The insurance industry is ripe for takeover
P&C insurance has grown over the past 300 years to today's (but
may not love) incarnation. - phase along the path added meaningfully to
the insurance industry. Without the significant technological advances
over the past 20 years, insurance will likely have proceeded down a steady
course. Insurance is an industry providing a full range of goods and services
with weathered time (pun intended). P&C insurance policies serve as
an integral framework, delivering tremendous social benefits through increased
risk-taking and
economic activity.
Without the cover offered by insurance to individuals and companies, more
money will be redirected into creating larger nest eggs or rainy day accounts,
holding this capital "closed" from more economically beneficial
uses such as financial and business investment. This unlocking of additional
money flows helps determine what a modern economy entails. Underdeveloped
markets with no stable private insurance sector have a distinct disadvantage
for those who do.
How flourishing is insurance for P&C? Consider these statistics:
- Net premiums written for the sector totaled US$558.2B in 2017.
- 2,538 P&C businesses worked in the U.S. in 2016, hiring a total of
648,200 workers. Another 1,1 million employees worked in agent & broker
space or other insurance-related companies.
- In 2016, gross P&C cash and savings were $1.59 trillion.
- According to Swiss Re, P&C insurers charged $144B in catastrophe-related
losses globally in 2017. This is slightly higher than the $54B trusted
globally in 2016, well above the $58B 10-year average (adjusted to $2017).
- Despite the high 2017 losses due to an active hurricane season and significant
wildfires in the U.S., P&C insurers earned $36.1B net income based
on ISO results.
Bottom line: P&C insurance is enormous. It creates work for millions of people
and trillions of money used to invest. It gives billions of dollars in
payouts when significant disasters, including hurricanes and wildfires,
occur. Despite the amount of downside risk it assumes, the industry can
perform this critical economic role profitably.
So what's our current insurance system's problem? Until recently,
a healthy and immune to change industry was considered a positive attribute.
Stability tends to be a feature of the insurance industry that society
needs. Noted industry veteran and keynote speaker Tony Cañas put
it best when he said, "Why are all insurance firms so conservative?
Because all the others are doing business!"
Despite the P&C insurance sector's resoluteness, both industry
veterans and new professionals fear the huge iceberg insurance is beginning
to melt. As demonstrated by the tremendous increase in venture capital
entering the insurance room over the past five years, VCs and entrepreneurs
also view it.
According to Venture Scanner, from 2012 to 2017, funding for companies
in the Life, Home, and P&C Insurance area grew at a compound annual
growth rate (CAGR) of 181 percent, with most of that funding the last
two years. In the second quarter of 2018, space start-up funding was equivalent
to 2017-wide. In Q2 2018, there were 35 funding activities, and 74% were
seed funding or early-stage Series A investments. I assume the insurance
investment will continue to grow due to:
- Global non-life insurance market size ($2.2T in 2017, Swiss Re said).
- Endless ways to enhance the new P&C ecosystem.
The possibility of a mega payoff and countless opportunities to disrupt
an industry will continue to draw investors until the industry disrupts
itself on a large enough scale. There is a tremendous amount of failure
that has not occurred to date. A small change in key performance indicators
(KPIs) could result in millions of dollars of profit. And conventional
insurance players feel unprecedented transformative prospects in modern history.
The number of re/insurers make venture capital investments in insurance
start-ups is rising. Where are these opportunities? It's an infinite
list. Many are unique to each incumbent pursuing incremental changes in
new goods, simplified procedures, lower spending, loss avoidance, alternate
revenue sources, and improved consumer interactions. Some have built categories
of opportunities to create a map of sorts to look for a return on investment.
For example, Venture Scanner recognizes fourteen forms of insurance technology
that involves 1,486 companies and a cumulative $23B in funding through
Q2 2018. In the following pages, I would suggest that the most lucrative
opportunities will go to incumbents or new entrants seeking to "correct"
one or more "Six Fatal Insurance Flaws."
These transgressions are integral to modern-day insurance and are not readily
erupted. They pose massive barriers within the existing system. If left
unchallenged, these roadblocks will continue to hinder opportunities to
reduce costs or improve product accountability and accessibility dramatically.
If technology can overcome one or more of these problems, the insurance
industry would be radically altered in ways that offer significant benefits
to customers and society in general. Naturally, the vast disruption generated
by fixing one or more of these inherent weaknesses may also challenge
strengthened firms.
Fatal defects
Here are the Six Fatal Insurance Flaws:
- Too costly
- Too confusing
- Drain of cash
- Doesn't protect all causes of loss
- Doesn't cover everyone
- Doesn't cover everything
Too costly
One of the consumer concerns is that insurance costs too much. Paying for
auto and property insurance (especially homeowners) is a significant part
of most people's annual budget, estimated at $914 annually for auto
insurance and $978 for homeowners insurance. These figures can vary widely
by state, with twice on average the most expensive places.
In most cases, it's also obligatory and doesn't have an immediate
tangible advantage as you might go decades smoothly without a claim. Besides,
P&C insurance has a lot of cost inefficiency compared to the service
customers offer, as only 66.9% of premiums were expended directly on personal
line risks and 55.6% on commercial lines in 2017. The balance is spent
on expenses and earnings.
Too confusing
For most families, insurance is the most confusing to use and recognize
major monthly expenses.
Consider other hefty monthly fees:
- Mortgage payment because we need shelter
- Auto loan payment because we need transportation
- Food because we got to eat
- Electricity to illumination, charge machines, and run appliances
- Water keeps taps and toilets running
- Student loan payment because an educational degree (hopefully) that contributed
to a better-paid job in your chosen profession (ideally)
With the potential exception of your student loan payment (which you might
or may not deem worthwhile in retrospect), most other significant monthly
expenditures have a permanent, tangible benefit. Insurance cannot be said
the same. Although it offers value in case of an insured loss, the operative
word is "covered." Delays, rejection of claims, and unsatisfactory
payments are the top three customer insurance concerns. Both contribute
directly to product complexity.
Drain of cash
One criticism I rarely hear voiced but needs further discussion is that
insurance is a drain on most people's liquidity. As an estimated 55%
of Americans do, something that depletes your cash savings is remarkable
when you live paycheck. For big things like rent or mortgage loans, car
loans, and student loans, cash is debt servicing. Conversely, insurance
needs full payment before the policy is successful.
Most policy terms, however, go without insurance claims. This specific
payment is made for a contingency - a covered loss may occur within the
policy period. Although insurance premiums may often be charged with a
credit card, insurance's comparatively high monthly cost makes this
unrealistic and impractical. This chronic cash outflow is a burden on
customers beyond the price of the commodity.
Doesn't protect all causes of loss.
Insurance is an enforceable legal arrangement that includes the insurer's
commitment to pay a covered loss in return for a certain amount of money
in the form of premiums charged over the contract duration (usually six
months for auto insurance and 12 months property and other insurance).
What is a covered loss?
Nutshell, damage to a protected object or objects (more on this below)
from a covered danger or malfunction source. Because certain risks or
causes of loss are covered, and some are not adequately, "using an
insurance contract requires the policyholder's fairly thorough knowledge.
Suppose the insured files a claim that is not protected. The claims adjuster
may refuse the appeal.
Since this is the correct answer to a recommendation that the policy is
not secured, insurers are disappointed. A typical response is to ask what
insurance is about?
Doesn't cover everything
In addition to damages from non-covered risks, losses to such properties
are either exempt or subject to special sublimits under standard contracts
for vehicles, homeowners, and tenants. A broken air conditioner or appliance,
for example, is not protected by legal insurance. They can only offer
an initial or extended warranty if bought. Under a homeowner or renter's
lease, jewelry is usually subject to lower limits. It also involves buying
a policy to cover more costly things, such as a wedding ring. And if a
loss is insured, it is usually subject to a first-applied deductible,
which must be pierced before the insurer's recovery.
Doesn't cover everyone
Fatal Flaws' last takes several forms. It most frequently follows a
devastating event like a hurricane, earthquake, or wildfire. When individuals
are not compensated by private insurance for these losses, the coverage
gap is called. Depending on the nation, the gap can be vast. MunichRe
reports that of the $330B economic damages incurred by global incidents
in 2017, only 41% or $135B is covered.
Individually, a lack of insurance coverage during a major accident is also
ruinous. This distance will trigger significant burdens over a prolonged
time and probably forever. From a societal viewpoint, private insurers'
absence to provide recovery means the government's responsibility
(and eventually taxpayers) to provide disaster relief. The availability
and affordability of personal insurance coverage is a problem in both
developed and developing nations. The coverage gap's size poses a
considerable business opportunity for any company that can profitably
find a way to write.
