Suddenly everyone seems to be talking about the $4 trillion global insurance industry and wondering, “Is a massive transformation underway?” Already in 2016, nearly $4 billion has been invested in insurance startups and growth-stage technology companies globally. That dwarfs the $650 million invested for all of 2014. We definitely have hit an inflection point, and it is right to assume tremendous change lies ahead.
To state the obvious, insurers are cautious by nature — and for the right reasons. As global risk-management firms, they protect consumers and businesses from multi-trillion dollar catastrophes and losses. But they’re also innovative (although they get little credit for it). Insurance products constantly evolve. New entrants include cyber liability products, drone insurance, and peer-to-peer 2.0 technology championed by industry incumbents such as Berkshire Hathaway, Lloyd’s of London and others. Or consider what driverless cars spark: new types of insurance protection for consumers against liability and physical damage claims.
As a venture capital firm that focuses on financial technology investments, Oak HC/FT spies more and more inventive insurance advances to benefit consumers, carriers, brokers, administrators and others in the ecosystem. These tech-enabled breakthroughs will make a difference in the industry.
But change will take time. As a reminder, it took Guidewire — among the most innovative insurance technology companies since 2000 — nearly a decade to reach revenues of $100 million before exploding by more than four times that figure over the next five years.
So what are some reasons why the insurance industry’s evolution will differ from other financial services counterparts?
1. Insurers face massive hiring needs.
As Hamilton Group CEO Brian Duperreault, the former chief executive of Marsh and ACE, explained in an open letter in 2015, the property/casualty sector faces a significant talent crisis. An estimated 45 percent of insurance executives are set to retire within three years and 400,000 jobs are likely to be vacant by 2020. Yet, fewer than five percent of millennials express any interest in joining the industry. And they now are the largest generation in the workforce. Technology will solve part of this talent problem.
2. The insurance industry doesn’t possess capital issues — unlike those faced by the lending, investment and banking sectors after the financial crisis.
U.S. property/casualty insurers, as a group, are overcapitalized by nearly $200 billion with another $100-$200 billion spread among insurers writing or reinsuring business in the U.S. but located elsewhere. This is a massive number. More importantly, it shows that the insurance industry is not distressed or in need of immediate change to improve dramatically its financial position (at least on paper). Carriers want to protect their cash position for growth or return capital back to shareholders. They are not going to risk that much overnight.
3. Industry operating expenses are growing, but they won’t put anyone out of business.
Insurers’ operating expenses are rising at a much higher rate than premium growth. And while carriers always strive to stem costs significantly, running a high expense ratio will never put one of the large incumbents out of business. In 2015, insurance companies spent nearly $70 billion on customer acquisition costs and nearly $90 billion on operating expenses, or roughly 30 percent of total revenue. This only represents roughly 20 percent of their capital. Carriers concentrate much more on controlling insurance losses, despite increasing operating costs.
So what do insurers desire? Over the past several years, three constants have defined their focus for progress and growth: enhancing the customer/distribution experience; accessing new products and capabilities; and improving underwriting and data analytics.
Few companies provide something different than traditional insurance, but significant progress is being made. Insureon, our fund’s first insurance investment, serves as a great example. It enables carriers to serve and distribute insurance to small- and medium-sized businesses. As a technology-focused distribution business, it is streamlining the commercial insurance buying experience by delivering pricing transparency, advice and direct connectivity with carriers for their small business customers. Insureon places hundreds of millions in premiums annually and offers an innovative departure from the traditional brick-and-mortar retail channel.
So what promises to be the catalyst for future change? Many tech companies believe the millennial generation will help transform the industry. They are expected to represent about 50 percent of global consumption by the end of 2017, when a staggering number of products, cars and household items will need to be insured. How can insurance companies serve them?
One such company that is enabling this is Trov Inc., the first global on-demand insurance platform. The San Francisco Bay area company seeks to insure any item, for any duration anywhere in the world all via the mobile phone. Its platform enables carriers to connect and engage with customers in real-time, providing new insurance products and distribution capabilities, and dramatically reducing the time spent on pricing, claims management and claims processing.
By partnering with carriers, companies like Trov — for which Oak HC/FT was the lead investor in its recent $25.5 million series C financing — and Insureon provide exceptional consumer experiences while disrupting the traditional ways consumers purchase insurance. That’s the really dynamic dimension — and we can’t wait to see the incredible impact innovations like theirs will make on the industry.