The End of Insurance as We Know It

by Rob Galbraith

  •A thermal imaging camera (really a computer) deploy facing in your backyard facing away towards the mountain range to detect an approaching wildfire

  Given that roughly 50-60% of homeowners claims are weather-related[145] and that fraud is a known issue in this space,[146] is it not a reasonable leap to see in the future where each house has a personal weather station installed outside? Such a device could confirm, among other items:

  •The average speed of wind and maximum gusts

  •The amount of precipitation (wet or frozen)

  •The extent of hail damage measured by the number of impacts, distribution of size and density of hailstones, force and angle of impact, etc.

  •The air quality from wildfire smoke, etc.

  When combined with structural information about the property, the resulting damages and losses from severe weather events can be predicted much faster and more accurately. For insurers who are able to instantly gather data on damages as recorded by a IoT enabled personal weather station, this provides a way to respond much quicker to loss events and pivot to managing claims proactively rather than reactively. A personal weather station also provides an opportunity to verify that damage did (or did not) occur at a particular home which can help streamline the claims handling and avoid paying for fraudulent claims.

  A SMART INVESTMENT?

  While the promise of IoT in property insurance is large, many challenges still exist. A huge hurdle to overcome for insurers is setting up the infrastructure for capturing, processing, analyzing and ultimating making sense of the massive amount of data each of these unique sensors provides. Unlike autos, where there is a single “black box” installed in each vehicle that is standardized, there are innumerable smart home devices in the marketplace today providing all manner of data streams. These devices may or may not communicate with one another, and likely will not, without a smart home hub as bridging technology to integrate them or at a minimum integrate their data feeds into one coherent framework. The challenge of creating a full smart home network where each sensor is connected and aware of the others, all of which is feeding standardized and synchronized data to the insurance carrier is quite large.[147]

  Another key question: How ready are consumers to share data from their homes with their insurance carrier? While some may be quite willing, the privacy concerns around this information are quite real.[148] This hypothetical business model for insurance providers is similar to the OnStar-like capabilities that telematics can offer. But how often are consumers turning to their insurance carriers for smart home information, advice and setup? Carriers who seek to be a smart home provider will be compared with trusted retailers like Best Buy or Amazon that have been a go-to source for consumers looking for technology solutions.[149] Realistically, consumers will likely continue to trust tech companies in advising and setting up their smart home systems as opposed to their insurance company, as some hope. As with many things insurtech, the hype of smart home technology and its loss prevention capabilities that benefit home insurance carriers is way beyond the reality, which is just getting off the ground.[150] This is an area when many of the insurtech startups have what appears to be a compelling value proposition but could fall down when attempting to deploy at scale.

  I believe that carriers that best partner with key vendors to acquire, integrate, analyze and interpret smart home data will be the ones that end up gaining a competitive advantage. In my view, this will likely occur independent of whether they offer devices themselves. In fact, any carrier looking for success in this arena must be able to do so using data from devices that are previously installed by the homeowner, builder, or other third party wholly independent of the insurance carrier. The exponential proliferation of smart home devices will surely outstrip any single carrier’s ability to deploy their own devices at scale. In order to fully analyze and interpret data from devices you don’t control, you must be able to:

  1.Integrate data from the devices into a single platform of some type

  2.Combine that data with actual claims and exposure data to be able to use it in pricing and risk selection

  ALEXA THE AGENT

  The proliferation of voice-activated assistants such as Google Home and Amazon Alexa - along with Apple’s Siri functionality - provides insurers with the ability to have a conversation about insurance in a customer’s home rather than an agent’s office. Several insurers in the US have already rolled out basic functionality that provides search results when the user requests information on auto insurance quotes.[151] As the technology improves, it may be possible to have more of an interactive conversation with these devices than a more basic search-like functionality of today. These conversations will likely be simple to start, such as asking to have an agent provide a call back at a time that is convenient for the customer. Over time, the technology may be robust enough to complete a policy application and receive a quote or make policy adjustments. It may also have the ability to report a claim and check on the status of one.[152]

  What are the benefits of carriers who are early adopters of leveraging this new technology? For starters, companies will be in channels where their customers are spending more and more of their time. Gartner estimates that 30% of online browsing without a screen and Google estimates that 50% of searches will be performed by voice, both by the year 2020.[153] Such searches can provide more leads for agents and help them spend more time interacting with customers and less time on administrative transactions such as requesting auto identification cards or checking on the balance due.[154]

  It is fairly common in the insurance industry for consumers to use multiple channels: they often start their search online and may consult a quote aggregation tool before examining one or more companies more in depth. Typically, somewhere along the way a call or visit to an agent’s office is involved to close the deal. By considering the carrier’s presence in these voice-activated channels to be as essential to driving brand awareness, sales and service and ultimately customer satisfaction, companies can seize an early market advantage over their competitors.[155] Finally, like more traditional digital channels like websites and mobile apps, these voice-activated channels remain open for business 24/7/365 unlike an insurance agent’s office.

  BEST BUY

  The simple fact is that smart home technologies are proliferating faster than the industry’s ability to gather and make sense of the data. Unlike the S-curve potential for disruption on the auto side, there is more space to move at a measured place and learn along the way with smart home tech. While smart home IoT devices may not represent the existential threat of driverless vehicles, they can still prove to be a large threat to the home insurance business. Any significant reduction in preventable losses, while terrific for consumers, may result in a decrease in premiums (revenues) for carriers. Unlike auto sensors, which are often damaged and need replacing in an accident (which has contributed to a 17% increase in auto repair costs over the past decade),[156] smart home IoT sensors are much less likely to be damaged as part of a loss event.

  Ultimately, my personal view is that smart home IoT technology will prove to be far more beneficial to the industry than other technological trends. The Consumer Technology Association estimates that 29 million units of smart home devices were shipped (63% increase over 2016) with estimated revenues totalling $3.5 billion (57% increase over 2016).[157] Gartner estimates that there will be 25 billion IoT connected devices in homes globally by the year 2020 with the smart home market size estimated to reach $43 billion.[158] Carriers must be committed for the long run with their support for smart home technologies in order for any investments to pay dividends. The possibilities for disruption to the traditional reactive business model are too large to ignore. Imagine a future if insurance policies are directly tied digitally to auto and home and can sense when a loss event occurs and instantly record a claim. Even better, imagine a future where these devices prevent a loss from occurring in the first place.

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  CHAPTER 18 - THE INSURANCE OF THINGS AND THE GIG ECONOMY

  DEMANDING MORE

  Caribou Honig, the co-founder of InsureTech Connect, perhaps encapsulated the insurance experience for many consumers best when he compared it to going to the dentist. People get their teeth checked once or twice a year and do not particularly enjoy it. Otherwise, they only go to see the dentist when they have a toothache. This sounds very similar to the experience for insureds: they only interact with their carrier when they have a claim. Honig was quoted as saying “I think the insurance industry has asked, ‘Can we do that too? Can we raise the level of engagement so that it’s something happening on a regular or daily basis?'”[159] There is a growing need for new products and services as well as a desire by some consumers to have more interaction with their insurance provider, so perhaps insurance will become more like a toothbrush that cleans teeth daily rather than an infrequent visit to the dentist.

  The traditional P&C insurance coverages are familiar to anyone in the industry and to most consumers. If insurers wish to shift to a more integral part of their customers lives, they need to examine if the traditional coverages are truly ALL that consumers need.

  Current products meet many consumer needs, and, as such, demand for these products will not disappear overnight. Insurance products are still quite relevant and help address critical financial needs for individuals, households and businesses alike.

  However, lifestyles are changing, and insurance needs to change at the same pace. This book previously discussed the shifts in auto ownership and several studies that all point to a delay in home ownership for millennials and other first-time homebuyers.

  There are several reasons for these lifestyles shifts that are well documented. Of particular note, the average student debt load has doubled in the past 2 decades.[160] This has created financial stress on millennials (and the up-and-coming Gen Z) which has led to shifting consumer preferences away from the burdens of ownership in general. At best, we can say that growth for the traditional personal lines products of auto and homeowners insurance are meagar - low single-digit growth. In particular, personal lines auto insurance saw just 2% of new customers entering the market in 2017.[161]

  The same is true for traditional business coverages as many businesses today are small, entrepreneurial ventures - often referred to as “side hustles” - that may have limited exposures.[162] Many participants in the gig economy may not even be aware of their exposures as a business and, hence, the need for insurance coverage for their business activities.[163]

  DID YOU GET THE GIG?

  In particular, the gig economy has quickly become a major source of income for millions of individuals and is predicted to be the most common form of employment by 2027.[164] The needs of the gig economy are different than our “traditional” classifications of personal and commercial lines.[165] For example, a personal lines auto policy is adequate for the personal use of your vehicle.

  If you drive for a ride-sharing firm, they likely have a commercial policy in place that protects the driver from *some* exposures, often just liability coverage; physical damage and business interruption gaps exist in your coverage. Similar gaps exist for home sharing and home exchange activities.

  The major challenge for the insurance industry is that its legacy distinction between product lines - personal and commercial - is oriented to serve yesterday’s economy. If you have personal liability exposure through your activities as a driver, renter and/or homeowner, you purchased coverage for those activities. If you worked for a business, you were generally an employee that was covered by your employer’s insurance policies. Even if you were a contractor, you were often covered by your firm’s insurance (albeit sometimes with more limited coverage). If you were an entrepreneur, you purchased business insurance for your company - even if it was a small business. Bottom line: you purchased insurance for your personal activities and were either covered for business exposure as a employee or purchased coverage if you owned your own business, which was the exception. Some people have called for the need of a third class of worker between an employee and a contractor to reflect the realities of the gig economy worker.[166]

  Contrast this to today’s world where many people work multiple jobs, often a primary job and a side hustle where they work as a gig economy contractor receiving payment on a task basis - when a car ride is given, when a room is rented, when a package is delivered, etc. People who pursue gig economy positions may choose to serve as a contractor for months or years - or for a single Uber ride. They may work 60 hours one week and never work the rest of the month. They may do a variety of tasks for a variety of companies. The insurance needs of this population are different, and startups are beginning to recognize the need for coverage and flexibility like binding coverage in 3 minutes.[167] Cake & Arrow has published an excellent white paper entitled "Insurance in the Age of the Gig Economy: What Happens to Insurance When Business Gets Personal" that examines this issue in detail. Their original research found that gig workers

  •need to be educated on risk

  •want to buy direct

  •are willing to share data

  •want custom coverage

  •expect flexibility

  •will demand more value

  Health insurance is a major concern for gig economy workers in the United States, but a related need is business interruption insurance. I met a rideshare driver named Andrew on my way to an airport once. Andrew shared a story that he had been involved in an accident where he was not at fault, but the resulting damage to his car took 3 days to fix. The time it took Andrew to get his vehicle fixed resulted in an interruption of his income stream, and he lamented that no insurance provider was offering a product to provide income for those 3 days based on his prior driving history and income. As a rideshare driver for the past 2 years, Andrew has a reliable track record of driving from which to base an appropriate business income compensation on.Similar stories abound in the gig economy. By nature, these jobs provide intermittent income streams and any interruptions - particularly when the gig economy is your “full-time hustle” - can make it challenging to pay the monthly bills.[168] Research has shown that gig economy workers are less financially secure than counterparts who are full-time employees at a firm.[169]

  Part of the challenge in developing insurance products that meet the needs of gig economy workers is the ongoing debate about whether these contractors should be considered as employees for the companies they work for. If they would be considered employees, they would then be covered by traditional commercial insurance products. Another concern is that it remains unclear whether providing insurance products to the freelancer market will provide a similar return for insurers as on traditional products.[170] Some companies that rely on freelancers have sought to provide limited benefits but have been exceedingly cautious in doing so out of concern that providing a more robust benefits package would result in freelancers being reclassified as employees. To help close the gap, startups have jumped into the space to create new products offerings specifically for the gig economy workforce.[171] Based on the growth in gig economy workers to date and its expected rise in the future, through test-and-learn scenarios it is likely that a whole new class of insurance products will emerge to serve this market. This could result in major disruption to traditional carriers in the commercial space.

  FLIPPING THE SWITCH

  Another area in which traditional carrier product offerings may not be adequately serving the needs of today’s lifestyles is the flexibility and ease of use of interacting with a policy. Many P&C insurance carriers have long offered special coverage through a policy endorsement or separate product to cover valuable items such as jewelry, cameras, fine arts and guns that are subject to sublimits on most renters or homeowners policies. These policies are most often marketed to higher net-worth individuals, although many people do carry coverage for items such as their wedding rings.[172] The standard value proposition is
that, for a relatively small additional premium, coverage for these valuable items is provided at a limit closer to their actual value (as opposed to the low limits offered on standard renters or homeowners products) and at a lower deductible. The valuable items policy term is annual, similar to renters and homeowners, and may be bundled along with those products or issued at a separate date. Depending on the extent of valuable items to be covered, consumers may rarely interact with their policy after inception or may frequently seek to add or remove items on a regular basis (generally if they have the means to continually acquire such items).

  More recently, there has been a movement in the insurtech startup space to provide much more flexible coverage for individual items marketed as on-demand products. These products allow consumers to leverage technology, usually a slick easy-to-use mobile app interface, to quickly add or remove items to be covered at will.[173]

  •Want to insure your fancy camera only when you are on vacation? No problem.

  •Want to insure your expensive painting only when its displayed at the art gallery - or in transit? No problem.

  •Want to insure your wedding rings at the jewelry store? No problem.

  •Want to drop them after your wedding day because you are a responsible married person now? Also not a problem.

  The on-demand approach challenges conventional wisdom that insurance is a “set it and forget it” product. These products blur the lines between valuable items coverage and extended warranties without the time limits of either. It remains to be seen how popular these new offerings prove to be with consumers. Perhaps the on-demand component is a nice marketing angle, but the real value proposition for consumers is an easy-to-use app. In fact, a good user interface that makes it easy for consumers to add and drop items may result in users adding items and leave them, continuing to pay premium month after month for coverage. Another aspect of on-demand insurance that remains to be seen is whether new startups in this space can earn a underwriting profit. If they are able to do so, this would run counter to the conventional wisdom that offering this level of flexibility leads to major problems of adverse selection where consumers only insure items when the likelihood of loss spikes up.