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InsurTech from the Inside Out

InsurTechs are creating new, creative, and  helpful tools to improve the customers’ experience in selecting, and using insurance products.  However, there are risks for the start-ups and the insurers that are starting to rely on the InsurTechs. Is this improving the experience and maintaining the products’ viability?

Analysts and  InsurTechs

Matteo Carbone, director of the IoT (Internet of Things) Observatory and Adrian Jones, a traditional insurance professional and InsurTech investor undertook an analysis of the three Insurtechs above for FY2017 with an update for Q1-2018. The results are published in Insurance Thought Leadership.

The authors selected three InsurTechs:  Lemonade Root Insurance, and Metromile. Lemonade insures renters and homeowners, Root and Metromile cover automobile.  All three operate exclusively in the US.

Each InsurTech has developed unique digital algorithms to support business processing.

The high level results

To be succinct, the analysts found the three Insurtechs each had significant growth and were supported by investors, including large reinsurers.  As a result, these Insurtechs are frequently held up as ‘successful’ disruptors.

But there are existential concerns….

In the intro for the 2018 update, the analysts noted that “Underwriting results have continued to be consistently poor, even excluding expenses, which are influenced by scale and inter-company agreements.”

The analysts point out that the poor results are not explained by “prudent or cautious reserving.”  Rather, they note, “Auto and renters are well-modeled, short-tail lines of business where large absolute differences in estimates are less common than in lines where losses take longer to become known.”

So what’s the status?

The gross loss ratios (excluding loss adjustment expense) for the first quarter of 2018 mimics the previous one-year results.

  • Lemonade
    • Q1- 2018: 116%;
    • 2017 range: 104% to 144%
  • Root:
    • Q1-2018: 121%;
    • 2017: 128%
  • Metromile:
    • Q1-2018: 104%;
    • 2017: 104%

Not a comfortable place to stay for long.

Enter the angels …

Carbone and Jones were ‘surprised’ to find that some investors expect that loss ratios will decline with scale “as any other costs on the income statement.”

Reinsurers and other investors are continuing to subsidize losses.  In turn, the insurtechs have been growing rapidly and the analysts suggest the insurtechs “will probably improve their loss ratios and expense ratios will scale down.”

The overarching question is when. The analysts note:

We won’t know for a few years whether these daring start-ups are really groundbreakers or just expensive follies – as long as they are not acquired in the meantime. We’re cheering for them and think that we will see rapid growth and also profitability improvements in future quarters.(emphasis supplied)

We’ve seen a bit of this before

In the 1990s, insurance/IT professionals took to the ‘new’ internet technologies.  Standardized e-mail connectivity allowed ease and speed to exchange information and files.  Web sites proliferated within a short period, and there were expectations that this would allow seamless connectivity to compare quotes, place business, and service claims.

A brave new world was on the horizon.  What many of us didn’t see was a 2 kilometer wall that was named ‘Year 2000’. Starting in the 1997, panic overtook many IT departments, which were tasked to make sure that two-digit years would cause unpredictable results.

And price was no impediment … This was a ‘save the company’ project.  As a result, resources for other initiatives (the Internet, e.g.) were put on hold.

However, when the bells rang on 1/1/2000, there were bills to pay, and this put Internet service plans further out.

Will this happen again?

At this moment, InsurTech is still a hot commodity, but that doesn’t guarantee smooth continuation.  A wise IT elder told me:  “People plan, God laughs”.

As IT has become a critical component to virtually all activities in the insurance space, there is more emphasis on robust technology programs, which will provide better resilience. But this needs to continue.

What do you think?

If you are deep into development or expecting to see changes, we’d be interested in your thoughts. Meantime, don’t forget we have two events that will help you understand the InsurTech opportunities and directions:

The Digital Future of Insurance: Is Risk Passé – The 2018 Insurance-Canada.ca Executive Forum, August 28, Toronto Sheraton Centre.

InsurTechTO 2018  – November 7, 2018, Toronto Sheraton Centre.