Economic Health

Risk Rewards

Insurtech providers are set to play an increasingly critical role in making civil society more resilient today

Vishal Vasishth | 08/12/2020

What a time to be alive.

In the last 20–30 years we have seen dramatic reductions in poverty, extraordinary growth in renewable energy production, and people choosing to eat healthier foods. We have also experienced, in recent months alone, a global pandemic, devastating impacts of climate change, large-scale cyber attacks, and the second-order effects of all three on job markets, commercial real estate, personal finance, and more.

Many of the risks we face today — as individuals and businesses — come at us expectedly, but the vast majority arrive from directions and at times we are largely unprepared for. With many people’s net worth tied up in their house, what if something happens to the place they call home? With so much of business operations today now digital in nature, what if hackers gain control of its data? With our lives often in the hands of the healthcare providers, what if those providers aren’t able to deliver the best care because of whatever network we are (or aren’t) a part of?

These feel like simple questions, and yet when the time comes we cannot face down these challenges alone. We need organizations to help mitigate these risks and propel us back to normalcy from their effects. As we look to a near future with more risk-laden “spikes” of activity — from climate change to pandemics — we will need even greater resilience as a civil society.

The insurance industry, at its best, is an essential instrument in fostering that resilience.

Let’s fall in love with insurance

The insurance incumbency isn’t exactly known for its trustworthiness, transparency, or net promoter score — and yet we can’t imagine a world without it. Would we be able to buy homes with confidence? Take worthwhile risks in opening businesses? Venture out in the world without fear of getting injured or becoming ill?

At the same time, many of us have been unfairly lumped into “high risk” pools (knowingly and unknowingly), despite taking responsible steps to mitigate risks associated with that pool — say, a type one diabetic who keeps her HbA1c levels below 6.5 being categorically rejected from securing life insurance, or a homeowner in the outskirts of a fire-prone area that consistently maintains defensible space with a Class A roofing being unable to secure home insurance.

Insurance providers of all stripes have traditionally centered not only their models, but their mindsets, on pooling risk with longitudinal pricing strategies. Today, we live in a world where consumers expect more, and rightly so: the combination of technology advancements and more human-centered experiences have radically transformed industries from retail to grocery. In many ways we are all an n=1 to the companies flipping those sectors, from sizing on Rent the Runway to savory suggestions from Good Eggs.

Why hasn’t insurance taken this approach as well?

The industry, it appears, is now on the doorstep of disruption, powered by three key movements in the sector:

1. Personalization takes hold
Insurance is known for pooling risk across populations. The near future, however, will be personalized. The great digitization of risks, claims, and more has created massive data sets that can be analyzed and made actionable like never before. This also means that the potential to upgrade service offerings in a more personalized way — one that, say, meaningfully rewards policyholders for taking better care of their property or themselves rather than the narrow band of rates broadly applied that we see today. With more sophisticated algorithms enabling more precise edge case calculations, we should see more n=1 underwriting (companies like Openly are already making this happen). Models that are tailored for a pay-for-use vs. pay-for-everything-regardless-of-use approach may also have a competitive advantage in the years ahead, as these operations could see dramatically higher net promoter scores that help drive retention and revenue.

2. User experience catches up
Securing a quote, purchasing a policy, and filing claims should be as simple (and secure) as Amazon. Until recently, this was hardly the case — mostly because insurance industry incumbents didn’t have human-centeredness in their DNA. Today, however, we are seeing a new generation of user-centered experiences across the funnel, making sense of the complexity and simplifying the entire experience. Take Hedvig: their product is as easy to interact with as the best consumer brands out there. Hedvig customers have filled out exactly zero forms, have spent zero minutes on the phone, and wait on average 2.7 minutes to get a reply when chatting with their reps. And the user experience extends beyond consumers to independent agents, who have also endured decades of sub-par service: Openly, mentioned above, is bringing technology-driven transparency to the fore with agents, who were previously accustomed to opaque, inefficient, and manual UX.

Across all targets, it’s worth noting that a whopping~40% of premiums typically goes toward administrative and marketing costs. A more human-centered and digital-first user experience not only makes insurance shopping faster, easier, and more transparent, it also dramatically lowers administrative and marketing costs — and puts pressure on incumbents that are bloated with waste.

3. Risk mitigation heads further upstream
The only thing better than a magical experience with an insurance claim is not having to file it in the first place. A growing number of providers are investing more with people and businesses to mitigate risk upstream, and the expectation that they do so will likely increase. From cyber attacks to flooding, we now have a great deal more access to actionable data — especially when packaged the right ways and aligned with business models. Corvus, focused on commercial cyber insurance, has a set of proprietary products that enable customers to take specific risk-mitigating steps to prevent loss. With Corvus, this creates a virtuous circle for a multitude of stakeholders: their software can detect actionable IT security threats to organizations which prices product (→ better return for capital providers), simultaneously building data sets and tools (→ added value for brokers and policyholders) that ultimately inform policyholders of opportunities to avoid cyber attacks (→ financial benefit for organizations, and better results for capital providers thanks to lower claims).

MedicareAdvantage outfit Devoted Health serves as both payer and provider with their patients, ensuring an aligned business model focused on prevention and healthcare that delivers better outcomes. Their values-driven approach is summed up by CEO Ed Park: “The prime directive that everyone at Devoted follows is very simple: …when making any decision — in particular, the hard decisions — we close our eyes, imagine the face of a family member we love desperately, our mom, our dad, our brother, our grandmother, and ask ourselves, what decision would we make if that decision impacted her or him? We then open our eyes, and proceed to do what we would do for our own family.”

As the insurance industry makes progress in these three key areas, its sophistication will grow specific to existing and emergent risks, especially climate-related. In order to build viable models in states like California, Texas, and Florida, these insurance providers should collaborate with regulators who may not be privy to more modern, data-driven approaches. Information-sharing here will be paramount in helping identify places where policymakers can build in backstops, and we can ensure healthy, functioning markets over the long-term.

In the immediate term, innovation in insurance is on the march, validated by many factors including public markets’ reception to Lemonade’s recent IPO. The rise of APIs are greasing the works here as well, enabling a deeper digitization of internal processes, payments, and personalization across startups and incumbents alike.

Let’s keep the momentum going by reimagining this category with full-stack approaches that broaden access to high quality coverage, take on new coverage areas entirely, and make the world we live in more resilient. If you’re building a company in the space, we’d love to hear from you at vishal@obviousventures.com or on Twitter.