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Insurtech

This year insurance companies, witnessing tremendous changes taking place in the banking sector, intensified research and collaborations with startups in the sector.

Read our full research “Money of the Future”. Download PDF (20MB)

There will be a lot of products in the online insurance; PFM-services have been actively cooperating with insurers even before; blockchain will be useful (safekeeping of insurance history, the issue of policies and their “journey” between those who issue them, buy them and request them). It’s a new class of market players interested in fintech. They now have to understand how to integrate current services in their core businesses, and thus enter the allied industries instead of inventing fintech for their own.

Insurance represents a huge opportunity that has yet to see real innovation. The U.S. insurance industry is the largest in the world in terms of revenue, with net premiums surpassing $1.2 trillion. At the same time, the major players have some of the lowest Net Promoter Score (NPS) ratings of any industry, meaning the companies do not inspire satisfaction or loyalty in their customers.

People do not like or trust insurance companies. And it’s no wonder why, with headlines like “9/11 Responders With Rare Cancer Denied Insurance Coverage” and “Sandy Homeowners Systematically Denied Insurance Claims.” The industry is notoriously rife with moral hazard and fraud.

Add to all of this the antiquated way insurance products are delivered to consumers in a world where almost anything can be procured with a few taps of a smartphone screen, and it’s no wonder that most Americans are underinsured.


Less than half of “middle market consumers” aged 25 to 64 have individual life insurance coverage, and 40% of those Americans who do have life insurance coverage think they do not have enough. And, 64% of American homes are underinsured.


A few brave souls have taken an early crack at this market and seen success — most notably, Oscar and Metromile. Oscar is “a better kind of health insurance company” that aims to use technology and design to improve the experience.

The company is now valued at a whopping $1.5 billion, just a year-and-a-half after its launch. Metromile sells pay-per-mile car insurance, which appeals to the 70% of people who drive under 10,000 miles a year, and thus probably overpay for car insurance. Both companies offer intuitive and accessible (mobile) user interfaces, consumer-friendly business models and greater transparency. This is just the tip of iceberg — every line of insurance needs to be “millennialized,” – we’ll see huge disruption in home, life and P&C, just to name a few.

Millennials are shockingly underinsured. This is partly because they simply do not want to talk to someone on the phone.
There are also reams more data available today than 10 years ago, which means new ways to underwrite risk. For example, Apple watches and FitBits provide information and insight into people’s daily activity that can be extremely useful when making health assessments.

And in the auto industry, a huge risk is how far and through what geography an individual drives to work each day. While accelerometers have been around for years, every cell phone now has a GPS, which provides far more accurate and detailed data.

Finally, the insurance industry is begging for new ways to acquire customers. Millennials are shockingly underinsured. This is partly because they simply do not want to talk to someone on the phone. The channels they like to use and those with which they are most comfortable are not the channels on which insurance companies try to reach them. As a result, a huge target demographic is underserved.

PolicyGenius is already showing that they can convert this previously un-convertible population by providing better information and education online.

Bankrate muses that Lemonade may become the “the Uber of insurance” and Sequoia Capital’s Haim Sadger says his firm’s investment in the company was a no-brainer because “we’re betting that Lemonade will transform the insurance landscape beyond recognition.” Lemonade secured $13 million from Sequoia and others in seed funding, which may not seem like much in the mega-billion dollar insurance industry.

The Bankrate article points out that a P2P insurance model usually involves a small group of policyholders who pay premiums into a claims pool. If there’s money left in the pool at the end of the policy period, members get a refund. However, it’s a costly format to get going. While this approach is relatively new to the U.S., similar P2P models have started – and succeeded – in other countries, including Germany (friendsurance), the United Kingdom (Guevara) and China (TongJuBao).

And more and more new players are coming. Finsphere, a company that allows checking whether the customer is located in the place where his card is being used, has raised $1,8M in funding.

Online health insurance for small businesses platform SimplyInsured has raised a total of $1.75 million in seed funding from Starling Ventures, Altair, NerdWallet co-founders Jake Gibson and Tim Chen, Amee and Adil Chaudry, Sam Melamed and Y Combinator to help “pour gas” on sales of the product.

SimplyInsured launched out of Y Combinator’s winter 2013 batch with the aim of providing an easier way for small businesses to get health insurance coverage for employees. It does this by analyzing thousands of insurance plans within seconds and coming up with the best rate. Co-founder Vivek Shah compares it to the way travel sites pull up the best airfare prices and then let you compare the price with the time and other details important to your needs.

Two unicorns from insurtech: Zenefits and Oscar Health

In May 2015 Zenefits said it has raised $500 million in a round led by Fidelity and TPG at a whopping $4.5 billion valuation. The company, which allows small- and medium-sized businesses to manage human resources services in a much simpler fashion, is one of the fastest-growing SaaS businesses ever, and in an interview, Zenefits CEO Parker Conrad said the big round was raised to keep the company growing as quickly as it already is.

Ashton Kutcher’s Sound Ventures, Insight Venture Partners, Founders Fund and Khosla Ventures also invested in Zenefits, and previous investors Andreessen Horowitz, IVP and Jared Leto participated, as well.

Still, such rapid growth doesn’t come without a cost. Our sources previously told us that the company expects to lose more than $100 million in 2015, which dwarfs the amount of money it burned through in 2014. Raising venture capital financing is an important way to shore up against those losses and still sustain the incredibly rapid growth a company like Zenefits has experienced.

The company offers its HR services dashboard to employers for free, and makes money by receiving commissions from insurers. Zenefits also said as part of the announcement it has signed up more than 10,000 companies in the U.S. and that it closed more business in March this year than it had in around the first year of its life. Zenefits said it now manages over $700 million in health insurance premiums, as well.

The company said it’s on track to hit annual recurring revenue of $100 million by January 2016, and hit $20 million in annual recurring revenue in January this year. Since launching in April 2013, the company has gone to a valuation of $4.5 billion in just about two years. In June last year, the company was valued at $500 million as part of its series B financing round.

Zenefits is well on its way to that, saying that it has around 1,000 employees in the announcement today. The company has also made a number of high-profile hires, including Yammer CEO David Sacks, who joined in December last year.


The issue at hand is Zenefits’ crafty and unusual business model. Unlike most companies that sell HR software to small businesses, Zenefits gives its software away for free. Instead, the company collects a fee from insurance companies every time a customer buys insurance through Zenefits. It’s this piece that has enraged traditional insurance brokers.


They argue that in giving away free software, Zenefits violates state rebate laws that forbid brokers from giving away free perks to entice people to buy insurance. Regulators in some states have taken up the call, forcing Conrad and his team to spent a substantial amount of time and money defending their position.

According to Conrad (and, it would seem, the regulators who have already dropped their objections to Zenefits), the company is not breaking those laws, because it doesn’t require customers to buy insurance from Zenefits to get the free software. In fact, Conrad says around 50 percent of users don’t buy insurance from Zenefits.

Some of that work has already begun. Conrad says some members of the Zenefits team have been traveling from state to state meeting with regulators. The company even set up shop at the National Association of Insurance Commissioners annual meeting, where they try to convince insurance regulators that Zenefits is, in fact, operating above board.

“That way if and when they get a complaint, they understand the product up front so hopefully they’re less likely to believe a random insurance broker who says we’re breaking the law,” he says, “But yeah, it’s costly.”

In April 2015 the New York health insurance start-up Oscar Health announced it raised $145 million dollars in a Series B round. The Oscar team would not comment on valuation, but sources close to the deal said the funding values Oscar at $1.5 billion.

That’s nearly double the $800 million valuation slapped on Oscar in a Series A round last May. Founders Fund’s Peter Thiel and Brian Singerman led the round. Also involved: Horizon Venture’s Li Ka-shing, Wellington Management and Goldman Sachs. Previous investors Formation8, Jim Breyer (Breyer Capital), Stanley Druckenmiller, General Catalyst Partners, Khosla Ventures and Thrive Captial (run by Oscar founder Joshua Kushner) invested too.

With the latest round, Oscar has raised $300 million since its 2013 launch. The new cash will go to customer growth and product development.

Kushner, with cofounders Mario Schlosser and Kevin Nazemi, started Oscar in October, 2013, taking advantage of Barack Obama’s Affordable Care Act to inject a Silicon Valley ethos into the staid insurance industry. That means bringing technology, data, and design to the confusing and opaque health insurance industry. The team knows tech. Kushner’s Thrive Capital invested early in Spotify, Warby Parker and Codecademy.

He got in on Instagram just days before Facebook bought the company for $1 billion. Mario Schlosser, a Stanford-trained programer, worked at Bridgewater Associates and McKinsey & Company. Kevin Nazemi was a director in Microsoft’s healthcare division before joining Oscar.


Oscar’s user interface is simple and clean. Its mobile app lets you search symptoms in plain English (“my head hurts”), find doctors on a Google Maps-like layout, and compare prices on services like MRIs and physical therapy. In January, Oscar started giving customers free MisFit pedometers to track their activity–users who hit fitness goals get cash rewards.


Oscar, which operates solely in New York, has 40,000 customers, up from 16,000 last May. Users pay an average of $4,500 in annual fees, putting Oscar’s revenue around $180 million. Kushner says Oscar is in the process of opening in California and Texas. Further down the road, he says Oscar will expand beyond individual insurance, partnering  with corporations to provide coverage to their employees.

While $1 billion-plus valuations are commonplace in the tech world these days, Oscar is one of a handful of startups that seems to have truly earned it. Meanwhile, Oscar has set a high bar for other insurance companies, offering members a slew of perks like free televisits, free fitness trackers, free checkups, and cash incentives for getting a flu shot.

Now, insurance companies in other markets are beginning to follow Oscar’s lead, meaning the challenge ahead for the Oscar team will be to expand faster than their competitors can rip them off. In an industry like health insurance, where the healthcare landscape can change drastically from state to state, that doesn’t happen overnight.

“We don’t just go into a new geography and put a bunch of banners on the walls,” Schlosser says. “It makes the barriers to entry for anyone attempting this quite daunting, but the good thing for us is, for at least parts of this process, we have the technology to handle it.”

Oscar also partners directly with physicians to help them better understand their patients. For instance, Oscar may soon give hospital planners access to data on whether or not patients fill their prescriptions or visit urgent care centers after a hospital stay. According to Schlosser, it’s this holistic approach to technology that will be the company’s competitive advantage as it scales.

“Just fixing the user experience won’t be enough,” he says. “We went to great lengths to create an incredibly close relationship between our technology and physicians.”

Already, Oscar is seeing some promising results from this work. One particularly impressive statistic is the fact that some 60 percent of Oscar members who have bronchitis have used the telemedicine feature to diagnose it and get treatment, according to t he company. Of those cases, 93% get resolved over the phone with no need for a follow up visit.

“We feel that it’s a nice win-win-win situation” Schlosser says. “The physician can deliver care in an efficient way. The member loves it because it’s convenient, and frankly, we like it, because oftentimes, those conditions could become worse.”

But while a $1.5 billion valuation may be huge for a two-year-old startup, it’s important to remember that’s pocket change compared to, say, UnitedHealth Group’s $114 billion market cap or even Aetna’s $37.75 billion value. If Oscar’s seemingly overnight success in one of the country’s most competitive cities for health insurance is any indication, it’s clear the company still has lots of room to grow.

Future challenges for insurance

One day, robots and artificial intelligence could eliminate millions of jobs in America, even in industries that aren’t immediately obvious. A study not long ago from two Oxford University academics found that 47% of positions are at risk of computerization over the next two decades. Robots are likely to take jobs away from humans because they’re cheaper than humans and more efficient, but also because they’ll obviate the need for services that prop up and protect humans. Why have human resources professionals if you don’t employ human resources?

Why buy insurance if automation makes accidents far less likely? That’s why so many people think the insurance industry could suffer in the age of advanced AI—particularly the auto insurance industry. Google forecasts that its driverless pods could eventually prevent 90% of all accidents, while at the same time taking many cars off the road (because we’ll have more sharing of cars, rather than everyone having their own vehicle).

Others have speculated that premiums could be reduced 75%, especially if drivers are no longer required to get specific coverage, and liability shifts from drivers to manufacturers and technology companies.

How quickly might that happen? In a recent report, McKinsey predicted the change could start between 2023 and 2037. “Insurers might be required to shift their main goal from covering private customers from risk tied to ‘human error’ to covering [manufacturers] and mobility providers against ‘technical failure,’” it said.

The U.S. National Highway Traffic Safety Administration (NHTSA) carves auto-automation into stages, starting with “function-specific automation” (level one), which includes cruise control and automatic braking, which have been around for a while. Next comes level two, which includes adaptive cruise control, forward collision warnings, lane centering and drowsy driver detection, which are all starting to appear now. After that, we have level three, is where drivers sometimes completely cede control of vehicles in optimal conditions, and level four, where the car takes over completely at all times.

In the short term, the level of accidents may decrease, but they might become more serious and more costly, says Jeff Blecher, senior VP of strategy at Agero, which sells vehicle information systems to car-makers. He expects level 2 automation to reduce the incidence of front-on collisions, side-swipes and routine fender-benders. (The accident rate is already falling in late-model vehicles). But advanced controls could also lead to poorer driving, such that when we do have to react, we’re less good at it.

The more intriguing question is what happens when fully automated cars become adopted—something Blecher says could start happening in about 10 years. A Rand Corporation report last year speculated that drivers might cover themselves with health insurance and homeowner’s liability insurance, and not see the point of specific car insurance. After all, we don’t buy dedicated insurance for most of what we do in life, say to ride a bicycle. And more to the point, it’s likely that car thefts will become significantly less problematic than they are today. In the future, all vehicles will probably be fitted with tracking and disabling technology, so that hot-wiring your neighbor’s Mercedes will be a lot less fun.

There are so many moving parts to the future of vehicles that it’s impossible to predict. But it seems likely that greater automation and greater sharing will harm the classic insurance model and put quite a few people out of work. “The insurance companies are still going to be around, but their business models are certainly going to have to adapt,” Blecher says. That sounds like an understatement.

A U.S.-based insurance company announced a new policy that specifically covers the damage of online abuse. Chubb Insurance told that its personal cyberbullying insurance would cover counseling fees, lost income from taking off of work, and the cost of hiring an online reputation management firm to help remove smears online.

Though the policy is aimed at parents whose children may become victims of cyberbullying, it will also cover adults who are targets of online harassment, which itdefines as “three or more acts by the same person or group to harass, threaten or intimidate a customer.” Once considered harmless trolling, online harassment is increasingly recognized for its serious offline consequences.

A string of teenage suicides has been linked to cyberbullying, and victims of online harassment have suffered real-world consequences such as being targets of false police reports, trouble getting work, depression, and a chilling effect on speech. Platforms have admitted that they have not done enough to stop the problem.

Twitter has increased its support staff in addition to releasing new reporting and blocking tools. Facebook created a “bullying prevention hub.” Despite these efforts (which some argue are too small), it looks like online harassment is still at least prevalent enough, or scary enough, for an insurance company to see it as a business opportunity.


AIG
, one of the world’s largest insurers, is rolling out a new set of policies aimed at the growing drone industry. The policy offerings are designed for a newfangled purpose: protecting the operators of unmanned aircraft from liability in case of collision, technical problems, or any other sort of situation that could cause damage either to people or property on the ground.

AIG’s decision to enter the drone insurance fray takes place as the FAA makes the first steps toward offering a legal framework for commercial use of drone aircraft. This process, which will take place over the next decade, is expected to shake up industries ranging from motion pictures to agriculture to energy.

The AIG drone insurance policies are also an outgrowth of aviation insurance frameworks that have existed for years. AIG’s literature emphasizes that its coverage includes damage from war and terrorism. And, acknowledging an inevitable reality of widespread drone use, AIG offers optional coverage for “spoofing”: when a hacker hijacks your drone remotely. Another large insurance company, USAA, is even working on using drones to investigate insurance claims.
Photos: Getty, company profiles, shutterstock,

Life.SREDA VC is a global fintech-focused Venture Capital fund with HQ in Singapore

 

One Response to Insurtech

  1. Anna says:

    Thanks for the honest and informative reviews of these products.SimplyInsured is great!