How Technology Is Disrupting the Insurance Industry

New, once-unimaginable risks - like self-driving cars - may not only redefine the type of insurance the world needs, but reduce the need for insurance entirely.

As if that weren't disruptive enough, technology and data may be able to provide more comprehensive, time-sensitive - per-use vs annual- coverage at a lower cost. The challenge the industry faces - aside from, first, a willingness to acknowledge the threat - is how to change to face it before being eliminated by it. JL

CB Insights reports:

As software is having more impact on our life, the question on risks, whether digital reputation, or impact of software failure in the real world is becoming more important. Real-time data from an explosion of sensors enables parametric insurance products. New industries, like ridesharing, need new insurance that are pay-per-use. Data can empower insurers to mitigate risk. Will risk shift to software providers away from individuals and traditional companies?
From health benefits exchanges to new pay-per-use insurance applications, tech startups are gaining momentum in their attacks on the insurance industry. And they are also gaining funding dollars. According to CB Insights data, insurance tech startups raised $831M through the first five months of 2015 alone.
VCs aren’t just funding insurance companies, they’re also weighing in on the parts of the insurance stack most vulnerable to change.
Below are 15 perspectives on the insurance tech industry from a variety of investors ranging from UK-based firms to fintech-specific VCs to large multi-stage VCs. If we have missed any perspectives that you think are worth highlighting, please let us know in the comments.

The Commentary

1. Software Is Rewriting Insurance

Frank Chen of Andreessen Horowitz on how tech can change how insurance firms pool capital, price risk, and empower stronger relationships with the insured.

“Historically, we’ve seen mutual insurance companies (insurance companies owned by policyholders) and stock insurance companies (insurance companies owned by shareholders). We expect to see more crowdsourced insurance companies, just as we’ve seen in other parts of the financial system. Crowdsourcing works great for personal loans, student loans, small business loans — why not for insurance? From the investor’s point of view, it’s great to diversify by investing in an asset class that should move independently of the stock or bond markets. From the insurance company’s point of view, it should be a cheaper way to pool capital.”

Update: Chen also joined A16Z’s Michael Paulus on a longer podcast around the technologies and trends driving insurance.
2. Where Are the Insurance Startups?
Rob Moffat of Balderton Capital argues that there is a dearth of entrepreneurs attacking the $3.7T insurance industry. Moffat also wrote a broader post on market size, obstacles, and success stories in insurance tech.

“But where are the insurance tech entrepreneurs? It is frequently and accurately argued that it is London’s birthright to play host to the poster-children of fintech, due to the capital’s impressive legacy and world-leading position in banking. Technology has the potential to drive effective and worthwhile change in insurance. There are already a few success stories, but only a few.”

3. Is the Insurance Industry About to Change Radically?
Yann Ranchere of Anthemis Group says the insurance industry is impacted by the same underlying trends as the banking industry (transparency, impact of digital on distribution, and big data) but will also face fundamental challenges unique to the industry.

“As software is having more and more impact on our life, the question on risks attached to it, whether digital reputation, or impact of software failure in the real world is becoming more and more important. Will risk shift to software provider away from individuals and traditional companies. For example, should Google or the user be insured for a Google Car?”

4. Insurance Is the Next Frontier for Fintech
Brendan Dickinson of Canaan Partners outlines challenges and opportunities in insurance startup disruption.

“New carriers are required to have unencumbered stores of cash to satisfy the regulators, and have to grow those unencumbered assets in proportion to the amount of risk they have underwritten, which is ever-increasing. This challenge is far worse in insurance than in lending. In addition, for some lines of insurance, pricing is regulated at the state level, with regulators controlling how much a company charges for a given product.
Then there is the adverse selection problem — the first people who need a new product often are the highest risk, and thus you run the risk of seeing much higher claims than the industry average once you launch. For a startup, this is just when you are the youngest and most vulnerable.

5. Investors Are Poised to Disrupt the Tech-Averse Insurance Industry
TX Zhuo of Karlin Ventures explains three areas insurance tech entrepreneurs and VCs should pay special attention to: risk assessment, efficiency and experience, and M&A activities.

“As traditional insurance companies become increasingly aware of the shift — while simultaneously losing ground — it’s likely you’ll see an increase in merger and acquisition activities. Large insurers will strategically gobble up insurance tech startups, which will drive more venture capital investments into the space.”

6. Slicing Up the Gecko
Arjan Schütte and Thomas Smyth of Core Innovation Capital write that the entire “stack” of insurance companies is shifting — including consumer-facing distribution channels, insurance carriers underwriting risk, and reinsurers and capital markets devising new ways to transfer risk.
 

“Real-time data from an explosion of sensors enables parametric insurance products, like usage-based car insurance. New industries, like ridesharing and home rentals, need new insurance products that are pay-per-use, not pay-per-year. And the food of new data can empower insurers to mitigate risk for their policyholders — resulting in fewer claims and happier insureds.”

7. Insurance in the Internet Age
Lee Hower of NextView Ventures on why insurance is the next big wave of the Fintech revolution.

“The internet has disrupted stock brokerage (E*Trade), payments (PayPal, Stripe), and lending (LendingClub, OnDeck, et al), but little innovation has happened in insurance. In most advanced economies, 40-50% or more of insurance is bought and managed over the internet, but in the US, it’s 1-5% in most insurance categories.”

8. Digital Insurance Anyone?
Pascal Bouvier of Route66 Ventures breaks down the digital vs. current insurance model and the key trends that will reshape the industry.

“Picture the Carrier effectively plugged in to the external world via data sources, plugged to the customer in myriad of ways that were not possible in the past, plugged in to third-party providers, all of this in real- or near real-time. No more old linear prosecution of the main insurance processes – customer acquisition, underwriting, claims management.”

9. Industry Appetite Is There
Nektarios Liolios of Startupbootcamp Insurance on insurance firms themselves wanting to be disrupted.

“Industry appetite is actually not something I was expecting from the insurance world. There seems to be a lot of hunger. I think they recognise that the financial world is in the process of doing this and the insurance world is lagging behind.”

10. Insurance Innovation Lags
Manish Agarwal of AXA Strategic Ventures on the slower pace of innovation in insurance.

“I think if you look at technology innovation in the insurance space, it’s behind some other industries, including financial services. There are certainly examples of innovation, but not as much as in other industries.”

11. Where Is All the Innovation in Insurance?
Toby Coppel of Mosaic Ventures outlines some of the big opportunities for insurance startups at various parts of the insurance value chain across lines.

“Insurance companies’ biggest oversight is simple: they have not been serving their customers. Actually, they rarely interact with their customers, since the vast majority of their business comes through brokers. Brokers are treated as their customers, and collect $45 billion of fees every year from insurers globally.”

12. Silicon Valley Venture Capital and Insurance Disruption
Christian Jensen of Accel Partners shares thoughts on how big data, IoT, and other major themes will affect the insurance business.

“A lot of the next wave of the businesses that are in the insurance space are going to be about finding the customer at the moment when they are interested or open to the idea of buying insurance.”

13. Momentum and the Probability of Success
Josh Nussbaum of Metamorphic Ventures highlights insurance as one of the prime markets where there is significant momentum, which may render past market dynamics obsolete.

“While today many startups are attempting to shift the paradigm and start their own insurance companies (through a MGA/MGU model), eventually legacy insurance companies will see these threats and realize that it behooves them to build out the necessary infrastructure that allows them to buy, integrate and build the right technology tools and services to continue their decades-long dominance.”

14. The Insurance Tech Moment Is Coming
Drew Aldrich of AXA Strategic Ventures on why insurance tech has been slower out of the gate than fin tech and the key parallels between the two in opportunity.

“Insurances’ inherent leverage makes carriers and regulators skittish of product innovation or changes to underwriting. Leverage is typically associated with banking and debt but insurance is arguably the most levered product in the market.”

15. Risk & Reward: Opportunities in Insurance
Spencer Lazar of General Catalyst Partners on why the time is right for insurance to be innovated and where his three investment theses in the space lie.

“There are 46 insurance companies in the Fortune 500, with an average age of around 95 years. We’re talking pre-internet, and it shows.”