Sometime in the 1300s a merchant in Genoa figured out he could make money by betting on cargo being lost at sea. Thus the modern insurance industry was born. Some sophistication and refinement aside, the basic insurance model hasn’t changed much since.
But don’t forget: we now live in the age of disruption! Startups in the insurance industry, or the “insurtech” sector, have seen new highs in funding this year, largely on the promise of revolutionizing the very way we think of insurance. Insurance, however, like most of the financial industry, may prove less disruptive than many founders and hypesters want you to believe. The core principles are built on relatively straightforward math, and math is hard to disrupt.
Essentially, Probability Of Bad Thing Happening x Amount Insurance Company Pays If It Happens = Risk Of Claim. The premium charged to the insured covers the risk, usually plus a bit extra. If the insurance company assesses risk well and has a large enough risk pool, it gets more money in premiums than it pays out in claims. That’s called profit. If it screws up and pays more than it takes in, it loses money. That’s called a tax write-off.
Casinos work the same way. Their basic model has also gone undisrupted for centuries. All because math is pretty consistent, no matter how much Internet and AI you throw at it.
Despite the inherent limitations, though, technology has changed and is changing certain aspects of the insurance industry. While some startups in the insurtech space are clearly demonstrating that business-as-usual is all but unavoidable, no matter how slick your insurance app is, others are showing signs that a few superficial changes can make a big difference in insurance outcomes – for consumers and providers. Whether or not this represents true “disruption”, as insurtech startups claim, is up for debate.
Lemonade launched with a $13M seed round in December of 2015, and according to their messaging is “the world’s first Peer to Peer insurance carrier”. To date, they have yet to release a product or any concrete details on what their products might look like. We will hopefully see how revolutionary they are sometime this year, but there are a few reasons I’m not exactly waiting with bated breath for anything particularly disruptive.
Firstly, there is the fact that four executives from the established insurance industry joined the company within two months of its funding, and had presumably been approached at the time funding took place. It isn’t that new insurance companies shouldn’t be hiring old experts, but because these guys know the numbers better than anyone, I would be expect them to be less likely than new guns to take a major leaps in policy innovation.
Secondly, Lemonade’s Peer-To-Peer insurance model isn’t as revolutionary as they’d like you to think it is. Companies like AAA and USAA started off as members-only nonprofit insurers where every claim was paid out directly from the pooled premiums of the other members. If any balance was left at the end of the year, it was distributed back to the insured – I still get a dividend check back on my USAA auto policy every year. All of the members, or peers, got together and agreed to insure each other. The fact that we can do it over smartphones and screens instead of getting together in a cigar-soaked boardroom is a nice twenty-first-century touch, but it doesn’t do anything to rattle the model.
A network of peers that never meets each other could actually hurt Lemonade’s hopes, in fact. Part of their game plan is reducing the cost of premiums and servicing policies by reducing the number of fraudulent claims and excessive payouts. The thinking is that when you’re part of the insurance “club” and your claim hurts everyone’s bottom line, you are less likely to make a fraudulent claim or insist on a larger payout than you deserve. But if virtual social networks have proven anything, it’s that we’re really good at being inhumane when we aren’t meeting face to face. P2P insurance will keep people honest like Facebook keeps people civil.
What Lemonade may do is make insurance easier to understand, simpler to sign up for, and more efficient to use. That’s something any insurance company that gives a damn could also accomplish, but since Lemonade is promising it from the ground up there’s more room to hope.
Lemonade promises to be a “full stack” insurance provider. Full Stack, in this context, typically means auto, life, home/renters, property, and umbrella insurance. Health insurance is a horse of another color, and one that’s been having an especially wild ride of late. With its startup take on medical coverage, Oscar is hoping to both take advantage of that volatility and smooth out the bumpy road. With nearly three-quarters of a billion dollars in funding since 2013—including $400M in private equity earlier this year—Oscar has certainly been hitting the healthcare world in a big way. After rolling out in four states though, they haven’t shown much disruptive potential.
Their policies don’t seem to bear any notable difference from those offered by more established insurers. The prices are comparable, too. Over the past year Oscar has been trying to cut costs (and eventually premiums) by cutting back on their provider networks, theoretically incentivizing providers to lower service costs in exchange for greater market share. The numbers haven’t borne this strategy out. The end result has been no appreciable price decrease and fewer choices when it comes to providers.
These are problems that sound very familiar to anyone paying attention to the health insurance industry over the past few…evers. Because health insurance can’t be disrupted in any meaningful way without disruption in the entire healthcare model from the middle out.
Both authentic free markets and single-payer, government-managed models of healthcare/health insurance “work”, despite some grim human consequences in the former and some heavy tax consequences in the latter. But our current system? Where we put for-profit insurance companies, who are incentivized to pay doctors as little as possible AND give patients as little care as possible, in the load-bearing middle? Do we really need to ask why we pay more for worse health outcomes than anyone else? The need for disruption is clear, but it can’t be accomplished by being an insurance company.
Slice is the Uber for Insurance…for Uber Drivers. $3.9M in seed funding earlier this year is bringing this on-demand insurer for on-demand businesses closer to a consumer-facing launch. This is one insurtech startup that’s actually taking a new approach in a new-ish space. Someone was bound to swoop in and try to solve the policy and legislative problems confronting companies like Uber, Lyft, and AirBnB; that someone of the moment is Slice.
Uber has been making the most prominent headlines for its legal battles in cities like Calgary and Austin and states like Ohio and Florida. The majority of the headaches (ignoring the antics of classically “disruptive” taxi drivers) have been because Uber’s own insurance policy—and virtually all regular, non-commercial drivers’ policies—won’t necessarily cover passengers and/or drivers in the event of an accident. Slice steps in to fill the gap by providing on-demand insurance; the policy is only active when a driver is working an Uber call, or while an AirBnBer is renting out their afghan-covered futon, and so on.
Without a live product (no hard launch dates are available) it’s hard to tell exactly how this will work, but presumably an API interface would track your Uber/Lyft/AirBnB time and charge you an accumulated flexible premium each month. Insurers know precisely when they’re covering risk and how much they’re covering, consumers get lower costs with a time-used pricing system, and governments get to rest easy knowing they won’t be stuck with beefy medical bills and other debauchery.
Still, again, the basics of the insurance model isn’t being changed at all. The ability to collect and automatically adjust to real-time data should make Slice’s risk assessment more accurate, enabling them to charge consumers lower premiums and still make a profit. There is a technology-backed improvement to the service that will definitely impact consumers’ insurance experience and as well as their wallets, but the underlying structure is the same as it always has been.
If Slice moved into offering standard auto insurance with the same time-used model, or if another auto insurer did the same, this would be significantly more disruptive to the auto insurance industry as a whole. I’d pay more the months where I take cross-country road trips, and virtually nothing the months I stay at home in the dark and wait for Domino’s to leave my lava cakes on the porch. Insurers could use even more data to adjust risk calculations and floating premiums, too: time/miles driven, average speed, defensive techniques as measured by brake and turning patterns, maintenance records, etc.
The power of Big Data and on-demand data collection does have the potential to radically disrupt insurance in the auto industry, but Slice is only doing it for….well, a tiny slice of the industry as a whole. And self-driving cars will be bringing their own disruption soon enough, rendering this whole line of thinking largely moot.
Trōv is another on-demand insurer that has launched on a pilot basis in Australia, and is hoping to roll out in the US this year. Trōv insures your stuff: phones, computers, instruments, bicycles, and more. You swipe the app to turn on coverage, you swipe the app again to turn off your coverage. The idea is that you can insure your laptop against damage while you’re traveling, or your bicycle against being stolen when you’re in class, but suspend the coverage during periods of low to no perceived risk.
The concept is nifty. It is insurance based on real-time data collection and a snappy user interface that makes insurance easy and even fun for consumers. When you consider the amount of blanket protection you can get for all of your stuff all the time for just $20-30 a month from a traditional insurance provider, though, the niftiness wears a little thin. You can buy item-specific insurance plans for cheap from a number of companies, too, and never have to wonder if you turned your policy on before you started frying bacon near your Stradivarius. So I’m still a touch skeptical.
Will this appeal to Millennial buyers who only own one or two things of value (not including their manbuns and their baseless feelings of pride and accomplishment)? Sure it will. It’s an insurance app, and that makes it totally different from the boring old insurance offered by boring old insurers. In feel, anyway. In terms of financial benefits to consumers and threat to existing Insurance of Things providers, we’ll have to wait and see how disruptive Trōv can be.
Small Change vs Big Money
Regardless of their individual success, Trōv and Slice’s data-based disruptions are shining a light on how the insurance industry can make the most of modern tech, even if it won’t allow them to change the fundamentals of how the industry turns a profit. Data collection and analysis tools are more prevalent, accurate, comprehensive, and powerful than ever before. No one can make better use of that kind of power than insurers. Their profits depend, directly and mathematically, on their ability to assess risks and assign them a monetary value. They’re gathering data on a magnitude they’ve never seen before, and in the long run, that will strengthen their game.
Whoever makes use of that data the best will be the real disruptor of modern insurance. These startups have the marketing cachet to attract Millennial consumers, but I’m still betting on old money to come through in the end. Of course, I’ll take insurance on that bet if the dealer is offering.
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