The patient reader who is willing to put in the time to read each chapter will find themselves rewarded with a stronger understanding of the forces of change within the P&C insurance industry and a better awareness of the role they can play to be a part of its future. However, the book is broken up into sections that can easily be skipped over for those who are seeking a few pieces to complete the mental puzzle in their heads. For instance, those steeped in P&C insurance may choose to skip over the section outlining the major pain points with the current paradigm and go straight to the section on disruptive technologies. Likewise, those already familiar with the major new emerging technologies may seek to focus more on learning the basics and opportunities within the P&C industry. For some, a few chapters may be sufficient to supplement their knowledge and gain value. I encourage readers to carefully review the table of contents to find the sections that will add the most value for you. For those looking to read the book cover to cover, I hope that you find you are able to do so in a few hours if you are willing to invest the time.
Part 1 delves into detail on what I describe as the 7 “fatal flaws” of P&C insurance to explore in depth how we came to the present state and why these thorny issues remain unsolved. Part 2 explores the rise of the insurtech movement and explores those who seek to change the status quo, both from outside and within the industry. Part 3 explores the major emerging technologies that hold the most promise for fundamentally altering the existing insurance paradigm that has been established over decades. Part 4 offers a guide for how to assess the future development of these emerging trends and where insurance may be headed as we approach the 2nd half of the 21st century.
A note on the focus of this book: I have intentionally focused the book on the P&C insurance industry rather than life or health insurance or financial services in general, based on my own background and expertise, as well as the target audience for my publisher, Insurance Nerds. If you are looking for information on how technology is disrupting banking or the life or health insurance space, you’ll have to look elsewhere although some of the problems and technologies that I address may certainly be relevant in those spaces. I also primarily focus on the personal lines side of P&C rather than the commercial lines side since much of the innovation today is geared towards the personal lines side and most readers will have familiarity with this side either from their careers or from being a consumer of these products themselves, where the same cannot be said on the commercial side. For those who work in the commercial lines space, I hope you are able to translate many of the concepts highlighted in the book and extend them to your world.
Let’s begin our journey!
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PART 1 - THE SEVEN FATAL FLAWS OF PROPERTY & CASUALTY INSURANCE
CHAPTER 2 - WE NEED TO TALK...ABOUT YOUR INSURANCE POLICY
OKEY-DOKEY
P&C insurance has evolved over the past 300+ years to the modern incarnation we know (but may not love) today. Each step along the journey was primarily an evolutionary process that contributed to the insurance market in important and meaningful ways. If not for the massive technological changes in the last 10-20 years, insurance would have likely continued along the same path it has for the last 3 centuries. Insurance is an industry that provides a robust set of products and services that have weathered the test of time (pun intended). P&C insurance products serve as an essential underpinning that provides large societal benefits through increased risk-taking and economic activity.[4] Without the protection that insurance provides to individuals and businesses, a lot of capital would be diverted towards building larger nest eggs or rainy day funds, making this capital "locked away" from more socially productive uses such as financial and business investing. This unlocking of additional capital flows help define what it means to be a modern economy; underdeveloped economies that do not have a healthy private insurance market are at a distinct disadvantage to those who do.
How successful is the P&C insurance industry? Consider the following statistics:[5]
•In 2017, net premiums written for the sector totaled $558.2B in the United States.
•There were 2,538 P&C companies operating in the United States in 2016 that employed a total of 648,200 employees. Another 1.1 million worked in the agent & broker space or other insurance-related enterprises.
•Total P&C cash and invested assets were $1.59 trillion in 2016.
•P&C insurers globally paid out $144B in catastrophe-related losses in 2017 according to Swiss Re, significantly higher than the $54B paid globally in 2016 and well above the 10-year average of $58B (adjusted to 2017 dollars).
•Despite the large 2017 losses due to an active hurricane season and large wildfires in the United States, P&C insurers earned a net income after taxes of $36.1B based on data from ISO.
Bottom line: the P&C insurance industry is large: it provides a source of employment to millions of people as well as trillions of dollars of capital used for investing. It provides billions of dollars in payouts when large-scale catastrophes such as hurricanes and wildfires occur, and the industry is able to perform this vital economic function profitably despite the amount of downside risk they are subject to.
OUR ICEBERG IS BEGINNING TO MELT
So what's the problem with our current insurance system? Up until recently, it was considered a positive attribute if an industry was stable and resilient to change. In fact, stability would appear to be a bedrock foundational characteristic that society would want when designing an insurance sector. Noted industry veteran and keynote speaker Tony Cañas put it best when he said: "Why are all insurance companies so conservative? Because all the others put themselves out of business!"
Despite the resoluteness of the P&C insurance industry, most industry veterans and new professionals alike sense that the massive insurance iceberg is starting to melt. VCs and entrepreneurs sense it too, as evidenced by the massive rise in investment capital entering the insurtech space in the past 5 years. According to Venture Scanner, funding for companies in the Life, Home and P&C Insurance space grew at a compound annual growth rate (CAGR) of 181% from 2012 to 2017 with the bulk of that funding occuring in the last 2 years. Through Q2 of 2018, funding for startups in the space were also equal to that for all of 2017. There were 35 funding events in Q2 2018 and 74% were seed funding or Series A early-stage investments.[6]
I believe the amount of investment entering the insurtech space will continue to rise in the upcoming years due to:
1.The size of the global nonlife insurance market: $2.2T in 2017 according to Swiss Re.[7]
2.Endless ways to improve upon the current P&C insurance ecosystem.
The chance of a mega payout and endless ways to disrupt an industry will continue to attract investors until the industry disrupts itself on a wide enough scale and/or there is a massive amount of failure which has not occurred to date. A minor improvement in key performance indicators (KPIs) could result in millions of dollars of profit. Even traditional insurance players sense that opportunities for disruption in the insurance sector are unparalleled in modern history, as evidenced by the number of re/insurers that have made venture capital investments of their own in insurtech startups. Where do these opportunities lie? It’s an endless list. Many are unique to each incumbent looking to make incremental improvements in the form of new products, streamlined processes, reduced expenses, loss prevention, alternative revenue streams, and better customer experiences. Taking a step back, some have created a categorization of opportunities to create a map or guide of sorts on where to look for a return on investment. For instance, Venture Scanner identifies 14 categories under insurance technology that includes 1,486 companies and a cumulative $23B in funding through the second quarter of 2018.
In the following chapters, I'll argue that the largest opportunities - not the easiest, but the most profitable - will go to incumbents or new entrants that look to "fix" one or more of the 7 fatal flaws of insurance. These transgressions are integral to modern-day insurance and ar
e not easily broken out. However, they represent massive obstacles to working within the current insurance framework. If left unchallenged, these roadblocks will continue to inhibit the opportunity to massively reduce costs, increase product transparency and accessibility. If technology is able to solve one or more of these major challenges, then the insurance market will be fundamentally altered in ways that provide major benefits to consumers and society in general. Of course, the massive disruption that would be created by correcting one or more of these inherent flaws could also threaten entrenched incumbents.
FATAL FLAWS
Here are what I term the 7 “fatal flaws of insurance” in today’s world:
1. Too expensive
2. Too confusing
3. Too easy to game the system
4. Cash drain
5. Doesn’t cover all causes of loss
6. Doesn’t cover everything
7. Doesn’t cover everyone
I devote a full chapter to each of these fatal flaws in the remainder of Part 1 but provide a brief rationale here.
1.Too expensive
One of the largest complaints by consumers is why insurance costs so much?[8] Paying for auto and property insurance (particularly homeowners) is a substantial part of most people’s annual budget, estimated at roughly $914 annually for auto insurance and $978 for homeowners insurance.[9] These figures can vary widely by state with the most expensive locations being twice these figures on average. It’s also compulsory in most cases and doesn’t provide an obvious tangible benefit as you could easily go 20, 30, 40 years or more before you have a claim. On top of that, P&C insurance has a lot of what I’ll term cost inefficiency relative to the benefit that consumers receive as only 66.9% of premiums were spent directly on losses for personal lines and 55.6% for commercial lines in 2017.[10] The remainder of premiums are spent on expenses and profits.
2.Too confusing
For products that are a major monthly expense for most households, insurance is arguably the most confusing to use and to understand the benefits of. Think of some other major monthly expenses:
• Rent or mortgage payment - provides shelter
• Car loan payment - provides transportation
• Groceries - provides food
• Electricity - keeps the lights on, devices charged, appliances operating
• Water - keeps the taps flowing and toilets flushing
• Student loan payment - provided an educational degree (hopefully) that led to a better-paying job in a career field of your choice (ideally)
With the possible exception of your student loan payment (which you may or may not view in retrospect as a worthwhile investment), most of the other major monthly expenses provides an ongoing, obvious tangible value. The same cannot be said of insurance. While it does provide value in the event of a covered loss, the operative word is “covered.” Delays, denial of claims and an unsatisfactory settlement or offer are the top three consumer complaints about insurance[11] and all are directly related to the complexity of the product for consumers to understand.
3.Too easy to game the system
Insurance contracts are considered contracts of adhesion. In simple terms, the insurer had the exclusive opportunity to craft the document as a “take it or leave it” proposition - without much, if any, input from the insured. As such, the legal principle surrounding insurance essentially states that any ambiguities will be settled in favor of the insured. In addition, attempts by insurers to not quickly and fairly resolve reported claims by their insureds can lead to a cause of action for bad faith, meaning that the insurer could be held liable not just for paying the claim but also punitive damages in addition to the claim settlement amount. These safeguards that have been enshrined in insurance law protect insureds but also provide an opportunity for insurance fraud. Insurance fraud can take many forms but, critically, all drive up costs that ultimately are covered by the insurance premiums that are paid by consumers.
4.Cash drain
One criticism that I rarely hear articulated and deserves more discussion in my view is that insurance is a major drain on liquidity for most people. When you live paycheck to paycheck, as an estimated 55% of Americans do[12], anything that depletes your cash reserves is noteworthy. For large items such as rent or mortgage loans, auto loans and student loans, the cash paid is the servicing of debt. By contrast, insurance requires full payment before the policy is in effect. However, because most policy terms go by with no insurance claims, this certain payment is made for a contingency - that a covered loss might occur during the policy term. While insurance premiums can sometimes be paid with a credit card, the relatively large cost of insurance monthly makes it difficult to charge it monthly without paying most if not all of the cost from cash flow. This constant outflow of cash is a burden to consumers over and above the outright cost of the product.
5.Doesn’t cover all causes of loss
As I mentioned before, insurance is simply an enforceable legal contract that provides the insurer’s promise to pay for a covered loss in exchange for a certain amount of money in the form of premiums paid over the length (term) of the contract (usually 6 months for auto insurance and 12 months for property and other insurance). What is meant by a covered loss? In a nutshell, damage to a covered item or items (more on this below) from a covered peril or cause of loss. Since some perils or causes of loss are covered and some are not, properly “using” an insurance contract requires fairly detailed knowledge on the part of the policyholder. If a claim is filed by the insured that is not covered, the insurer’s claims adjuster will deny the claim. Although this is the proper response to a claim that is not covered by the policy, it certainly leads to frustration on the part of insureds. For those who have a claim be denied, a common response is to wonder what the point of having insurance is if a loss to an insured item is not a covered peril.
6.Doesn’t cover everything
In addition to losses from perils that are not covered, losses to certain assets are either excluded or subject to a special sublimit under standard auto, homeowners, and renters contracts. For example, items such as a broken air conditioner or appliance are not covered by a standard insurance contract - they will only be covered by an original or extended warranty if purchased. Jewelry is generally subject to lower limits under a homeowners or renters contract and often requires the purchase of a special policy to cover more expensive items such as a wedding ring. Even if a loss is covered it is generally subject to a deductible which is applied first and must be pierced prior to any recovery from the insurer.
7.Doesn’t cover everyone
The last of the fatal flaws takes many forms but often arises most notably following a catastrophic event such as a hurricane, earthquake or wildfire. When people are not covered for these losses by private insurance, this is referred to as the coverage gap, and it is quite large depending on the country and the peril. Munich Re estimates that of the $330B in economic losses caused by events globally in 2017, only $135B were insured or 41%.[13]
From an individual perspective, the lack of insurance coverage that could provide financial support during a major catastrophe is often ruinous, causing a major burden for many for an extended period of time, possibly forever. From a societal standpoint, the lack of private insurance to provide needed financial support to promote recovery means that the burden falls to government (and ultimately taxpayers) to provide disaster relief support. The availability and affordability of private insurance coverage is an issue in many parts of developed nations and throughout in developing nations, and the size of the coverage gap presents a massive market opportunity for any entity who can find a way to profitably write insurance for segments who do not have coverage today.
BUILDING A BETTER MOUSETRAP - OR INSURANCE PRODUCT
From an innovation perspective, these 7 fatal flaws provide large market opportunities to improve or eliminate one or more of these major customer pain points. Solving even a fraction o
f just one of these problem areas could prove to be a large market opportunity due to the sheer scale of the P&C insurance industry. The hard work required to make an impact should not be underestimated; if it were easy, it would have already been done.There are - and have been - many, many smart people working in the industry for a number of years, and the sheer number of competitors in the industry suggests that someone would have built a better mousetrap already if it was a straightforward task.
So how can it be done? We live in unprecedented times with unparalleled technological advancements. Think of the massive revolution in daily life that we’ve seen in the last 25 years with the rise of the Internet, smart phones, a plethora of tiny sensors everywhere and artificial intelligence to make sense of it all. These technological advancements, along with the size and profit-making potential for disruption in the P&C insurance industry, have led to the rise of the insurtech movement which promises to fundamentally disrupt the existing insurance ecosystem permanently.
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CHAPTER 3 - HIGHWAY ROBBERY
INSURANCE ECON 101
Let’s face it: from the consumer’s perspective, P&C insurance coverage is expensive compared to the benefits received when the vast majority of people will not have a claim during the year. According to ISO, only 6.1% of auto owners filed a collision claim[14]and 5.3% of homeowners[15] filed an insurance claim in 2016. Some additional number of people may have benefited directly through other means such as receiving roadside assistance through their insurance provider. For the remaining policyholders, the value they receive from their insurance policy is mostly intangible; this value is often characterized in the industry as “peace of mind.” Insurance is often a means to an end - people purchase insurance because they are obligated to. To operate a vehicle, you must carry motor vehicle insurance: it is required by law. (At least, it’s required in principle - research suggests that 13% or 1 in 8 drivers in the United States are uninsured.)[16]To purchase a home, most people must borrow money from a bank in the form of a mortgage and the mortgage lender requires that home[17] be secured prior to closing. Increasingly, landlords are requiring tenants to obtain renters insurance in order to lease their property.[18]Insurance isn’t a product that is often bought voluntarily; it’s mandated either by law, a lender, or a landlord.
The End of Insurance as We Know It Page 2