January 20, 2022 | Investment Themes

Not Your Father’s Insurance Industry

Mark Selcow

Written by

Mark Selcow

Umbrella on abstract technological background

Insurance has traditionally been a boring and stale subject. I grew up in Hartford, CT, America’s industrial home for the insurance industry, and have vivid memories of friends’ dads telling me how they provided peace of mind in their work. I rolled my eyes at these middle aged corporate men (yes, in those days it was mostly men…) and thought of them as, well, dull and lifeless.

Yet, the industry managed mind boggling sums of money with tinderbox issues of fraud, discrimination, corporate bad behavior, and the task of protecting and pricing for brand new classes of risk, such as cyber attacks. Maybe it’s not surprising that this sleepy, dull seeming industry has an exciting side. An old time example is the Johnny Dollar radio program in the 1950s, where a James Bond-like insurance investigator sleuthed insurance fraud after getting hired by a flustered actuary (always in Hartford…), had romantic encounters, and got his man in the end. Johnny was reincarnated by a comedic, brainy James Corden in Oceans Eight.

Maybe cool kids do go into Insurance? Well, they do now. A range of creative new approaches are already in play, with hundreds of new companies having been formed to reinvent or improve this massive and essential part of the global economy. The driver of most of it is software and the data that feeds it. Software-enabled insurance is enabling innovations in the industry in several ways:

  • New insurance product creation: typically as MGAs, to better meet the needs of specific market segments or new types of risk.
  • New models of distribution: either direct to policyholders or via contemporary and digital approaches to broker enablement.
  • Embedded insurance products: enabling non insurance vendors to offer add on or complementary products to enhance their total solution for customers
  • New technical infrastructure to make these software-enabled products work and work with greater agility
  • Contemporary (often Cloud based) enterprise software for carriers to improve operations across Underwriting, Claims, Service and Distribution, and takeout cost, increase speed or improve overall customer experience

Focusing on new product creation, there are several ways software is making possible new types of insurance products that are meeting real market needs. Here are a few:

Behavioral insurance. Telematic innovations have enabled pricing models for auto insurance that are based on actual driving behavior — how quickly someone starts/stops, how often they look at their phone, and other factors that are predictive of higher accident risk. Vitality-based health and life insurance are another example. The idea is that you apply with exercise and fitness data, even wear a fitness tracking device, and depending on how often you exercise you get favorable rates.

On the spot insurance. Typically, insurance covers big things in your life: cars, houses, and so on. It has a long purchase cycle. But imagine you wanted to insure a bike for a weekend trip. Or a drone that you need to take to the beach. Or a business trip to a location with known risks of crime. With the data we have today, it is easier (and faster) than ever to evaluate such risks, issue policies and payout claims.

Bundled models. Sometimes, the best policy is multiple policies. Glow is a really interesting startup that has flipped worker’s comp insurance on its head. The problem with worker’s comp is that people often report accident injuries as work-related to qualify. Glow bundles accident with work-related insurance so that there is no incentive to do this, and companies can get a more accurate picture of their work environment. LifeRaft is another company doing this in Health and Supplemental insurance, where the financial exposure to major medical deductibles is too high for many families. Getting a bundle of products, for example cover for a disease or accident, hospital or imaging costs can be highly cost effective and reduce financial hardship.

Embedded insurance. There are now so many examples of this, the best known are product warranties or trip cancellation insurance. But new and more creative examples are being built today. Shore Crypto is a great example of this, embedding smart contract cover at the time of a DeFi transaction, thus derisking the trade for all parties.

Insurance may have long seemed an unpleasant chore that consumers undertake because the consequences of not doing so are so high. But it’s increasingly become a place where business model innovation, digitization, and machine learning are opening up much more targeted — not to mention efficient and cheaper — models that consumers and businesses will love. And it’s coming at a time when it’s needed. The world is changing in significant ways, and new classes of risk have arrived in our lives that will require protecting against. These include climate change, cyber threats, unexpected impacts from automation/AI, and demographic/migration changes. All of these bring financial exposure to businesses and consumers, and demand for new forms and models of insurance.

At Costanoa, we are excited about the prospects for significant new companies to be built across Insurance lines and markets. Our insurance and insurance-related investments include Noyo, Lively, Glow, LifeRaft and Shore, and we’re looking forward to more.