6 ways insurers are behaving like startups

Insurance is often viewed as a conservative industry, focused as it is on the management of risk. And that risk-averse approach has served the leading insurance companies well – many have been around since the first half of the 19th century.

Today, however, various firms are seeing an industry ripe for disruption. As expected, that includes lots of startups, with more than 1,500 attracting $28B¹ in venture capital. But much of the disruption is coming from a less expected source – established insurance companies embracing the InsurTech startup culture.

Startups targeting entire insurance ecosystem
To be sure, the established companies are well aware of the changes afoot in the market. InsurTech startups have set their sights on virtually every part of the industry ecosystem: product development, marketing and distribution, underwriting, customer service, claims management and customer retention.

These startups are leveraging tech like SaaS, AI/machine learning, IoT, bots, gamification and blockchain, as well as creating such innovations as usage-based, peer-to-peer and microinsurance.

Their business models vary. Some – like Clover and Devoted Health – sell direct-to-consumer. Brands like Lemonade and Friendsurance help create networks where peers insure one another. CoverHound and Goji operate marketplaces. And others provide digital management services and tools to help established companies operate with greater insight and efficiency.²

Disrupting the disruptors
As a result of the InsurTech invasion, traditional insurers are changing their approach.

Some are seeing opportunities to create or exploit entirely new markets. Others are seeing the need to play defense, especially when it comes to millennials. These younger buyers are projected to dominate the industry’s customer base in the years ahead and are twice as likely to buy policies online.³

Whatever the motivation, the capital and energy that companies are investing in new innovations is significant. And they’re placing bets through at least six distinct plays.

1. Become a Venture Capitalist
Insurance companies have always been investors. By putting cash from premiums into bonds, stocks, mortgage portfolios and other investment assets, they grow profits and lower premiums. By lowering premiums, they acquire more customers – which means more premiums to invest.

In recent years, more than two dozen insurance companies have created Venture Capital divisions, including Allianz X, which has a massive $1 billion VC fund, and MassMutual Ventures, a prolific investor in 38 startups.

As Bharat Rajaram of Aflac Ventures⁴ has noted, these VC divisions serve a couple of purposes: 1) to secure financial returns and 2) to keep their fingers on the pulse of consumer needs, technology and innovation. Aflac Ventures launched with a $100M fund in 2017 and doubled down with another $150M in funding last year. Rajaram’s team meets with close to 1,000 startups each year, and to date has invested in four:

• CoverHound, an auto insurance marketplace
• reply.ai, an AI-powered chatbot platform
• Picwell, which uses AI to make personalized healthcare benefits recommendations
• Tomorrow, an online broker that acquires customers through a free self-service tool for creating a will.

New York Life Ventures, launched in 2012, has invested $200 million in 30 startups, including Trifacta, a developer of data-wrangling software. The group also has a mission to bring innovation to the core of its business. They do this by facilitating Proof-of-Concept tests between startups and various teams within New York Life, averaging one PoC every two weeks for the past six years.⁵

2. Sponsor an InsurTech Accelerator
Several leading insurance companies have established their own accelerator programs, often in partnership with groups that specialize in accelerating startups.

Accelerators bring together cohorts of early-stage companies in intensive learn-by-doing experiences. The goal: compress years of learning into a few weeks or months. Startups compete for spots in these accelerator programs, as graduates of the top programs tend to receive their next round of funding significantly faster than their peers.

Lloyd’s Lab offers a 10-week program in a co-location space in its London offices. Mentors come from both Lloyd’s and Boston Consulting Group. Accelerator specialist L Marks helps Lloyd’s run the program. Cohorts of 10-12 startups are given the opportunity to develop their ideas at scale in partnership with the largest insurance market in the world. They also are given the opportunity to grow their networks in the insurance space, receive product validation from Lloyd’s stakeholders, and compete for funding from Lloyd’s Labs investment pot.

In addition to Lloyd’s, Swiss Re runs an accelerator in Bangalore, Sun Life runs one in Toronto, and MetLife has one in North Carolina’s Research Triangle. Nassau Re is also involved as a sponsor in The Hartford InsurTech incubator.

Among the startups participating in these accelerators: DropIn, which live streams video insurance inspections; Wellthy, an AI-powered diabetes therapeutics program; Enroll Hero, which helps seniors quickly pick optimal Medicare plans; and Parsyl, which combines IoT and data-mining to assess supply chain risk.

3. Partner with startups
Other established insurers are teaming up with tech companies to create new classes of offerings. Take the partnership between French-based AXA and Trov. The latter’s smartphone app technology lets UK consumers register property in their home – say, a laptop or fancy digital camera – and insure it for the day (or not) by swiping on or off. For this innovative offering, AXA provides the underwriting.

Similarly, in the term life insurance space, Hannover Re is partnering with Ladder, which offers a fast, seamless, transparent buying experience for underserved, tech-savvy consumers. (Allianz X and Northwestern Mutual are also engaged with Ladder through VC funding.)

For flight interruption insurance, Munich Re partners with Blink Innovation, which tracks flights and proactively rebooks your flight at no cost if cancelled/delayed, with no claims processing required.

Partnering with a startup is sure to grow in popularity, as it is no doubt one of the faster, lower-risk paths to grow revenue through innovative offerings.

4. Launch a dedicated incubator
Conventional wisdom says that established companies simply can’t innovate as easily as a startup. But a number of established insurance companies are creating skunkworks within the four walls of their own organizations with the goal of out-innovating the innovators.

One of them is Liberty Mutual. In 2015, the company created Solaria Labs, an incubator designed to ignite game-changing innovation. To help create a better, safer future, Solaria builds and tests experimental new products based on customer-centric research and trends.

Two of the start-ups being incubated by Solaria help home buyers and renters detect livability data (e.g., traffic congestion, convenience of location for errands and entertainment, noise level) that they might not notice at an open house. Another startup provides millennials with a simple way to acquire renters insurance. (Full disclosure: Pappas MacDonnell worked with Solaria Labs on the rapid development of a new insurance brand and platform for this offering.)

Other brands that have gone big into the incubator space include MassMutual, which developed the Haven Life offering, and Pacific Life, which has invested $30M in Swell, its robo-advisor.

5. Bring innovative technology to the core business
A more daunting challenge perhaps is driving innovation deep into the core of the business.

USAA Labs is using digital technology to directly enhance the member experience in every aspect of its business. With a net promoter score of +75, USAA members truly feel the love from the company – but USAA is not resting on its laurels. It’s bringing innovations into production to enhance that member experience – whether through Alexa integration that makes it easy for members to search by voice, or AI/machine learning that enables customer service reps to know members better so they can be more empathetic.

At USAA, innovation extends deep into the organization. In 2017, the company crowdsourced ideas from 92% of its employee base and brought 1,300 of these ideas to market.

One example of USAA’s approach is the rapid prototype for claims management it built in the wake of Hurricane Harvey. At that time, claims adjusters were hearing from concerned members that couldn’t get to their homes to assess and report damage. So the USAA Labs teams created – in 24 hours – a portal that provided before-and-after aerial photos of the affected homes, using existing satellite imagery and post-storm imagery from the National Oceanic and Atmospheric Administration to determine the extent of damages.

At State Farm’s Red Labs, the company is focused on core innovation, particularly through blockchain. The Red Labs team has come up with 50 different blockchain use cases for driving better outcomes in the business. And, in fact, State Farm and USAA are already using blockchain to settle mutual claims.

6. Combo platter
With disruption a central premise of business in the 21st Century, many established insurance companies are placing a number of different types of innovation bets.

Allianz X, with its billion-dollar venture capital fund, has also developed a partnership with Nauto, to capture data from connected cars and better understand the self-driving future.

MassMutual has a robust incubator but also a very active Ventures team, which has made 38 investments, 8 as lead investor.

Liberty Mutual, likewise, has both an incubator and a Ventures team. They sponsor accelerators like MassChallenge, and partner with startups through their incubator.

With 1,500+ startups and a wide range of innovation initiatives at legacy insurance companies, the InsurTech market appears poised to only get hotter.

Bottom line, we think there are plenty of opportunities to be seized in InsurTech, whether your company is a David or a Goliath.

Just keep in mind, it’s the consumer who ultimately rules the battlefield.

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¹ Venture Scanner, 6/2019
² Statista, 2019
³ Gallup, 3/2015
⁴ Innovation Leader, 7/2019
⁵ Forbes, 5/2018