Going Micro Is the Next Big Thing For Insurance Tech

InsCredit vFMicroinsurance — like microloans and microcredit — traditionally is thought of as a product for those in the developing world who earn $4 or less per day. But the very same innovations that made microinsurance possible and profitable are about to transform the larger insurance market.

For global insurers, microinsurance has been a fast-growth market: from 76 million clients in 2010 to 260 million in 2013. (Lloyd’s estimates that potential global market at 1.5 billion to 3 billion policies.) To sell these products profitably, however, insurers had to become drastically more efficient in administering policies. Mobile apps, FinTech systems and other digital innovations made that possible.

I believe that as these tech and operational efficiencies saturate the industry, we’re going to see a burst of innovation in insurance that will lead to more flexible, consumer-centric products for everyone.

To understand why, you have to look at two major inefficiencies in how insurance works today:

To understand why, you have to look at two major inefficiencies in how insurance works today:

  1. Operational inefficiency: A standard $1 million term life insurance policy costs about $1,000. At that price, insurers can afford to have multiple humans touch each policy as it flows through departments, from underwriting to in-force, and into multiple IT systems. When policies earn that much revenue, it also makes sense for a company to improve its bottom line by increasing sales or competing on customer experience rather than driving down operating expenses. Microinsurance—where a premium might be just $10— required a new paradigm. An operations efficiency loss of just $1 per policy represented 10% of the total revenue.
  2. Distribution inefficiency: Insurance’s commission-based sales model depends on those large, expensive policies, which then fuel operational inefficiency. An agent who might get $1,000 to $20,000 in commission for selling large life insurance policies doesn’t bother much with selling smaller policies (e.g. renters insurance or smaller term life) that earn him just $10 to $100. The carriers then focus on the larger policies that can support the big commissions, and thus don’t care about improving operational efficiency. It became a cycle to that was difficult to break until technology intervened.

Micro policies’ huge opportunity

Metromile shows how innovative micro-policies are already popping up outside the traditional realms of microinsurance. The auto insurer pioneered the idea of usage-based car insurance, targeting the low-mileage driver: customers pay a low monthly base rate (10% to 20% of a standard policy) plus an additional charge per mile driven tracked via telematics dongle. Metromile built its systems to be dynamic and efficient to automatically ratchet the insurance bill up or down depending on miles driven. Since Metromile proved the micro usage-based model, all major carriers have followed suit.

This is only the beginning. There are surely hundreds of ways to insure risk in a more granular way, with operational costs driven down by technology. Here are a few ideas I’ve been considering:

Micro-annuities/personal pensions: Annuities are insurance on longevity. Sold only by insurers, these policies help make sure you don’t outlive your assets, and they act much like a traditional pension by providing guaranteed income, for life, starting at retirement. Right now annuities are stuck in the large commission-cycle mentioned above; you won’t find an annuity with initial premium payments below $1,000. But I’m convinced that a micro-annuity, a “Personal Pension,” would be a big hit. I can’t be the only one who wants an advisor to handle contributions to a pension and show me exactly how much guaranteed income I’ll have at age 70. An asset-management fee eliminates the commission and a roboadvisor dramatically improves efficiency.

InsCredit vF

Automated insurance: The apps Digit and Acorns have demonstrated the allure of automatically siphoning off spare change or small payments and turning them into an investment portfolio and savings. Using a similar mechanism to fund disability, life and long-term care insurance seems equally feasible. I would happily sign up for an automated tool that would systematically fund those needs over time, gradually increasing my coverage until I was appropriately protected.

Bridging insurance and debt: For much of the middle class, the breakdown of a car, refrigerator, or being unable to work for a few days can be a financial catastrophe.  To deal with these sudden sub-$1,000 expenses, many people take out payday loans or accumulate credit card debit. Less than half of Americans report having the extra cash available to cover a $400 bill, and few people carry policies, such as mechanical breakdown insurance, that protect against these events. It should, however, be possible to buy a product that bridges the worlds of debt and insurance. This product would allow a customer to prepay against risk (prepaying would be cheaper on the whole because it removes credit risk) but allow for credit if the cost exceeds the amount insured.  Frank, a New York-based mutual-lending startup, is already starting to facilitate products like this.

MicroAnnuity vF

Fixing the efficiency gap

In my personal pension concept, both the operational and distribution efficiency problems are solved with a roboadvisor that automates sales, the processing of payments, calculating and collecting asset-based fees, and eliminating commissions.

One Financial, a portfolio company of AXA Strategic Ventures, could leverage the back end of its mobile finance operation to create the efficiencies microinsurance needs. One Financial has built a new, extremely efficient banking platform called Bee, which has a direct line to its clients via mobile phones. Their customers might, for instance, be interested in corpse repatriation microinsurance: a policy that would pay the $5,000 to $10,000 cost of returning a dead body from the U.S. to Mexico for burial. Partnering with a life insurer, One Financial could easily distribute, at extremely low cost, a micro-life insurance policy that would cover this expense.

There are other ways to eliminate some operational costs altogether. WorldCover, a recent Y-Combinator company, is using a pari-mutuel insurance structure to create efficient and profitable crop and weather micro-insurance. Its simple system —  pay if it doesn’t rain, don’t pay if it does — eliminates the cost of claims, administration, support, etc. This only works, of course, when data from a third party can easily verify a claim. For most of insurance, that’s not an option.

What are some other ideas?

The micro-insurance moment is upon us.  The market is there, the technology is ripe, and there are countless ways insurance can mitigate the immediate financial issues confronting customers.  At ASV, we’re aggressively seeking new ideas and partners to create breakthrough products, and I believe exciting things will happen over the next few years. I’d also love to hear from readers about any interesting innovations you’ve seen that I haven’t mentioned.

Going Micro Is the Next Big Thing For Insurance Tech

The New Age of Insurance Aggregators

Tech innovation is coming to insurance, but where and when it strikes is uneven.  Auto and health insurance have been facing serious disruption, for instance, but for very different reasons (self-driving cars and telematics, vs. the ACA and hospital mega-mergers). Life insurance and commercial P&C are only now feeling it. Reinsurance and annuities are following behind.

To see trends, then, it can be instructive to focus on specific insurance functions rather than the type (market vertical).

Distribution — that is, sales and marketing — is one area that has been especially active compared with other functions such as underwriting, risk, investments, admins/support or claims.

Why disrupt distribution?

 It’s where the money is. In general, when a P&C or Life insurer gets $1 in premium, 40 cents goes to distribution (marketing/sales costs, i.e. the agent) and 50 cents goes to everything else (underwriting, claims, service/support, risk, fraud, product, executives, etc.). Only 10 cents is profit. The largest distribution cost is usually agent commissions, which range from 50% to 130% of a policy’s first year premium.

It’s easy for carriers to work with alternative distribution channels. Insurance carriers are used to third-party distribution. They have been using independent agents, wholesale agents, and affiliates (e.g., sales through AARP) for years. Systems are already in place to easily take on new distribution outlets.
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The rise of insurance aggregators

Aggregators are simply comparison shopping sites — like kayak.com for insurance. They allow consumer to easily compare product features, carriers, coverage and price.  They aren’t the only distribution disruptors, but new developments are making them more potent.

Comparison sites come in three general flavors: Lead generators, call-center based agencies and digital agencies. From their websites, it can be difficult to tell them apart, but they operate differently and appeal to different investors.

Lead generators — such as InsWeb, NetQuote and Insurance.com — use a comparison shopping format to entice insurance shoppers to provide personal information. They then sell these leads, often to traditional brick-and-mortar insurance agencies. Lead generators specialize in either gathering lots of leads cheaply, or curating data to sell fewer but higher-value customer referrals. Lead generation is a specialized technique, an art even. But it’s mostly unrelated to emerging technology. It is difficult for non-lead-gen experts to assess the quality and sustainability of lead-gen platforms.

Call-center agencies can develop leads or purchase them, but their call centers employ licensed insurance agents who make sales.  A classic example: SelectQuote, founded in 1985 and known for its early TV ads, is now the largest direct channel for life insurance. Goji is doing this well in the auto insurance space and now has several hundred licensed call center insurance agents. Call-center agencies are also great businesses; their core competency, however, isn’t technology, but HR hiring and training. Hiring and training a large sales force and managing its churn is growth-limiting. A commissioned call center sales force might reach 300 agents, but it is almost impossible to get to 1,000 or beyond high quality agents. Crucially, too, the model does not leverage technology so margins are reliant on commissions remaining high.

Digital agencies allow customers to shop and buy entirely (or nearly so) online. Without a human sales force, they must create well-thought-out user experiences that make the process of buying insurance transparent and understandable. Typically this requires building sophisticated interfaces into multiple carriers’ systems so that the customer experience is unrelated to the company selected. In general, digital agencies hire developer talent rather than sales talent. Esurance, one of the first successes in the space, was bought by AllState for $1 billion in 2011.  A more recent example (and AXA Strategic Ventures portfolio company) is PolicyGenius, which is bringing this digital model to life and disability insurance.

I believe digital agencies are the future. They focus on technology to sell policies without the aid of a commissioned human agent. This is a crucial distinction because while both call-center agencies and digital agencies generate income from commissions, call-center agencies have to split that commission with their licensed call center agent while digital agencies do not.  This means that at scale, digital agencies should have higher profit margins.  In fact, it is likely that digital agencies will actually look to lower commissions to drive sales and to provide more competitive pricing than human agents or call-center agencies.

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Insights from the UK

The UK insurance markets adopted the aggregator model earlier than U.S. carriers, which gives us a window into their potential future. What’s happened there shows us three things.

First, aggregators have captured a material share of the insurance market and are continuing to grow. A recent Accenture survey found that in the UK, “aggregators account for 60 to 70 percent of new business premiums in the private automobile insurance market” and french aggregators have seen “18% average annual growth for past 5 years“. We’re already starting to see this in the U.S.: Oliver Wyman recently reported that “the number of insurance policies sold online has grown more than 400% over the last eight years.” Swiss Re saidmore than half of consumers say they are likely to use comparison websites to help make purchase decisions about insurance in the future.”

Second, aggregators eventually will compete with one another across all personal lines of insurance. U.S. digital agencies today focus on one type of insurance (life, or auto, or home) though they might claim to offer a few others. But almost all UK aggregators compete across all personal line insurance products.

Third, insurance carriers will get into the aggregator game.   Two of the top three UK aggregators sold to UK carriers; GoCompare was purchased by esure and Confused.com was purchased by the Admiral Group.  Only MoneySuperMarket remains independent.  And carriers are looking to create aggregators from scratch. Accenture’s report noted that 83% of UK carriers are “considering setting up their own aggregator sites”.

Startups, tech giants and carriers in the ring

Still, it’s not totally clear how digital distribution will play out here. Multiple startup digital agencies have raised significant capital.  PolicyGenius and Coverhound have raised more than $70 million, $50 million of it just in the last six months. This represents a fraction of what a major tech player (say Google or Amazon) could put toward an effort to enter this market. Interesting, Google purchased the UK aggregator BeatThatQuote in 2011 and launched the California auto insurance aggregator Google Compare less than a year ago, but just announced it was shutting it down.  It could be because Google Compare functioned as lead-gen for CoverHound and Google decided the fee they received per lead was cannibalizing their ~$50 per click ad-sense revenue they received from auto insurance search terms.

Long-term success in insurance, requires focus, deep knowledge of the industry, and deep knowledge of the consumer. Insurance is very different from most e-commerce products and Google’s experience could be indicative of the difficulty big digital brands will have trying to crack the insurance aggregator market.

Finally, most large American carriers haven’t decided what to do. Purchasing an aggregator creates strange incentives, potentially driving customers to a competitor. At the same time, it also gives the insurer the opportunity to quietly select the risk they want to keep and pass off the risk they’d prefer to give up. Progressive has had mixed success.

Final thoughts

I think the U.S. will see trends and dynamics similar to the UK’s, and soon. Within three years the major digital agencies will start to compete fiercely, and within five, one or more will have been purchased by a carrier.

More digital agencies also will tackle the complex insurance products: annuities, permanent life insurance and commercial insurance. Right now, startups are trying — Abaris for annuities and  Insureon, CoverWallet for commercial insurance — but their offerings aren’t yet as developed as Policy Genius or CoverHound.

Finally, I think the rise of digital financial advice platforms (a.k.a, robo-advisors or “robos”) give digital insurance agencies an interesting channel to consumers that will help at least one of them mature and grow to an IPO.

I asked a two digital agency CEOs what they thought the future was going to bring

Jennifer Fitzgerald, PolicyGenius’ CEO said “Consumers are much more self-directed in the digital age, so the focus is giving potential insurance clients the tools they need — instant and accurate quotes, transparent product recommendations, educational resources — so they can go through the process at their own pace. Then it’s important be there for them with an intuitive, easy-to-use platform and service when they’re ready to buy.  That’s the basis for the new wave of insurance education tools like the PolicyGenius Insurance Calculator, and is reshaping how consumers look at insurance.

Matt Carey from Abaris said “I think we’ll soon see a new wave of made-for-online products. Carriers have always gone to great lengths to create products that made sense for a specific channel.  The Internet will be no different. In our business, that probably means very simple lifetime income products that are subscription-based and have low minimums. Until then, I don’t think we’ll reach a tipping point in the migration from offline to online

Coming up next: Reader’s choice! Below are three topics. Comment or email your vote!

  • Disrupting Product: Why a “WebBank” for insurance is needed, and difficult, but doable

OR

  • P2P insurance: Why is everyone drinking the…Lemonade

OR

  • Micro Insurance: Difficult unit economics and blurring the line between Debt and Insurance
The New Age of Insurance Aggregators