Innovation is dependent on the product – Insurance Outlook Series #3

In article 3 of our ongoing insurance series, Eric Veron and Ian Wittkopp discuss the impact that changing technology is having on commercial insurance lines. We describe how innovative insurtechs like Kovrr and CyberCube are enabling incumbents to better understand cyber risks, while insurtechs like Slice and Vouch are servicing the gig economy, and Alan is redesigning the Health insurance offering.

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Find article 2 here

In commercial insurance lines, new technologies are changing the way insurers operate and assess risk and, in many cases, are creating new risks to be insured against altogether. These new technologies, along with the acceleration of changes due to COVID-19, have left the Commercial Insurance market in flux. Global average commercial insurance prices increased 19% in Q2 2020 because of large underwriting losses, uncertainty, and a low-interest rate environment.¹ Insurtechs in the Commercial Line space play a largely different role than in Personal Lines. Instead of an end-to-end provider (like Lemonade in Personal P&C), we see insurtechs focusing on specific areas of the value chain, such as underwriting analytics. The insurers who adapt first, may need to rely on their ability to partner with insurtechs in order to leverage their technology.

This article will provide an overview of the new technologies and opportunities for innovation in the Commercial Insurance market, while explaining how insurtechs can help incumbents adapt.

Mapping Commercial Lines by Innovation Potential

Innovation in Commercial Lines can be broadly categorized into three main segments:

• New risks to insure – Segments like Cyber Insurance have grown in importance as cyber intrusions become more frequent and damaging, and regulators begin to introduce new data and privacy frameworks. Furthermore, changing technologies that have enabled the gig economy have also increased the potential for new products aimed at shared mobility pools, for example.
• New ways to perform current processes – Across the value chain, just as in Personal Lines, processes are being reimagined. Risk visits for example, which are traditionally a high ‘human touch’ process, have been increasingly automated as drone and satellite technology is leveraged. For distribution targeting SMEs that are seeking bundled packages, trends in personal insurance apply – there is a desire for an end to end digital process, combined with digital or physical access to underwriters or intermediary expertise.
• New technologies to assist underwriting – Innovation often means leveraging new data sources in new ways. Insurers are beginning to leverage sensor data for underwriting and loss prevention, for example sensors that track maintenance and performance in aviation and marine insurance. In catastrophe insurance, entirely new models are being used to price.

The table below examines four key Commercial Line segments and how susceptible to innovation certain products are.

In the following section, we’ll take a look at the key themes highlighted by the chart above

Themes in Commercial Lines

Lower complexity products follow the trends prevalent in Personal Insurance

• In Personal Lines, customers acquiring travel insurance or low customization P&C products desire an end to end digital process. For products targeting SMEs, like bundled property/business products or simple Group Health, this remains true.
• In the SME segment, insurers like Vouch have focused on underserved niches like the start-up ecosystem. Vouch is a digital insurance platform that offers business insurance for start-ups that begins at just US$300 and includes products such as general liability, cyber coverage, directors & officers, business property, etc. Policies can be acquired in 10 minutes with coverage starting within 24 hours.² Chubb has been an example of an innovative incumbent with the introduction of Chubb Marketplace that has helped agents to service small business accounts more quickly and efficiently. Alan in France is an example of simplifying and rethinking Group Health insurance (they’ve done this for individual Health coverage as well).

The gig economy creates an opportunity for new products

• The gig economy, work arrangements defined by short-term contracts, has had numerous high-profile successful cases like Uber and Airbnb. Regulators have grappled with whether digital platforms are responsible for providing workers with insurance while new models to cover the provisions of services (example, the car of an Uber driver) have emerged.
• Slice, an insurance marketplace, offers on-demand home share, rideshare, and cyber insurance and is geared at workers who interact with digital platforms. For home share, Airbnb hosts can acquire a rental insurance policy in just a few minutes that only covers a specific rental period.

Cyber Insurance – The Frontier of Commercial Insurance?

• Cyber insurance is an area of immense opportunity and risk for incumbent insurers. This risk was highlighted in June 2017 when the NotPetya virus originating in Russia infected computers of large Fortune 500s including Maersk and Merck. Merck was hit particularly hard claiming $1.3B in damages and turning to insurers for coverage under their catastrophic risk plan that included cyber insurance aspects. A group of insurers refused to pay as they claimed the cyber-attack was an ‘act of war’ not covered and the case went to the courts.3
• Insurtechs have begun to fill demand for data and analytics solutions that help incumbents model and assess cyber risk. Cybercube is an insurtech in the U.S. and Europe that provides a data and analytics platform to assist insurers and reinsurances in underwriting decisions and portfolio optimization. Kovrr, a cyber risk modelling start-up in Israel, established Cyber Risk Accumulation Zones (CRA – Zones) as a framework to understand ‘catastrophic cyber risk exposure’.⁴ Parametrix, another Israeli insurtech, pioneered cyber ‘downtime insurance’ with parametric predetermined pay-outs based on downtime KPIs for Cloud, Customer Relationship Management systems, web hosting, payment systems, etc.⁵

Financial Lines – High human touch and bespoke solutions reduce innovation pressures

• As in Personal lines, increasing complexity of products can often reduce pressures from innovation. In Financial lines like Tax liability Insurance, a product that protects a company from financial losses related to a successful challenge from a tax regulator during an M&A process, there is little room for operational improvements from technology or new models. Given the bespoke nature of this insurance, customized products must be designed for each client.
• Defined Contribution or Benefits retirement Group products can benefit from similar innovation in individual savings products in terms of digital processing for both corporate clients and employees, but the customization of these products, combined with the local regulatory or tax specificities often requires a financial advisor and underwriter.

Implications for Insurers

As we noted in our foreword, Commercial Insurance premiums are increasing. While a part of this increase represents changing competitive conditions and the current COVID-19 situation, another part is related to recent large underwriting losses.

These losses show that the industry is adapting to new risks and grappling with new systems and data sources that will allow them to successfully, and profitably, underwrite.

Successful incumbents need to leverage the technical expertise that insurtechs can provide to improve their processes and push into new risk categories. To successfully partner with insurtechs, incumbents need to create frameworks for partnership onboarding that prioritize speed and flexibility.

Future Pieces

In future pieces, we will provide our viewpoint on the following questions:

1. What technologies are at the forefront of insurance innovation?
2. Where do insurtechs fit into the insurance value chain?
3. Do insurtechs have enough differentiation to sustain a competitive advantage?
4. What should incumbent insurers do to respond?

Sources

1. Global Insurance Market Index – 2020 Q2, Marsh, August 2020.
2. Vouch Announces Expanded Insurance Offering to Serve Mature Startups, GlobalNewswire, July 2020.
3. Merck Cyberattack’s $1.3 Billion Question: Was it an Act of War?, Bloomberg, December 2019.
4. Cyber Risk Accumulation Zones, Kovrr.com, August 2020.
5. Parametrix, parametrix-ins.com, August 2020.