now, while considering those which will impact future generations for the years to come. So, here are my top predictions for 2020.
1 - Health & wellness: prevention precede protection
As the air we breathe, the water we drink and the food we eat continue to become some of the most precious commodities we consume, our world will demand for corporations large and small to be worthy of our purchasing power.
I remember talking this past year with an executive of a renown US health insurer, who shared with me his views on our destructive patterns in this world. One of his key comment was “Why are we today mostly focusing on the billions of people that are unwell, when our priority should actually be on changing the behaviour of the healthy.”
As many other sectors, healthcare is being disrupted by tech entrants rising from core and adjacent industries. These players are able to combine data and emerging technologies to change our behaviour towards healthy living, promoting wellbeing for all ages while supporting large corporations in gradually adapting key priorities towards things that truly matter.
Prevention is on the card. We have seen pure digital players such as Oscar, Clover Health and Bright Health jointly raise $2.6Bn in investment in a market valued at $10+Trillion at least, setting new customer engagement standards and combining the very best of digital platform and ecosystem building techniques to address really deep societal challenges.
Quote: Minh Q. TRAN, founder of Insurtech Capital
“Prevention is at the heart of most mutual insurance companies that want to personalise engagement with customers, change behaviour and drive social impact to differentiate and strategically reposition.”
As, Alphabet Amazon, Apple and even retailer Walmart are all investing in health and targeting now not only universal topics, but also reconstructing the health value chain, It is clear that as part of this reconstruction insurance is certainly on the card.
2 - Autonomous driving: Not as far away than what you think
There are today over 19,000 Auto Tech ventures. These includes on-demand and car hailing transportation unicorns such as Didi, Grab, Lift or Uber as well as usage-based and telemetry insurance providers such as Metromile and Root among the few.
As insurers extract true benefit from advanced technologies, they start to acknowledge that the trajectory from connected car & telemetry solutions that have become gradually popular in various European markets and the US, to smart cars and autonomous driving is not that far away.
Every year, there are 1,000s of fatalities and injuries resulting from motor accidents and an estimated 90% of these arise from human error. Autonomous driving has the potential to remove the risk from human error and could therefore have a dramatic effect on road safety. Google’s redesigned Prius has driven more than 700,000 autonomous miles without a single accident. This reduction in risk could cause third-party damage insurance to disappear. Forbes estimated that premiums could be reduced by as much as 75% as a result. Accenture predicts $81 billion in new insurance revenues just in the US between 2020 and 2025.
As cars become more automated, risks will likely be transferred from the individual driver to manufacturers. Accidents will be principally caused by system malfunction, forcing manufacturers to insure whole fleets of cars instead of individual drivers. This shift will result in typical auto insurance coverage moving from personal lines to commercial product liability insurance with the introduction of big aggregation risk caused by system failures affecting multiple vehicles at once
As Tesla and other motor manufacturers create new sets of products and services based on the rich data sets they collect from drivers to fulfil promises, a next generation of business models will emerge where car manufacturers may work directly with reinsurers to create new types of end-to-end propositions.
3 - Climate change: Increased accountability for those that create the damage
Over a two year-period, natural catastrophes caused a record $225bn of insured losses. More than 50% of those losses are the direct result from "secondary" perils: independent small to mid-sized events (e.g. river floods, thunderstorms, torrential rains) or events that occur as a secondary effect from a primary peril (e.g. storm surges, tsunami after earthquake). These perils have been rising dues to the ongoing increased in urbanisation in areas exposed to flooding and fire risk, consumerism as well as waste, and severe weather patterns triggered by climate change.
Indeed, earlier this year, insurers warned that climate change could make cover for ordinary people unaffordable after the world’s largest reinsurance firm blamed global warming for $24bn of losses in the Californian wildfires among others. Clients holding concentrated assets in vulnerable locations will likely experience the impact of increasing risk pricing and premiums. The result is that people on low and average incomes in some more exposed regions will no longer be able to buy insurance.
Well, already 35 of the world’s biggest insurers with combined assets of $8.9Tn, equivalent to 37% of the insurance industry’s global assets, have begun pulling out of coal investments. They declare that coal – the biggest single contributor to climate change – “is on the way to becoming uninsurable” as most coal projects cannot be financed, built or operated without insurance. It is expected that within two to three years it will be very difficult to obtain insurance for most coal projects and as a result most of them won’t go forward.
“The other dilemma and opportunity facing the industry insurance leaders, is the fact that they also represent a significant portion of global capital markets – either as direct asset managers or given they are large investors in funds structures globally. The exposure of these portfolios to regulatory pressure will grow significantly in 2020 onwards. Greenwashing is a deep and wide dilemma and transparency of assets will create friction for the fund management industry as a whole. So, insurers face a ‘double whammy’ in both the assets they insure and the returns they make from those assets in capital markets. Risk exposure in the transition to a low carbon world should be of the highest priority with insurers globally.” Nicole Anderson, Managing Partner, Redsand.
“We are familiar with Insurance Linked Securities (ILS) in climate change but recently, about a dozen insurance companies are starting to look at Life ILS in relation to climate change”
Insurers will continue to pay close attention to the growing trend created by fossil fuels and the risk they represent. Still, the existing protection gap is an opportunity for the insurance industry to support more of the global population build resilience, deploy more sustainable ways to operate and be better prepared to manage the financial hardship that disaster events can inflict.
To reduce, the underlying gap and create more awareness within the market, insurers will gradually leverage value chain enablers with advanced technologies to improve their risk-modelling capabilities and develop more integrated solutions that produce dynamic catastrophic risk assessment to help reduce the overall underinsurance of catastrophe risks. They will find ways to protect large proportions of the risks that are underinsured or uninsured and educate those needing improved risk awareness to change behaviour. I very much think that climate actions are likely to become one of the defining issues of our times.
“With the very recent announcement from the Bank of England that both asset managers and insurers should, with immediate effect, begin to deploy stress tests to not only manage physical risks but also the transition risks associated with moving away from ‘brown’ to ‘green’ assets and investments, means significant opportunity for technology and new entrants to support the transition to a low carbon economy. I believe we are just at the start of a new fintech innovation curve which will enable capital markets to unlock green finance, insurance to better mitigate against the risks of climate change and transition of global economies and ultimately provide better green financial products to businesses and consumers.” Nicole Anderson, Managing Partner, Redsand.
4 - Inclusion: Don’t ignore that underserved segment of the population
To follow from the previous comments, over 3.8Bn of low-income individuals in emerging countries or the lowest 60% of income do not have access to insurance today. This represents 8.6% of people with no bank accounts in Europe. Increased mobile phone penetration has helped alleviate some of the risk for the most vulnerable populations. As noted above, still insurance is not always available for all and leaves significant sectors of the population vulnerable to disasters and other tragedies. What needs to happen is developing ways to more readily educate underserved customer segments about the benefits and risks of insurance products as well as change insurers’ mindsets in the way products and services are being designed. One cannot just downsize existing products to fit the needs of new market segments. A clear understanding of the new realities for many of these customer segments will be important.
This is where inclusive insurance can help insurers access newer risk pools by serving those that have not been served by traditional insurance. These may include lower middle classes with an emphasis towards the most vulnerable and low-income populations. “Accessing the low-income population is so important in closing the protection gap” states European Central Bank president Christine Lagarde. More and more insurers are aiming to serve these underserved niches through various initiatives such as investing in and collaborating with InsurTechs to tailor unique value propositions. Nonetheless, inclusive products will still continuously to be judged on their ability to deliver social impact while yielding financial growth and profitability too.
We already know that among people with very little disposable income, insurance has become a vital tool to manage financial risks for families such as the stress resulting from illness, crop failures, natural disasters, or loss of income due to the death of the main household wage earner. For instance, farmers who have insurance can often qualify for credit that allows them to purchase higher-yield, drought-resistant seeds—so that if they do experience a drought, they can avoid selling precious assets. This is what M-Pesa thrive to do in Kenya with a mobile payment-led platform enabling parametric insurance to be paid out to the most vulnerable farmers seeking to increase crop yields and profits while minimising the risk of loss. Mobile-based insurance and health services platform, BIMA has also done well receiving investment from the likes of Allianz to build products fit for the emerging economies.
The microinsurance movement is demonstrating the benefits of insurance for low-income people, as well as explored new innovative business models to serve these customers profitably in emerging markets. This trend will gain more momentum and focus in 2020.
5 – AM Best Innovation Score: Driving the transparency of future innovation leadership
Early 2019, AM Best released a first draft of its innovation score which will be finalised and deployed first half of 2020. The score will assess companies based on 5 criteria - leadership, culture, resources, process and structure - from an activity/ delivery, transformational outcome and impact achieved viewpoint.
While AM Best confirms that the score will not affect a company’s rating at first, organisations will need to respond to it by demonstrating how their overall group strategy is aligned with the innovation activities they have in planning and are deploying projects that deliver measurable and tangible benefits that support the resilience and adaptability of the business towards a more digitally friendly world.
Organisations don’t have must choice. They will need to create innovation inventories, audit key innovation activities and identify if they are truly value generating - If not, where the gaps lie. To remain relevant, they must then be opened to adapt internal methods and approaches to meet required cultural and structural innovation shifts. They will need to then evaluate, create and build relevant capabilities to support innovation objectives and adapt incentive structures. This will entail collaborating with startups and focusing on delivering production-ready implementations to augment existing core competences with new sets of assets while industrialising the process. This will also mean upskilling multi-disciplinary internal teams in the art of innovative thinking, business model and venture development.
While we are expecting to see successes and failures, by the end of 2020 we will likely have a more transparent representation of the true innovation leaders and those aiming to grapple with deploying innovation frameworks that yield value.
6 – The future of startup growth: follow the zebra or the unicorn?
We have seen this year interesting development around unicorns such as Facebook, Uber and WeWork either being called upon to improve their data privacy practices, to eliminate toxic workplace cultures or to base their inspirational valuation on more than just good stories.
Is the rise of the charismatics entrepreneur gone as NYU professor, Scott Galloway, predicts? Probably not if the basis of creating successful businesses is aligned with satisfying customer needs, designing value adding products and services, and delivering sustainable and profitable growth over great investor stories.
The truth is that we will still have a few big large winners reshaping market practices with innovative business models able to challenge known business believes. And many more challengers likely to more widely look at balancing a variety of business drivers to align profitable objectives with societal impact. There is indeed too much capital in search for good investment opportunities.
At the same time there is a new tribe of companies that are emerging called Zebras. “These alternative models will balance profit and purpose, champion democracy, and put a premium on sharing power and resources. Companies that create a more just and responsible society will hear, help, and heal the customers and communities they serve.” state Jennifer Brandel et Al. in their essay on the Zebra.
The Zebras are a group of strong collective that protects and preserves one another, like the basis of insurance: Mutuality. With 12 InsurTech Unicorns, I have certainly met more Zebras in insurance than Unicorns. And a few investors will likely lead the way in adjusting their investment thesis to balance hype vs sustainable growth, particularly in a market where 90%+ percent of the players are actually Zebras. In 2020, we will see insurers look for more Zebras able to impact of world on sound basis and in a profitable way.
7 – The gig economy: Enabling new small business entrants
As the “gig economy” grows and makes short-term engagements, temporary contracts, and independent contracting commonplace, it opens up new opportunities for freelancers where professionals can decide where and when to promote their skills to buy for service. These freelancers are commonly known as sharing economy and agile workforce. For instance, in North America and Western Europe, approximately 150 million workers have left a relatively stable and comfortable organizational lifestyle to work as independent contractors. These people include the emergence of ride-hailing and task-oriented service platforms, knowledge-intensive advisory and consulting industries as well as creative occupations. These are highlighted by McKinsey as the largest and fastest-growing segments of the gig economy.
Globally, what constitutes participation in the gig economy is still evolving. On the 11th September 2019, the California Senate passed gig-work legislation that could transform the state’s employment landscape by turning many independent contractors into employees.
Ultimately people are questioning how they want to work as well as questioning what it means to be part of the workforce. We know that growth from the gig economy, as well as changes in the way and nature of work, or even the way young businesses want to bank, have driven signs of progress within workplaces, work styles, and also financial and account management practices.
As insurance becomes a key enabler for SMEs to manage and prevent risks digitally and friction-free, the usual one-fits all approach to designing products won’t work any longer. Insurers will need to personalise their offers and identifying relevant value-added services for very niche market segments, provide and collect intelligence to score good behaviour and master dynamic and/or risk-based pricing while ensuring a seamless set of interactions. It is likely that 2020 will see more interest from several leading organisations in redefining value generating offers for that segment and build ecosystems of value-added services to support the multitude of needs the small business has, a little like Starling Bank’s marketplace.
8 – Reconstructing the insurance operating model
60% of InsurTechs that are out there are pure digital players aimed at delivering sliver of end to end propositions targeted a very niche market segment. Still progress are being made to augment the insurance value chain with very specific tech capabilities able to support the segments and propositions of tomorrow.
Distribution: The prevalent distribution channel in insurance is the broker and the agent. As we all know, in the UK price comparison websites have gained significant influence for the past 15 years and have been a key driver of consumers increased price sensitivity. Still, new digital brokers and direct to consumer players are also winning market share in the car, home and travel spaces. As FinTech challengers and engagement-focused players such as Yolt, N26, Revolut, Starling Bank are delivering seamless digital experiences, they also are striking new partnerships to re-invent what customer access, reach and interaction could look like. In personal lines, insurers have lost 2 to 3 percentage point market share to new entrants and adaptive competitors. Insurers must find unique ways to reach customers through their preferred engagement methods and align with new desires and behaviours.
Underwriting: It is not easy to make a profit from underwriting activities today. An EY report found that the combined ratios for the Top 20 European P&C insurers increased from 93.8% in 2012 to 98% in 2017. It id unlikely that the aggregated data will not look any better for 2018 and 2019. Given low interest rates affecting investment decisions, insurers are less certain as to how to drive sustainable growth. As InsurTechs develop new methods to source unique data sets to drive new dynamic, real time or on-Demand pricing techniques they will thrive to satisfy the needs of the most demanding segments.
Claims: In the eyes of many, claims processes are the real service that matter for customers. Claims management must be engaging, transparent and speedy while mitigating the risk of fraud. A Forrester report found that “in the UK 71% of property & casualty insurance customers would consider switching providers if they had a bad claims experience.” This thesis is supported by many research agencies around the globe. A number of new entrants, within the financial space and outside, are now on a mission to make claims, payment, settlement and billing processes as smooth, integrated and frictionless as possible. A number of strong use-cases are being pursued by young ventures that incumbent players should not omit to quickly.
Insurers that have been observing the market trends know that many value chain enablers actually stand in many other tech categories than InsurTech. Understanding how to truly deliver tangible benefits from combining a series of emerging technologies across the value chain will accelerate in 2020.
In a world where tech companies lead the way, it is no excuse for executives to take too-long in making unusual and riskier choices to save their business. Shareholders are likely to put pressure on CEOs to get in line, be replaced or sell their business if they don’t align with the new market reality and avoid the fate of so many companies that dropped out of the Fortune 500 since the 50s.
As Daniel Schreiber CEO of Lemonade shared with us at DIA Amsterdam 2019. We have only touch 1% of the transformation which will affect the insurance sector in the future. So, whether you think about pure digital players, value chain enablers or ecosystem builders there is likely to be winners and losers across the board and a lot of learning still to be made. The path though is unlikely to be an easy one, even for those with an eye on how to identify, collaborate or invest in the most innovative business models.