Insurance Incumbents on the Smart Home, Big Data and Scale

The insurance landscape is going through tremendous change, and policy reform is not the biggest challenge on the horizon. Data analytics, machine learning, and a surge of new entrants are disrupting the traditional insurance model and creating easier, more affordable access to coverage. If these trends are ignored, big insurance providers are in jeopardy of becoming irrelevant, warned Sarah Street of XL Caitlin, a P&C insurance company, speaking at the CB Insights Innovation Summit.

Street was joined on the panel by Deborah Sundal of UnitedHealth, in a discussion moderated by CB Insights’ senior analyst Matthew Wong.

Insurance remains a challenging market. Sundal noted that the industry still has a stringent regulatory environment, an outdated service model, and a slow adoption pace. “We acknowledge that problems exist in healthcare and the problems that exist are way too big to not collaborate among unlikely partnerships,” she said.

Some of the biggest pain points in today’s insurance model are the customer experience and high costs.

“Nobody wakes up excited to buy insurance, but Lemonade makes buying insurance fun,” said Street.

On the front end of the platform, Lemonade, a full-stack insurance startup, has a bot that customers can chat with directly to submit insurance claims. She said this significantly reduces the time to submit and process an insurance claim from weeks to seconds. Additionally, by cutting out the middle processing agent, costs associated with processing the claim are reduced, benefiting the customer. “This is game changing” said Street, whose company’s venture arm XL Innovate was an early investor in Lemonade.

Street noted that in the property and casualty (P&C) insurance industry, behavioral data sets, such as payment history, have created new ways to calculate risk and the cost of underwriting a policy. “Data sets that are proxies for the behavior of the insured are the best predictors of risk,” said Street. Further, they allow providers to create tailored prices based on behavior. “Every business should be looking at data and analytics to improve what we do,” Street said.

Smart home devices are also affecting how P&C insurers underwrite the cost of insurance. These data sets have helped in the property appraisal process and also help reduce the cost of loss.

When asked if smart home devices would eliminate the need to own a P&C insurance policy outright, though, Street said, “It won’t eliminate the need to have insurance, irrespective of what you do around loss prevention, disasters still happen.”

In healthcare, Sundal believes that new data from sensors and wearables could have the biggest impact on early detection and treatment of chronic diseases, but cautioned that the cure won’t come overnight. Implementing new technology requires years of research, data, and regulatory approval. She also highlighted the scale differences of startups going after the full-stack in health insurance. “We can have the most elegant, well-positioned startups who have no idea what it means when we say scale. They may be able to scale for a hospital system, but they do not know what it means to turn on a dime to sell to massive numbers of large employers and then to need to be able to deliver that across the country and sometimes across the world.”

Partnering with the regulators, the government, startups, and nonprofits is critical to getting new technology approved and implemented quicker, she said. “We want fast solutions, but these are 5-6 year projects in research and development.”

Transcripts:

Matt Wong, CB Insights, Moderator: Okay, great. So yeah, let’s just get right off the bat here. Deb, you know, I think on everybody’s mind, obviously, is the recent election and, with that, you know, what’s gonna happen to the ACA. You know, people are expecting…I think they had expected possible repeal legislation as soon as February, but now maybe a little later than that.

But, you know, as you think about that inside of United Health, and what, sort of, the possible effects of that legislation, you know, might be, how does that impact where you’re driving resources, from an innovation standpoint, and what are you sort of doubling down on now or maybe stepping away from?

Deb Sundal, Senior VP of Innovation, United Health Group: Great, so I won’t speculate on the election and the effect of the election. But what I will say is that healthcare is continually changing, so the policy landscape is just one of those areas, and a very important area, but as are many others. So, when we look at machine learning and what’s happening in that space, as we look at even just the chronic conditions and how our population within the United States and across the world is changing, there’s tremendous change and there has been for quite some time.

So, I think we’re all now focused on the undercurrents of change as it pertains to policy, and that’s incredibly important, but as are many of the others that have come and are also existing that have been talked about in this conference. So, our company as a whole, we have over 230,000 employees. We are focused both on the insurance side, from a health benefits perspective, but also on a health services side.

And I think it’s a really unique blend, because what it allows us to do is partner with many, many types of groups. So, we partner at the state and federal levels, because so much of our health insurance is also government health insurance. In addition, we partner with unlikely partners, startups and non-profits. And I think what’s so important is every single person in this room has an incredible and an effective and a good healthcare experience, most likely.

But you also probably have a story or two to tell about yourself or a loved one and a family member that maybe wasn’t a great experience. And what’s so interesting about being able to look at the data that’s accessible within United is that our innovations are focused significantly on the problems. So, the first thing that I will say to you is we acknowledge the problems exist in the healthcare system, and they need fixing.

And they are way too big and massive and too important to all of us, both professionally and personally, to not collaborate across unlikely partnerships. And so, yes, policy helps move that needle. It helps change how healthcare is delivered, as does our changing demographic and population and pieces. So, whether it be access to care or wide variation that we see in the United States around cost and quality, whether it be engagement and how do we, as consumers, get engaged in our own healthcare.

Many of these different problems we’re seeing in our data, we’re seeing in natural experiences with our members, and we’re focused on all of those, including the policy changes that really can help us make a better healthcare system for the United States and then globally.

Matt: Great, and, Sarah, you know, there’s been a lot of new startups on the P&C side, especially going after distribution, you know, in different ways. I think XL has invested in a company called Lemonade. And there’s a lot of corporate venture now investing in…insurance firms who are investing in startups. So how does XL, you know, when it comes to distribution, so that you’re selling insurance and building that, you know, customer relationship with consumers, how does XL identify the startups it wants to invest in and work with, given sort of the influx of different startups now in the market?

Sarah Street, Innovation, XL Catlin: Well, firstly, good morning, everybody. It’s really great to be here. I think the first thing I’d like to sort of say is we very much are embracing all of the new activity that’s taking place within our industry. I mean, we recognize a need to innovate. And, certainly for me, there were a couple of statistics I saw back in 2014 that really made me realize that unless the…and I’m property and casualty, global reinsurance, so different from what Deb does, but a real need that if we didn’t innovate we were going to become irrelevant.

And those statistics were one, if you looked at the percentage growth of nominal GDP in the world back in 2014, it was 4.3%. And if you looked at the growth of global premiums in the insurance industry it was three and a half, something like that. So, the global economy was growing much faster than the insurance sector was, which showed that, over time, if we didn’t start to fix this, we would become irrelevant.

The second statistic, which actually was even more glaring, was if you looked back 20 years ago, at the market capitalization of the S&P 500, about 80% of the value was represented by physical assets on a company’s balance sheet. So, that’s plants and property, buildings, tangible assets that insurance companies had decades and decades’ worth of data that we could analyze, and we were very, very comfortable underwriting the risk on.

Fast forward 20 years, that has completely flipped. Today, only 20% of the market cap is represented by those tangible assets sitting on companies’ balance sheets. The 80% is made up of intangibles. It’s brands. It’s IP. It’s patents. It’s all those types of assets that currently the P&C insurance companies are not providing risk solutions to our clients. So, if we don’t come up with ways to actually innovate, somebody else will, and we will become irrelevant.

So, the P&C industry has a sort of a really interesting challenge ahead of itself. And there’s no doubt that we need help, so we have very much embraced all of the activity in our sector, because I actually believe that XL Catlin is probably one of the more innovative companies within the P&C space. It’s in our DNA. But if I look at it with a critical eye, I think we’re very good at marginal innovation.

I don’t think we’re very good at transformational innovation. And as anybody in this room works for a big company knows, it’s really hard to innovate internally and do those transformational. So, we are really, really interested and excited, not sort of at all head in the sand around what’s going on. We really want to engage with that. And that is very much why we have a number of sort of innovation initiatives within XL, particularly XL Innovate, which is the venture…it is an independent venture capital firm that we sponsored and launched, where it is making investments and working with startups.

And sort of at a granular level, we’re obviously, just like any venture capital activity, looking for smart entrepreneurs and management teams. We’re looking for scalable businesses. Because at the end of the day, to make venture capital pay, it has to be scalable. You have to have sort of…because you’re going to have a bunch of things that don’t work, so you have to have your successes as being sort of big successes.

And whilst we don’t require that it is something that is in line with XL Catlin’s core business, I think we’ve come to realize that where we can add the most value to our portfolio investments and partners is through areas which XL is involved in, because we have the expertise of the individuals within XL Innovate, but if we can bring the 7,000 other people that we have within the broader company to help solve problems, share insights, share knowledge, then actually we can be a much more value-added VC investor, and not just be sort of the cheapest money there.

So, I think, whilst we have done things, I mean, Lemonade, which we can talk about more later, is not something…we’re not in the personal lines business, so we will do things that aren’t when we find really interesting things that we think we can learn from. I think over time we’ll find more and more things we’re looking to…we can bring our bigger expertise to the table.

Matt: So, just a follow-up on that. You know, you mentioned Lemonade, which is a company that is going after sort of the larger part of the stack, I mean, as a carrier license and looking to expand in homeowners and renters insurance. You know, looking specifically at Lemonade, what do you think the major opportunity is for a company like that? Will this have a broader impact on the industry, as a lot of people are talking about?

Sarah: Well, clearly yes, because we’ve invested in it. We think it’s great. I’m always a little hesitant, to be honest, to talk about Lemonade, only because the CEO, Daniel Schreiber, is so articulate. And even if I sort of practiced looking in the mirror, and practiced it a hundred thousand times, I would never be anywhere near as articulate as Daniel in terms of trying to describe what Lemonade is all about.

But as you said, it’s a new insurance company. It’s trying to address a number of what they perceive as being current…big challenges with the current insurance model, and that is both high expenses and customer experience. So on the customer experience side, they have very much focused on making buying insurance fun. Most of us don’t wake up in the morning and go, “God, I’m really looking forward to buying my insurance policy today.”

So they’ve tried to really simplify the process. And they’re using Chatbox in terms of [inaudible 00:32:38] at the front end. And then more importantly, because I think there’s been quite a lot of development already on that front across the industry, but they’re using Chatbox on the back end in terms of claims. And that Chatbox AL Jim was very proud of himself last week, because he settled a claim in less than seven seconds.

And so, a customer submitted a claim, Jim went off and pulled up the policy, did 19 full checks, and then issued an instruction to the bank to settle the claim and send the notification. That is going to be game-changing for the insurance business, because let’s face it, as consumers, we all want things better, smarter, quicker. When you start getting insurance policies issued within two minutes and claims settled as quickly as that, that does definitely change the customer experience.

And then the other aspect of the Lemonade model…so that’s the customer experience front. It’s also the reduction in the cost. And that’s not only from being able to build an insurance company without legacy systems and infrastructure, which allows them to have a model which doesn’t have the 30%, 40% expense ratios that the traditional insurance carriers have. And secondly, they’re also going after improving the loss ratio.

And that’s through using behavioral science and looking at how people think about their insurance companies, and trying to…I could talk about it for hours, and I won’t, but it’s very interesting in terms of trying to change how people think about their insurance company. Because there are certainly surveys that have been done that said that 25% of people in the U.S. are very comfortable embellishing their insurance claims.

So, that means one in four people are happy to almost do insurance fraud. There’s a fine line between embellishment and fraud. That costs the industry a lot. So, by trying to change the dynamics between the relationship between the insurance company and their clients through different business models, we think it’s very interesting and it’ll be interesting to see how it plays out.

Matt: Great. And Deb said earlier, on the health side, we have also seen, you know, a few startups who are also going after sort of that full stack approach. You know, Oscar Health comes to mind. There’s others who are going after sort of the Medicare advantage market. Are there…and using sort of data as a differentiator, or at least, you know, thinking about that.

Do you see pitfalls for startups who are trying to do that, especially as some of the models start to shift when we think about healthcare moving forward? And, you know, do you see opportunity on that front, for startups to really try to break through in terms of a model there in healthcare? How does United sort of think about that?

Deb: Yeah, it’s a packed question. And I think what’s important is that the partnerships are the key. So, Oscar and other health insurance, we’re constantly, as an industry, trying to look at how do we remodel care? How do we remodel that experience? And I think what’s interesting of we have many, many partnerships. So, I’ll tell you a story of how does all of this work together, both from an insurance side, because in earlier panels there were questions around what gets reimbursed, what doesn’t, why is it that way, and then how do we partner with companies who are adding more personalized data?

So, just from a data perspective of what we have today, and I’ll actually read it to you because it’s pretty massive. So, just today, alone, United Health Group covers over 80 million medical lives, 170 million lines of claim data, resulting in 250 million clinical and administratives. So, when you start to boil that down, what does that actually mean? What are we doing on a daily basis? Well, we’re interacting with eight billion lab results a year, four billion determinations, as well as three billion medical procedures. So, already we’re starting.

So, when you say data, and the potential to do machine learning, and to really change how healthcare is delivered today, it’s staggering. So, we have OptumLabs. And what OptumLabs is, is it is a group that’s partnering with Mayo Clinic, and they’re looking at that data set and saying, “What could we do in the natural progression of disease?” So, we partner with academic institutions, we partner with other medical institutions.

And one of the projects is around Alzheimer’s. And so, as we look at that data and start to be able to see, from a predictive analytics perspective, what are the biomarkers and what are the indicators in this massive data set that potentially could keep our loved ones from getting Alzheimer’s? That’s real work that’s happening today within United. But I think what’s also important is once we know that, what do we do? And what do we do that? And how do we actually help treat?

And so, we also go into research from the medical delivery side as well. And so, a great example, and I think you were talking about partnerships, and the startup and what is the role. I’ll spend a little bit of time to talk to you about a particular story that’s one of our big success stories that’s so critical. And what it does is it really illustrates how United, such a huge company, approaches at disrupting our own selves.

And so, innovation is one of our values. It is every single person who is hired to the company is called to innovate. So, what does that actually mean? So, we have the business side where they’re doing that constant improvement on existing products, but we also have robust R&D cells across the organization. So, that might be venture groups, it might be groups like ours that are really focused on medical and behavioral, and then we also have technology.

And so, there’s this team of teams approach where we are keeping things outside of the business until we can incubate it and help. And I think earlier, on one of the panels, we saw this, you know, what is the experience of startups? So, I came to United 11 years ago as part of a startup, so I have personally experienced this, that euphoria of getting bought. And then what does that actually mean, and where do those products go, and how does it actually evolve?

And when we say hockey stick of growth, so we can have the most elegant, well-positioned startups who have no idea what it means when we say scale. They may be able to scale for a hospital system, but they do know what it means to turn on a dime to sell to massive numbers of large employers, and then to need to be able to deliver that across the country, and sometimes across the world.

So, what we do is we partner with those startups. So, let’s just start with the policy question in the beginning, with the Diabetes Prevention Program. So, 79 million Americans today, and growing, have pre-diabetes. So, if you look to the left and you look to the right, 1 in 3 of those 79 million Americans will become diabetic. Our healthcare system was built to respond to acute care.

If you broke a leg, you went in, you paid for that service, you got it fixed, and you went home. The healthcare system today was not built to respond and help manage 79 million pre-diabetics, and keep them from coming in the back door of diabetes. So, how do we respond to that? How do we pay for that? So, we partnered with the CDC, and we said, “Wow, our government has put in massive amounts of dollars of research and, lo and behold, we have an evidence-based practice called the Diabetes Prevention Program.

And it not only keeps people from becoming diabetic, but it also helps people lose weight. So, we partnered with…and many other startups also partnered with the CDC to say, “How do we roll this out nationally?” So, first we partnered with Y, and we said, “Okay, what if we could get the DPP at every single Y in the U.S.?” And our role in that was the technology to actually pay for the claim. This was the first wellness intervention that was medically sound enough to be paid for via claim.

And I think that’s a really important point, and it’s very important, because so many people come and say, “Will you pay for my Fitbit? Will you pay for this device?” We will pay for things that are medically proven in the literature, from an academic perspective. So, we built that system where the DPP could now be paid for via claim versus a per member per month charge. But then we say, “Okay, we still have 79…”

Even though we have the largest distributors of the DPP, we still have 79 million Americans who have pre-diabetes. What next? So, then we partnered with Comcast, and we’ve created a reality-based TV series. And we went to the CDC and we said, “It’s the same exact intervention, but we’re going to deliver this virtually.” And the CDC came back and said, “That’s great, but we’ll only accredit you if this is a proven intervention in the literature.”

So, we partnered with researchers at Northwestern. Yesterday, we talked about grittiness. I think so much we want these devices, and we want the quick fix. But it is these long, five, six year projects that are happening in the R&D space that now, with policy change that says…there’s many, many partnership, and I won’t go through all of them, but through this we won an Emmy for filming a reality-based TV series that was able to help a large employer reduce pre-diabetes in their population. We then went and partnered with the startup of Beachbody, and they are now creating that. And now we have a product in the market which is real appeal, and it’s addressing diabetes.

Matt: I just want to make time for, you know, I think…the title of the panel, you know, Insurance Innovation in the Age of Data, and so I did want to get to some of those before we…

Deb: I think what I would just add, though, is that the intersection of this, what’s so critical, is everything that was talked about in the morning, but then also how is that paid for via claim. And so, this intersection of the claim is what’s critical.

Matt: Great. So, Sarah, I mean, lots of P&C insurers, including XL, are investing in smart home technology and startups who are in that, and partnership and also investing. So, you know, to what degree does smart home technology maybe change the underlying need to even have insurance, or, you know, what will be…when will we start to see real impact in terms of smart home technologies impacting the P&C insurance industry?

And how many…and as the last, you know, the last part of that, is what is the privacy angle of that? Are there, for example, devices that just don’t pass the muster of meeting some of those criteria?

Sarah: Well, certainly there is a lot of activity in the home connected, sort of, sensor space. And we’ve been interested in it for a couple of reasons. I mean, we’re not a personalized writer, but we did make an investment in a company that does residential [inaudible 00:44:10], because were interested in learning more about it, and thinking about it. I mean, do I think it will eliminate the need for insurance?

No, I don’t, because irrespective of everything that you do around loss prevention, disaster still happens. But it will definitely influence insurance. And we think it’s a good thing, because obviously can help on loss prevention. And we’d like to help…I think the industry likes to help or should like to help its customers actually prevent the losses. And in fact, it’s something that we’ve been doing in the commercial space for a long time, where companies like ourselves, we’ve had groups of risk engineers that, when we go out to do the underwriting of a commercial building, they will make recommendations to our clients about things that they should do that would reduce their loss.

And then we would take all potential loss, we take that into consideration. So, I think the industry will engage with it from that perspective. But then also, the data analytics that come out of it could be very helpful. I mean, for years, insurance carriers have offered consumers discounts for having security alarms in their houses, but we’ve not known whether those security alarms have ever been switched on or whether they work.

And therefore, we’ve been assuming that rational behavior would be the case. With real sensors and with real information, we will now, I think, allow…it’ll allow the industry to be a lot more granular on a consumer-by-consumer basis, offering better terms, offering better coverage, lower deductibles, and ultimately better prices for people who we see have different behavioral aspects. So, I think you’re gonna see, with a lot of time and energy by, particularly, the large personal line carriers, being put into it.

And I think it’ll be a great development for the industry. But I do ultimately believe that bad things still happen irrespective of everything that you do, and basically, that’s the basis of the insurance policy, is still to be there to provide the protection when it’s needed.

Matt: Great. So, before we get to audience Q&A, I am curious to get both of your takes on, you know, what…we talked a lot about different things on the panels in the past few days, but what particular data sets do you think will maybe gain in importance over time? Both in health and then also on P&C side that aren’t, you know, necessarily used today in underwriting purposes and in other aspects of the business?

Deb: Yeah, as we move from a fee-for-service model into a value-based care model, which is it’s dramatically changing the relationships between all the players, the employer and member, as well as the medical provider, it’s that small data that will continue to grow. So, as we’ve been hearing about devices and we see a huge advancement in the personal wellness data space, the small data, but it’s really the people who have the grittiness to stick it out, to figure out what the medical small devices are that become FDA approved and are evidence sound that will really make the difference.

And it’s not just the device. It’s the ability that when that physician walks into the room, that regardless of what device you have, you have a single translation of that, and then how do you turn care models more into real-time. So, I’m not dependent on giving you a black box of my data when I come in for my appointment, but you have this real lifetime monitoring. And we’re doing some of that today, even with Type 1 diabetics in the Children’s Hospital, where we’re changing the model of care.

So, it’s the combination between value-based care, that transition towards value-based care, pay-for-value versus services, combined with the incredible potential of small data and personalized data that’s meaningful to both the member and the provider, and gets you beyond a physician thinking of a compliance or non-compliance, but really understanding the behavioral components.

Matt: Great.

Sarah: So, I think for us, within the context of the P&C company, I mean, one, I should stress our CEO has made it clear that every business and every function should be looking at data and analytics to improve what we do. And I thought it was fascinating yesterday listening to Billy Beane and how to sort of take away and then connecting that back to some of the stuff that Jana had talked about on SanDisk and HR using it.

I think even sort of, we would expect our HR department to be using data there. But when it comes to the core sort of what we do, it’s underwriting, it’s risk selection. So, that sort of is where the most critical data sets are. And we found that it is…I mean, there’s lots and lots of data, but as our head of strategic analytics likes to remind us, it’s all about relevant data. And what we’ve found is it’s the data sets that are proxies for the insured behavior, the behavior of the insured, which is the best predictor for us of risk, and things like prior loss, demographics, financial metrics, those types of things.

So, I think it is data sets that will allow us to get even more granular and even more accurate. And as proxies of behavior around the insured, that will be the thing I think that we will see…we’re certainly focused on in terms of accessing.

Matt: Great. So, I think we left a couple minutes for audience Q&A, which I think we’ll be doing from the back. Are there any questions from the audience?

Man: Yeah, we’re running a little bit over, so we’re just gonna ask one quick question. Given the influx of funding and interest to insurance startups and digital health startups, do you think that these venture capitalists and upstart companies understand the complexity of the business you’re in and are they bringing different perspectives by attracting different types of people into the industry?

Matt: Sarah, do you want to start?

Sarah: You know, I mean, it’s hard for me to make observations about other venture capital firms. I mean, I would say I feel, from the XL Catlin perspective, we are very privileged to have attracted Tom Hutton to be managing director of our venture capital. He’s not an entrepreneur in himself. He’s been an investor. But he was one of the original founders of RMF, which now it’s such a critical piece of the property and casualty, or the property sort of net cap risk modeling.

So, he gets it. He knows what it takes to use data and to build a business out of it. He’s been in insurance. So, we find that that, in terms of our dialog with entrepreneurs, is something that we feel is really, really helpful, because not only, actually, we understand the business, but we can help those entrepreneurs themselves, because it is a complicated industry. I mean, I’ve worked at XL for 16 years.

A good portion of it was at…most of it was actually I was on the investment side. I was chief investment officer. But I’ve sat in meetings on insurance for 16 years, and I still only have a scratch of the surface of the knowledge, because it’s complicated. It’s a whole new jargon. So, having the industry expertise, I think, is really, really critical in this particular sector.

Matt: Deb, what about on healthcare side? There’s a lot of investors now investing in a lot of different parts of the very big healthcare industry.

Deb: Well, billions, right? And I think what we see is lots of investment really going I this whole connective personalized device space. But I think what’s important is, both from understanding risk pools and understanding from an insurance side that there’s a component, and then also that grittiness. I think we see that there have been huge advances on the wellness and the prevention side, because it’s not as hard. It’s not regulated by the FDA.

You don’t necessarily need the medical studies that go along with it so that it can be paid for via claim. And so, we see those advancements. But I think if we’re really going to make a turn, if we’re really going to be able to help people keep from getting sick, what we need to do is we need to make those advances and find, first of all, keep it out of the business for a bit longer so that we can really ensure that when it’s coming into the business it is ready for that hockey stick of scale.

And really keep it in that R&D space, but embed it within the business framework so that we can continue to evolve it and get the right publications, and align, and ensure that we’re working with FDA to get approval, and ensuring that we have the publications, and ensuring that those platforms from the data comes into a place where it’s meaningful for the clinician. And so, there are many, many steps, and so the iterations are much longer term.

And I think yesterday that was talked about as well. So, it’s the grittiness, and we want to work with people who understand that, not necessarily the quick win, but have that stamina to really stick with something for three to four to five years before it actually can be scaled within the business.