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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- As US Stock Worries Loom, Canada’s Startup Scene Booms - June 23, 2017
Excellent article and discussion. Here is a related one:
My comments on that site:
If I had the time, space and inclination, I could refute everything in this article. What most of these “disrupters” have in common is the ability to write press releases that the unsuspecting buy into. Maybe it’s the use of buzz words like “ecosystem” that capture the imagination. For example….
Based on the description in the article, I have no idea how Mojio is going to “turn the insurance world upside down.”
Regarding CoverHound and Amazon 1-click ordering, insuring your property and liability exposures is not analogous to buying an electronic book or ordering 2-day delivery of foot cream online. Insurance policies are complex, legal contracts. If you get an online quote for a dozen insurance companies that simply lists their names and the premium, how do you know what you’ve purchased? How do you know the contract you are entering into properly covers your exposures to potentially catastrophic loss? You don’t. Insurance is NOT a commodity. And what do “urban chic offices” have to do with anything?
I’ve read about Trov but apparently I don’t comprehend their business model for selling “micro” insurance that, as I understand, covers specific property only when exposed to loss? How can you price that affordably? Why would someone want dozens or hundreds of micro policies? Today, you simply buy an HO-4 “renters” policy and it covers almost ALL of your personal property AND your personal liability anywhere in the world. It doesn’t matter how often you move or what you own. What’s simpler than that?
As for Lemonade, does anyone know what they actually plan to do? From what I read, they plan to operate as a mutual insurance company or perhaps a reciprocal. These forms of insurance organizations have been around for ages.
No, this is not “all good news” for consumers, especially where insurance for catastrophic exposures is being sold online without any guidance as to what product best fits the unique needs of consumers. Let’s not be dazzled by every startup that dangles a shiny hype-laced object in our faces or tells us how much better tasting their Kool-Aid is.
Douglas Bruner says
I think we all know the odds are pretty good that the one using the data the best is going to have the most money invested in the project.
Joseph Woods says
I would like to see an insurance policy that covers everything…..everything. Just make it happen.
Vella Reynolds says
That would be ideal, right? But the reason the insurance companies make a ton of money is that they build policies that are not a lose-lose for them.
Chris Logan says
I’m working on it…www.peercover.co.nz
It can be done right now. You just wouldn’t be able to afford it.
Jessica Ferris says
If you can bring in technology to help with things like this and it is used properly, it will disrupt.
Mike Mallery says
The disruptive part of this is going to cause the “big” money to really make a shift of attention to exactly what you are talking about here.
Christopher Padilla says
This is a great article. Insurance is in the top 10 topics of the normal consumer’s concerns these days. Knowing the information that you shared here opens up the possibility that the consumer realizes they have another option. Knowing that startups are out there trying to change the landscape, is a great thing.
Jeff Berezny says
Great piece Daniel. I think it depends on your definition of “disruption.” Is reinventing the way in which people interact with insurance a disruption? It is if it displaces the old way. Is taking an industry that is known for loopholes and distrust and shifting it to one of transparency and openness a disruption? It is if it displaces the old way. The extent to which the new wave of insurtech startups will actually be able to disrupt the industry remains to be seen, but the industry is certainly ripe for a change in tide.
Daniel A. Guttenberg says
Absolutely! My worry is that we’re looking at tech as the solution when really the technology isn’t especially disruptive–I can interact fairly easily with my old-school insurer through my app or a quick phone call. The disruption is in the approach to customer service, and that could include the UI as well as the philosophy behind the UI, but the philosophy is the bigger piece of the puzzle. And that doesn’t need tech at all.
I may be skeptical, but I’m excited to see where Trov goes and I’m always happy to be proven wrong–it gives me more to grumble about.
Cheryl Yakey says
Great comments, Jeff. Whether ‘disruption’ is the right concept remains to be seen, but no doubt there’s a great deal of room for innovation in the insurance industry. And as you point out, if that disruption (innovation) provides the oft missing transparency and openness, so much the better. Wishing Trov great success. I’ll be watching for more about the company!
I’ve yet to understand a business case for “micro” insurance where you obtain a separate insurance policy on individual items. Who wants to track dozens of insurance policies when you can buy a single homeowners/renters policy that coverage almost EVERYTHING you own?
Marilyn Ramsey says
I agree. This is a very good article about a topic that should be talked about. Some of the technology used for the insurance companies might be disruptive, but that is going to be for the consumer only. Right now, contacting your company is getting easier by the year.
“Is taking an industry that is known for loopholes and distrust and shifting it to one of transparency and openness a disruption?”
What “transparency”? Most of these “disrupters,” especially those doing little more than providing an online or app-based market channel are making a variety of insurance policies available on the presumption that they’re a commodity with little or no difference between the insurance products and those delivering them.
There are DRAMATIC coverage differences within all classes of insurance policies. If you get a list of 12 insurance companies and the ballpark premium for each of their auto insurance policies, how can you make a rational decision which is the best value if you don’t know what the policies do and don’t cover? Insurance policies are complex legal contracts. The differences among them are substantive.
Want some real-life examples of how you can lose almost everything you own and 25% of your net income for the next 20 years by choosing a product that allegedly saves you 15%? Check this out:
Sal Gerardo says
Think about cognitive underwriting with a general purpose AI platform. Very disruptive!!
Chris Logan says
Interesting you say casinos work the same way as insurance because the gambling industry has dynamic odds and marketplace betting (i.e. peer-to-peer) e.g. betfair. On-line gambling has changed the industry. Can we say the same for insurance?
Dynamic odds: are coming into play with telematics/IoT – with the help of insurtech startups
Peer-to-peer: whilst there is a limited extent of insurance securitization, it is very limited. Smart contracts and distributed capital has potential to enormously change insurance as we know it and the industry is taking note e.g. http://www.coindesk.com/allianz-blockchain-smart-contracts-boost-catastrophe-bond-trading/
How much can insurtech startups disrupt insurance – I think a lot.
ps I’ll disclose that as founder of PeerCover.co.nz, I’m slightly biased. I’m kicking off an insurtech company that is looking to remove the legal fineprint in insurance and using the crowd instead of legal/medical experts for claim quantification and validation.
Daniel A. Guttenberg says
I’m curious how dynamic odds come into play with insurance, other than changes to the risk pool itself? That is, the insurer’s overall risk changes depending on who’s in the risk pool (and how many there are), but each individual policy holder still has the same odds of needing to file a claim.
In gambling, a change in the “pool” changes the odds for everyone in the pool. My presence at the poker table affects your odds. In insurance, the fact that you and I have the same policy and insurance provider doesn’t change the odds that either one of us will have a claim-worthy incident. My presence in the pool doesn’t affect your risk at all.
A constant flow of environmental/situation information…I can see how an insurer could use that to continually adjust risk assessments and thus premiums, but to roll that change out to consumers you’d have to get them to agree to a variable insurance rate, which would be a tough sell to me as a consumer.
As for P2P insurance, the idea of decentralized capital is great. But you can’t decentralize the intelligence; “the crowd” isn’t going to be any good at accurately assessing risk. Without wanting to get into a debate here, I have some serious concerns about the feasibility and the advisability of something like PeerCover. Unless you have an always-growing pool of policyholders, the last few people to “file a claim” are going to be left out in the cold, having paid into a system that is no longer around to pay them back. It’s only a few steps removed from an outright Ponzi scheme, without the mastermind profiting in the background.
Chris Logan says
Thanks for the response – I hope my reply is not too long…
Odds changing for everyone is the house hedging their bets – because their perception of risk has changed. The same goes with IoT/telematics e.g. the more you are behind the wheel – the more you are exposed to risk – your risk has changed. You could call this rating per mile / dynamic pricing / user pays. People are willing to accept variable pricing if they think they are better risks. But it goes beyond pricing… if you are speeding / travelling much faster than the average vehicle on that stretch of road (measured by a telematics device) insurers can make a higher excess apply – just like they do for young drivers. Hence, the coverage level can change dynamically as well.
I agree that PeerCover is exposed to pricing risk i.e. under-pricing can lead to lack of funds to pay future claims but insurance companies face exactly the same risk. Anyways, PeerCover decentralizes the claim quantification/severity assessment, not the pricing/reserving/capital aspects – which is managed by me – an insurance actuary.
I think your concern is that you want insolvency risk to be minimal i.e. you have preference for a AA rated, regulated, diversified, public, exchange-listed insurer and you are willing to pay a pretty penny for that / accept policy wording that minimizes the insurer’s risk.
We acknowledge that PeerCover is unrated, unregulated, private, unlisted risk sharer and is cheap as chips. Our FAQ’s state that it is a supplemental/gap cover and is not designed to stand on its own or provide basic, insurance coverage. However, we figure folks should have a decent option to address policy wording gaps i.e. co-pay, waiting-periods, deductibles, excesses, (sub)limits, warranties, exclusions and condition of average. I guess we’ll see where is goes – if people like it, there is no reason why we can’t increase max payouts and hedge our risk – with reinsurance/smart contracts or dynamic pricing!
Daniel A. Guttenberg says
I completely agree that auto insurance based on more constant and comprehensive data analysis would be disruptive. I also think self-driving cars will be standard in twenty years, so there isn’t much time for an insurance company to make a profit on that new type of auto insurance, but it would shake things up for sure.
That’s variable pricing based on variables I can control, though; with something like a catastrophic umbrella policy, my risks are relatively stable while the risk to the pool are dynamic. Variable pricing based on who else happens to jump into the pool is a tougher sell.
Insurance companies do have the same risks, and that’s why they’re one of the most heavily regulated industries on the planet. You have to prove that you’re really good at managing your clients’ premiums before you’re allowed to set up shop as an insurance company. There’s no way a crowdsourcing model made up of non-actuaries is going to come close to the same level of risk-assessment.
Yes, insolvency risk has to be minimal for an insurance company to be viable. If the insolvency risk is high, you’re selling very risky insurance. You could argue that it should be legal to sell really risky insurance as long as customers know it, but my guess is if you told people how likely they are to lose money even on an average insurance plan they’d balk (most people lose money on insurance, after all–the system wouldn’t work otherwise).
I’m not accusing PeerCover of anything untoward, and you are relatively transparent (I’m still not entirely sure how it works despite having read through the site a few times). All of that transparency makes it easy for me to say that, while I might be of the minority in this opinion, there’s no way I would pay into a crowdfunded insurance scheme, especially one without defined benefits.
Another difference between insurance and gambling is that no risk exists for the gambler until the wager is made. The gambler creates the risk. With insurance, the risk exists whether covered or not.
On the “new” peer-to-peer approaches, as I understand them, the concept has been around for centuries in the form of reciprocals or mutual insurers. I’ve seen very little from so-called “disrupters” that really revolutionizes anything about the insurance and risk management industry. Some may be incremental improvements in interfaces, but that’s about it.
And keep in mind, not everything can be reduced to an app or an Amazon-like 1-click transaction. Consumers and businesses face complex and potentially catastrophic risks of loss. Risk managing these exposures, with insurance being but one method, is not equivalent to downloading music or buying foot cream on Amazon. Each insurance policy is a complex, legal contract and there are many and varied differences among even the simplest forms of insurance.
No doubt there are ways to tweak the process and improve it, But there is nothing revolutionary I’ve seen so far other than the intensity of the hype and the prolific-ness of these start-ups’ PR firms. But, of course, they know more about an industry that’s been around since the days of the Phoenicians than the players within the industry.
Here’s a great comment from a new venture capitalist:
“Most interesting observation after 3 months as VC is how critical I am of things I know something about and how excited I get when clueless.”
The main thing being disrupted is the profitability of venture capitalists who know NOTHING about insurance.
Wow! Good one! Great job, keep it up, proud of you.