Meeting Demand for Insurance in an Uncertain World

COVID-19 is deeply and profoundly changing the insurance industry, compressing trends that may have taken years to play out into a matter of months. Changing end-user demand, a much more challenging environment for insurers, and the emergence of new technologies are fundamentally upending the underwriting and claims management processes that power traditional insurance. The opportunity is ripe for startups with the vision to reimagine this infrastructure.

The effects of the current health crisis have woken many up to the reality of an uncertain world. Businesses and consumers are becoming aware of a whole range of risks against which they have been historically underinsured — increasing demand for health and life insurance, income protection, business disruption coverage, and more. Environmental factors and a more challenging geopolitical environment could make these risks a more regular part of life going forward.

The rapid growth of the on-demand workforce has contributed to these gaps in personal coverage, and also changed the profile of insurance buyers in many markets from companies representing large pools of risk to individuals with distinct risk profiles. Meanwhile, increased digitization creates or expands a whole new range of risks: BYOD (bring your own device) and WFH (work from home) policies increase cyber-risk, delivery drones will need coverage, and digital assets will need protection not guaranteed by current regulatory regimes.

Finally, end users of insurance will increasingly demand a fully-digital insurance experience. COVID-19 is speeding up the transition from consumers managing their financial lives in the analog world to the digital one. Consumers that have grown used to opening up bank accounts, applying for loans, and even trading complex options with just a few clicks will expect to be able to buy insurance in real time and manage claims online. This requires a much deeper automation and digitization of paper-heavy operations.

Insurers Need to Develop Solutions for Today

In addition to demand-driven pressures, there are a number of imperatives driving insurers to look for new, digital infrastructure. On a recent earnings call, Chubb CEO Evan Greenberg discussed the two-faced challenge COVID-19 has created for insurers. Highlighting the “infinite tail” risk created by the pandemic and the insurance industry’s massive exposure to sweeping rate cuts, he argued, this “will be the largest event in insurance history when you add it all up, both on the asset side and liability side of the balance sheet.” This sentiment is shared across the insurance industry as COVID-19 exposes the weaknesses and gaps in the sector today. In the US and EU alone, insurers are expected to face up to $80 billion of losses as a result of the pandemic.

Just as end users are waking up to an array of risks, many insurers are discovering gaps in their underwriting models, realizing that they have been systematically mispricing risk for years. More importantly, most insurance models have not been updated for years, and do not take into consideration the breadth and depth of public and private data sources available today. The need for actuarial innovation is especially great in the face of the changing demand for insurance: new types of coverage or even expanding existing coverage models to new populations will demand new underwriting models that not only leverage new data sources but entirely new technologies. Risk models will need to be dynamic, making real-time adjustments to the underlying risk profile as data is ingested and analyzed.

As plummeting interest rates and significant payouts create acute margin pressure for insurers, many will look to trim their massive spend on operationally heavy legacy processes. Investments in claims and underwriting infrastructure can both cut costs and improve customer satisfaction by speeding up turnaround times on purchasing and payouts. Streamlined, low cost processing, paired with new underwriting models, also enables a whole range of new insurance products that were once impossible to offer at a profit. This might include microinsurance in developing markets, telemedicine-based health insurance, travel and entertainment insurance and more. In claims, the use of machine learning and advanced technologies would not only serve to greatly improve the end user’s experience but also to combat fraud which gets more sophisticated every day.

Next Generation of InsurTechs Rising to the Challenge

• New Infrastructure Powering Innovation

The challenges faced by insurers require solutions that go well beyond creating a pretty UI: insurers need to incorporate new technologies and fundamentally new modes of provisioning insurance products. Companies that can operate with a B2B or B2B2C approach, focusing on building complex solutions to difficult problems while avoiding the costs of a distribution-driven model are best positioned to create this new infrastructure.

Just as we’ve seen in today’s neobanking turf wars, the battles for distribution in insurance will be fiercely fought. Furthermore, incumbent insurers have staying power, with a number of advantages beyond those enjoyed by incumbents in other financial services. Distribution models are often highly complex, with insurance sold through extensive partner networks, risk models are much more complicated than those employed in lending, and there are significant advantages to scale. Without a fundamental change to the backend technologies new entrants face little advantage over incumbents who are quickly digitizing front-end processes.

• New Approaches to Evaluating Risk

Solutions powering the next wave of insurance innovation must take a fundamentally new approach to evaluating risk. Most of today’s InsurTechs have followed the same playbook: hire teams with actuarial experience from existing insurers, and then replicate existing models with automated data intake and processing. The results have been predictable: loss ratios about as good as existing insurers at an improved cost.

In order to drive critical improvements in loss ratios, insurers need to incorporate new models altogether which leverage new sources of data and AI to create real-time decisioning engines that improve over time. New approaches to risk evaluation can also improve claims management processes, allowing greater automation in evaluation of claims.

• Modular, Specialized, and Interoperable

We anticipate that the most compelling infrastructure solutions will take a microservices approach, addressing specific pain points and problems, rather than overhauling entire systems. These solutions will also be delivered through integration-light approaches, built around easy to use APIs. In a more challenging market environment with corporate budgets constraints, such an approach allows for more attractive pricing, less up-front costs, and faster integration.

These solutions will also need to be interoperable, allowing easy deployment of future complementary services. For example, we may see underwriting risk modeling that can seamlessly connect to identification, KYC, and fraud management solutions.

• Fragmented Market with Many Winners

We see room for many winners in a relatively fragmented market for insurance. Given the diversity of insurance products and segments, successful one-size-fits-all products are unlikely to emerge in underwriting and claims management. This stands in contrast in many ways to banking and payments infrastructure, which arguably is more standardized and will see greater concentration with fewer, larger winners.

As the current crisis rapidly expedites secular trends in the industry, one thing has become clear: the infrastructure powering insurance needs to be fundamentally upended. Without this the economics of the industry can’t work.

Written By: Stephanie Zepeda and Brandon Baum of Arbor Ventures