The P&C insurance industry has yet to see the full impact from Covid-19 — but it is coming. As incumbents look to gain a competitive edge and protect the franchise, they may finally embrace promising, emerging insurtech categories.
US-based property and casualty insurers are in crisis.
The Covid-19 pandemic has hit P&C insurance revenues while increasing losses. While US-based P&C insurers have been historically slow to adopt new technologies due to leadership and regulatory constraints, insurers today are under unprecedented pressure to reduce costs and protect the franchise.
As a result, insurtech — the technologies and products leading innovation in the insurance industry — is seeing renewed interest.
Below, we take a look at why tech has never been front and center in the $650B US P&C insurance industry, how the Covid-19 pandemic may change that, and the tailwinds and headwinds that will impact insurtech categories such as cyber insurance, telematics, drone inspections, and others.
TABLE OF CONTENTS:
- The tech gap in P&C insurance
- Why now for insurance & innovation
- How the Covid-19 pandemic is changing insurance
- Tailwinds & headwinds for insurance technologies
The tech gap in P&C insurance
Historically, tech innovation has not been a huge investment area in P&C insurance.
Instead, keeping up with extensive regulation meant that 60-70% of investments went towards maintaining regulatory compliance.
Organizational structure, regulatory landscape, and inflexible legacy technology have also been major contributors to the slow-moving pace of change in the industry.
Organization & structure
Compared to other industries, leaders in insurance have long undervalued technology.
In the mid-20th century, many large industrial conglomerates like GE provided management programs that gave company leaders experience across the different areas of the business, such as IT and manufacturing.
This was not the case in insurance.
Leaders typically came directly from the main functions, like underwriting and claims, while the IT department reported to the finance or operations executives rather than the CEO. As a result, these leaders tended to see technology as a cost center rather than a strategic opportunity.
Although some insurers have started to broaden executive rotations, this legacy shaped the industry’s approach to IT.
Progressive Insurance is one auto insurance giant that bucked this trend. Glenn Renwick became the CEO in 2000 after 2 years as the head of the IT department.
As head of Progressive, Renwick focused on tying tech to business outcomes. He spearheaded the adoption of tech that could improve the customer experience, reduce expenses, and boost efficiency — like redefining the length of auto policies to more accurately price shifts in risk. For these efforts, he received significant blowback from competitors and Wall Street.
But by 2002, Progressive had grown new business insurance premiums by 30%. When Renwick retired in 2016, Progressive’s market value had increased by about 2.5X since the start of his tenure, and written premiums had more than tripled.
Former Progressive CEO Glenn Renwick prioritized IT spend to take the lead of the auto insurance market. Source: WSJ
His leadership served as an example of how a focus on IT at the very top of the org could have a major impact on an insurance incumbent’s growth.
Regulation & competitive landscape
Another significant challenge to insurance tech investment is regulations. Insurance — especially personal insurance lines like auto — is a highly regulated industry, requiring significant maintenance investment to ensure compliance with frequently updated laws.
On top of overall compliance costs, certain insurance regulations may also disincentivize investment in new tech. For example, regulators protect consumers by requiring that US auto insurers file policy pricing and pricing rationale to confirm that policies are non-discriminatory. This means that pricing strategy is difficult to change quickly, so it can’t be used aggressively as a way to beat out competitors and gain market share.
While this is typically cited as a reason insurers don’t invest in technology, a forward-thinking insurance company can turn it on its head.
In the case of Progressive, the company used technology to employ a multi-tiered rating policy. Once published, competitors could see the company’s strategy, but they didn’t have the tools to enact a similar plan.
Regulations for US insurers also help keep the competitive landscape stable due to the high costs of compliance. Between 60-70% of tech spending within the space has historically gone toward maintaining old systems and keeping up with regulations.
Complex & outdated technology
Insurers weren’t always laggards in tech adoption. In fact, insurance was one of the first industries to adopt the use of mainframe computers back in the 1950s. However, being first created its own set of challenges in later decades.
Farmers Insurance’s first computer was a 1956 IBM mainframe. Source: Farmers Insurance
In the 1950s, insurance companies built in-house, proprietary transaction systems. Every insurer built its own set of programs to underwrite or price policies, manage claims, bill customers, and report insurer activities to regulators. At the time, these systems were complex and state-of-the-art, using code language like COBOL or FORTRAN.
By the start of the 21st century, however, these systems were outdated. Still, some insurers held onto bits of these legacy systems for as long as 40 years.
Insurance companies have been reluctant to revamp or rebuild back-end tech. It was working well enough, didn’t cost much to maintain, and there was limited competitive pressure to innovate or improve. Instead, they would add new software to the original code to keep costs low while also staying up-to-date with any regulatory changes.
As newer processes and code were bolted onto the original product, the existing systems became more confusing, messy, and difficult to rebuild.
Source: MacKinney Systems
More importantly, the techniques used to discover and implement new technologies grew old and outdated as well. New products were typically developed using the “waterfall method,” where individual departments would work sequentially on their own part of development rather than collaborating across all stages.
This all began to change in the mid-2000s.
Tech companies entered the space to offer insurers more flexible packaged software, such as all-in-one claims management systems with flashier user interfaces. Insurers could now decide whether to build out their own systems or buy.
That said, while these packages offered more flexibility and increased efficiency, they largely tackled broad insurance functions like claims or billing, and did not respond to advances in emerging technologies.
The rise of insurtech over the last 5 years is starting to change that, as insurers increasingly focus on tech across new areas including accident detection, claims settlement, and renewal processing.
Why now for innovation & insurtech
The rise of digitization has finally come for insurance.
Consumers now expect the purchasing process for insurance to be as easy, cheap, and accessible as buying something on Amazon. They also expect consistent and fast customer service, for everything from policy coverage to settling a claim.
As a result, insurers have been forced to improve their application process to retain customers. This change is now the standard. However, by improving the speed and ease of applying for new policies, insurers also lowered the barriers to switch providers, making it easier for customers to hop from one insurer to another, further increasing competitive pressure in the space.
Now it’s not enough to have high-tech apps for policy application or claims settlement — insurers must stand out in other areas as well. Insurers are looking at add-on services like automatic applications and simplified claims settlement processes to provide better customer service, increased engagement, and lower costs.
To do so, they have begun looking more closely at insurtech startups.
In the past, insurers would build their own technology systems. Now, insurers can partner with, purchase a stake in, or buy point solutions from startups. This is a relatively new option, and it’s materially changing insurance technology.
Since 2015, the rise of insurtech startups has allowed insurance companies to add on new products or features that work in concert with its main transaction systems like billing, claims management, and underwriting. Unlike the broad packaged software of the 2000s, these features are very specific offerings, and they are often created using advanced tech like computer vision.
For example, the claims management process for auto incidents used to require visits from adjusters to confirm damage and significant paperwork. For insurers, the process was difficult to verify.
Now, some insurers are turning to startups like Snapsheet, which enables users to take pictures of car damage themselves, or Cambridge Mobile Telematics,which provides real-time data on car speed and movement during an accident via in-car telematics.
Source: Cambridge Mobile Telematics
To scout out promising tech startups, some insurers have put venture groups in place. American Family Insurance, for example, has had innovation and venture groups in place since 2012.
The company teamed up with startup co-creator firm Highline Beta to launch Relay Platform, a re-insurance collaboration platform. American Family’s partnership with Highline meant that Relay was able to “cut the initial exploration and MVP development work by 1-2 years,” according to Relay’s CEO. Relay Platform was later spun-off from a project within American Family Insurance into an independent company.
Source: Relay Platform
Now, as the Covid-19 pandemic puts unprecedented pressure on insurers, incumbents that have built out agile systems for incorporating new technology have a competitive advantage.
How the Covid-19 pandemic is changing insurance
The Covid-19 pandemic has forced insurers to rethink their business models.
For publicly traded US P&C insurers, underwriting results in the first quarter were similar to last year, as the virus did not begin to impact the economy until mid-March. In fact, Q1’20 profits were up 21% year-over-year, according to AM Best.
Emergency relief programs will help stem some losses associated with the stay-at-home orders and prevent some businesses from permanently closing; however, second quarter earnings will be significantly impacted. As the crisis continues, it is expected that consumers will be slow to return to regular spending habits, the US will see continued economic slowdown, and bankruptcies will spike.
For insurers, this means the worst is yet to come. Many businesses still have insurance policies despite temporary closures — but as some close permanently, insurers will lose customers and revenue streams will likely contract. They will also suffer from loss of investment income as interest rates remain at historic lows, and losses related to policyholder fraud could increase in the coming quarters.
Insurers will have to protect themselves by cutting expenses in line with falling revenues and by protecting market share.
Insurers will need to reduce expenses to survive as revenues contract in the coming quarters, so any technology that allows them to cut costs or create other efficiencies will be extremely valuable.
Process efficiency is one area with potential for significant cost savings. Many P&C insurance functions still rely heavily on a paper form workflow, even if they are submitted online. Extracting the content within these forms requires human analysis and data entry, which is costly, time-consuming, and prone to error.
Some insurers are partnering with and investing in data analytics startups that extract text from documents to streamline this process and cut costs. For example, QBE Insurance Group uses data extraction startup Hyperscience to process personal automobile claims. QBE’s venture group also invested in the startup in 2018.
QBE Ventures has also invested in SaaS startup Riskgenius, which works with insurers and uses AI to review insurance policies, check coverage details for consistency, compare products to competitors, and evaluate new risks. The company automates previously labor-intensive tasks, helping insurers improve efficiency and reduce expenses.
Other insurtech startups focus on reducing a different loss driver: fraudulent insurance claims.
Shift Technology, for example, uses AI-driven algorithms to identify fraudulent transactions. It offers two main products: Force, a fraud detection suite, and Luke, a claims automation module for simple claims cases. These tools aim to simplify the claims process by using AI to compare claims against a library of scenarios to identify fraud risk, reducing costs for insurers.
Protect the franchise
Insurers that bring internal expenses down may be able to better weather the storm as revenues start to decline. However, Covid-19 will also require that insurers be more proactive in retaining their customers.
Insurance is a relatively sticky industry, with an average retention rate of 84% in 2018, according to the OECD, but the pandemic is poised to change that. Customers today are more likely to switch insurance providers that offer lower costs or better service. In fact, 77% of auto insurance customers were likely to look for another provider in 2020, according to a study by J.D. Power.
This provides both a threat and an opportunity for insurers — the companies providing the best customer experience can gain significant market share amid the turmoil.
Insurtechs could help with retention by enhancing customer service and increasing personalization.
One way of doing this is digitizing claims management. Even before the pandemic, 39% of policyholders who had a positive experience filing a claim were still likely to switch to another provider. This number rose to 65% of people who had a negative experience.
Insurtech startups working to improve customer experience include Tractable, which uses AI algorithms trained on images of car accidents and repair operations to create damage assessments and cost estimates.
Similarly, Matterport and Hover let users take pictures of properties with a mobile phone and create precise 3D renderings that can be used for claims processing, appraisals, and adjustments.
Another retention lever is improving personalization.
For example, Slice Labs provides a platform that enables insurers to build pay-as-you-go digital insurance products. Customers can buy auto, homeshare, travel, or cyber insurance for only the time that they need them with coverage personalized for their needs.
Tailwinds & headwinds for insurance technologies
The Covid-19 crisis is accelerating certain insurtech trends while making others irrelevant.
The insurers that come out of the pandemic ahead will likely be those that are agile enough to invest in technologies experiencing tailwinds and deprioritize those facing headwinds.
Below, we take a look at the insurtech trends that will be most relevant amidst the coronavirus pandemic, and those that will most likely take a hit in the coming months and years.
AI and predictive analytics
Covid-19 brings uncertainty to insurance underwriting and claims settlement. As the industry adjusts, it will need to look for new patterns in data and adjust practices appropriately. Insurers using the emerging techniques like artificial intelligence, machine learning, and predictive analytics will gain a competitive advantage.
Usage-based insurance & telematics
Usage-based insurance (UBI), a type of auto insurance where policyholder premiums align with vehicle use and driver behavior, should see significant tailwinds from the Covid-19 pandemic.
Telematics — the in-vehicle devices that track driver behavior like speeding, distance driven, hard braking, and air bag deployment — will likely be of interest to consumers who may be limiting their driving during and after lockdown.
Robotic process automation (RPA)
Robotic process automation (RPA) tech cuts costs for insurers by automating manual processes like sorting, data entry, document routing, and other labor-intensive workflows.
Insurers can save money by using RPA to automate tasks in claims, underwriting, sales, and service areas. Though this is not as novel as other categories, and a lot of work has already been done in the space, it will likely see more interest from insurers looking to reduce back-office costs.
Virtual claims, where policyholders can submit claims online or through an app, have the potential to help remake the digital experience in P&C insurance. For example, taking a picture of your belongings or relevant damage to a vehicle is a much better customer experience than scheduling a visit with an insurance representative at your home or in their office to file a claim. It may also help to reduce the labor costs of claims management for insurers.
Cyber risk insurance
Insurance that covers the risk of cybersecurity breaches is already seeing a huge jump in interest from businesses, as remote workers lead to additional security risks and more operations moving online create more opportunities for hacks. For example, cyber hacks more than doubled from February to March 2020.
Though cyber insurance is hard to price, the customer demand for this product is high now, so insurers that get in on it now may be able to hold or grow market share across multiple offerings.
Natural language processing (NLP)
Chatbots and other uses of conversational AI could benefit insurers on two fronts: they could reduce the costs of employing customer service representatives, and they could improve the customer experience if used correctly.
Insurers have some of the lowest rankings for customer satisfaction, according to Celent — scoring only above the government and cable companies. With significant room for improvement, automating and speeding up the customer service process would be beneficial for insurers.
Geospatial analytics use satellite photos, GPS, and other tech to evaluate underwriting risk and assess claims. Similar to usage-based insurance, geospatial analytics can improve insurance policy pricing by more accurately evaluating risks and increasing returns for insurers while potentially lowering premiums for policyholders. It can also be used to assess damage during catastrophe events and provide outreach.
Smart home monitoring
IoT and smart home monitoring was slow to take off even before Covid-19, mainly due to the difficulty of installing smart home devices and the lack of interoperability between systems.
Many homes are not yet wired for smart devices, upping the cost and hassle of installment. It’s unlikely that home monitoring devices will take off broadly without some kind of regulatory requirement, similar to how smoke detectors became widely used. This trend will likely remain on the back burner for the time being.
Drone inspections are used by insurers to assess damage to a property following a catastrophic event, or to assess risk factors surrounding an area from the air.
Though drones allow insurers to make more accurate estimates when underwriting, there are a few factors holding the space back. For one, the rise of virtual claims means that clients can take their own images of any damage without requiring the use of drones. Secondly, FAA regulations require that drones flown within a business context are operated by someone with visual contact on the drone, meaning that drone inspections can be labor intensive.
Peer-to-peer (P2P) insurance is a very new product within a new market. Unlike typical insurance policies, P2P insurance allows policyholders to pick their insurance pool to share premiums and risks, whether it’s family, friends, or people with similar interests. After the policy period, any premiums still left over are refunded to the policyholders.
At the moment, the area does not have meaningful investment from established insurers. Given the urgency of responding to Covid-19, more nascent areas like this are unlikely to gain traction in the near term.If you aren’t already a client, sign up for a free trial to learn more about our platform.