Growing momentum in insurance technology was a major theme at this year's Future of Fintech Conference. See what speakers from Lemonade, AmFam, Hiscox, NEA and others had to say.
At last week’s CB Insights Future of Fintech Conference, the growing momentum of insurance technology as well as corporate venturing within the insurance sector became major themes among panel speakers including executives and investors from Oscar, Lemonade, American Family Ventures, NEA, and Hiscox among others.
In Q1’16, deal activity to insurance tech startups hit a new all-time high at 47 deals totaling $650M in total investment as the landscape expands to startups across life, small commercial, renter’s, and other categories.
Below are 10 perspectives on the insurance tech industry from last week’s conference on a variety of topics including cyberinsurance, a possible corporate VC shakeout, Oscar’s quirky subway ads, and much more.
Will there be an eventual corporate VC shakeout in insurance?
Dan Reed, Managing Director, American Family Ventures
I think one of the things that’s unique to corporate VC is that you’re subject to leadership changes in the organization because you have a single funder and it’s not a traditional LP-type model. So I think one of the main reasons why some corporate VCs will cease operations is the strategy and the leadership of their companies will change.
The other thing that I think is important for the success of a CVC is that they need to make sure they align every aspect of their process to market standards – that has to do with the speed of execution, it has to do with the diligence process and who you need to get involved with and then what type of contractual expectations you have beyond what the financial investor would expect.
Will there be a major startup winner in the SMB insurance space?
Kevin Kerridge, EVP, Small Business Insurance, Hiscox
I remember when I came here in 2009 to scout the opportunity and I went back to London and said, I must be missing something because small business insurance is so far behind everything else in life in the US and what am I missing? And the big conclusion that we came to was that it’s just all about channel conflict. All the big incumbent insurers have got so many billions of dollars of premium tied up in traditional agents that for one of them to actually break ranks and say we’re launching an online direct-to-consumer business would be a huge deal.
So I think that’s the thing that’s holding it back at the moment. We are seeing some signs – Berkshire Hathaway launched a business this year, direct-to-consumer. We’re seeing a lot of activity in the online agent space. But what we really hope for at Hiscox is one of the really big small commercial brands to start going for small commercial in a big way because all those marketing dollars they spend will benefit brands like us because it will help change consumer behavior to actually go to the web than traditional channels.
What are the root causes of why insurance is broken?
Daniel Schreiber, CEO, Lemonade
To us, there are two structural issues in insurance today and that’s why Lemonade is rebuilding itself as an insurance carrier because we don’t think you can simply parachute down some kind of technological solution on existing infrastructure when the problems are structural.
The first is the legacy. In the US, almost 10% of the Fortune 500 are insurance companies, the average age is 95 years old. Nothing wrong with that but what you’re talking about is a corporate structure that is really the byproduct of the Industrial Revolution. These are companies that were best practices, no doubt, at the time of their establishment but those best practices are no longer true today in the era of the sharing economy and the Internet. And it’s incredibly difficult to reinvent yourself when seas change. So State Farm has 18,000 brokers – what do you do? How do you reinvent yourself as a direct-to-consumer when you have that albatross around your neck.
The second is more subtle and insidious and that is the business model. So at the risk of being a little provocative, insurance makes money by denying claims. There is a profound conflict of interest at the very core of the insurance business model. So if I’m the insurance company and you’re making a claim, every dollar that I pay you is a dollar less to my bottom line. And I think that is something that spirals. So I have a profound financial incentive not to pay you, you sense that, which then justifies me treating you as a criminal putting heavy-handed claims processes in place, which pisses you off and makes you behave even worse and you get this spiral where people don’t like insurance, don’t trust it, and most American say they do not believe the insurance company will pay them when the day comes.
Will we see the death of the insurance agent?
Kevin Kerridge, EVP, Small Business Insurance, Hiscox
There’s a lot of talk about insurance agents going the way of the dodo. That ain’t happening. Insurance agents are here for the long-term. It’s more about what those agents look like and how they will be enabled by technology.
On insurance tech investing opportunities
Joe Lonsdale, Founder Partner, 8VC
Insurance is also a really interesting area. I think a lot of the big insurance companies here are aware that they could be using data to do their job a lot better, whether it’s life insurance or health insurance. Health insurance is interesting because it’s very regulated so you can’t use data to do better stuff with individuals but you can with groups and you also can for cutting your costs. I think there’s a ton more to do in health insurance, it’s a trillion-dollar market. I am very bullish on Oscar, I think it’s going to be very big but hopefully there’s more stuff you see there that transforms it.
I think in P&C, that’s obviously a very data-driven area. One of the best run insurers there is Ace-Chubb that combined; they have lower loss-ratios than other companies and I think they’re a very well-run company, but there’s still a ton of data they could be using that they’re not. So you still have these very big insurance companies that are not really up-to-date on the latest datasets and data platforms. There’s lots of room for disruption there. It’s become an area that a lot of people in Silicon Valley are focusing on so you should expect to see a lot more new insurance companies as well as technologies.
Why did you take the full-stack approach when starting Oscar?
Mario Schlosser, CEO, Oscar
In the very early design slides for Oscar, we actually said, oh we should be an asset-light insurance company. So originally the idea was we want to be on our own paper meaning we want to have our own capital, our own balance sheet and so on to be able to make decisions more quickly and decide what we want to reimburse and pay for and so on, but the idea was let’s get the best APIs, let’s get the best platforms to connect to, etc.
We thought that’s how you can build an insurance company early on. And that’s decidedly not the case. There’s really two reasons for it. Reason 1 is when you go and work with vendors that attach themselves to payers in the industry, whether it’s a pharmacy benefits manager that negotiates drug prices for you, whether it’s a network of physicians, whether it is a utilization management vendor, you wouldn’t expect these guys to be particularly technical. We met one vendor very early on, in 2013, and we said bring your technology guys, we want to talk about how to tap into your systems and get a real-time data exchange between your systems and our systems. We go into the room and the two guys who are the tech guys are the guy who plugs in the network cables and the guy who installs Microsoft Office on your PC and they both fell asleep during the meeting.
The second was that healthcare vendors don’t live in environments where they get beaten down on their error rates. Healthcare tends to have a 10 to 15 percent error rate, where claims are wrongly coded, where transmissions get dropped in ways that are very core to the way the business works and nobody seems to really care all that much because you and I as the end users are not the end customers.
So that’s why we said we got to be full-stack, we got to rebuild the systems from the ground up so that we now have our own claims system, our own processes around anything from utilization management to clinical research to member services.
On the plethora of touch points in health insurance vs. other personal lines
Mario Schlosser, CEO, Oscar
The big difference between any other insurance vertical and health is the number of interaction points you have. In auto insurance, in home insurance, you don’t crash your car all the time, your auto insurer doesn’t pay for your car checkup, there’s no preventative care for cars. These are all interaction points we have in health. Health insurance is worrying more than just when you get sick. We are very economically aligned with a member, if we can keep you healthy, we will make you money. The average member has four doctor visits a year, eight prescription drug refills a year and so on so you have these interaction points and that’s a very important difference.
On Oscar’s quirky subway ads
Mario Schlosser, CEO, Oscar
This was the simple insight. We started running search ads and banner ads and we noticed we didn’t get members out of it. And buying something as heavy as insurance, you do want to have an idea of what this company is. So we thought, is there a way to make us look more solid? Subway ads are the second biggest channel that people describe as the reason why they joined Oscar in NY. The first is word-of-mouth. But it doesn’t work in other markets. (In other markets like NJ), radio works better. In particular, DJ reads, where the DJ talks a little about the story. In NY, the subway is very egalitarian. Hedge fund managers and people building your furniture alike ride the subway and radio might be a bit more like that in other places.
On investing in cyberinsurance
Ravi Viswanathan, General Partner, New Enterprise Associates
(We’ve invested) in company called Cyence. It’s a team out of Informatica that started the company a few years ago and the pain point they found is that boards, this is being elevated to board-level conversations, didn’t really know the cyber threats. A lot of the boards are paralyzed and don’t know how to deal with that threat and so there’s a whole industry that’s emerged and this is really insuring for cyber. And there’s a whole ecosystem they’ve developed with carriers and reinsurers and it’s really taking off in terms of being able to bound the threat, insure against it, monitor it, there’s a whole data layer that’s getting established. It’s still in its infancy as a market, but I think it’s a market that will evolve significantly.
On enabling trends in insurance tech
Patricia Kemp, General Partner, Oak HC/FT
Number one is that there’s not a lack of capital. The insurance carriers have capital. There’s an excess of capital so making good use of the capital and allowing data and cloud-based services to help deploy that capital, they want to sell more insurance. Number two, most people would indicate that there’s going to be an employment issue in insurance. That people aren’t going into insurance so they’re losing 500,000 people to retirement over the next 3-5 years so they are looking for cloud-based solutions to lower the cost structure and replace human labor with a cloud-based service so they’re actively looking, most would say.
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