The future of insurance - a disruptor's dream?

Insurance is big business but many of the major players in the game are looking over their shoulder wondering when disruption is going to take off in their market. The global insurance market still enjoys robust margins compared to other industries. This has been highlighted by a recent surge in alternative capital from private investment firms coming into the market. With this, the good times should be rolling.

But unlike other industries where digitisation has been jumped upon and now pride themselves as early adopters, insurance is a conservative industry where modernisation is treated as a potential pitfall rather than a solution. This means that right now insurance is heavily slanted towards a more traditional model and the industry could easily be skewered by a disruptive incomer – both because there is all that alt cap money floating about just looking for a home, and because of insurance’s pitfalls.

One prime example of this is the US home and contents market; the US, understandably, has the largest market in the world and the figures are staggering (Net premiums written for the sector totalled $558.2bn in 2017), but one of its potential problems is that normal US home insurance does not cover flood damage. Instead, this is covered by a federal programme which pays out after, for example, a natural disaster.

"The insurance industry is 'ripe for disruption' is a phrase that has been bandied about by external and internal market participants over the past few years," says Peter Clarke, managing director and founder of Insurercore, a digital insurance market directory. "But has the industry seen real disruption? The last time the market faced any real form of disruption was in the early 2000s with the introduction of price comparison websites." However, there is a feeling of ill-ease in the market that all it would take is for a company such as Amazon (NASDAQ: AMZN) or Walmart (NYSE: WMT) to find a way to wriggle into insurance and offer an alternative that offered a product that included this and within a few years, it could have taken billions off the books of traditional carriers.

Options for the incumbents

The biggest American insurance companies are all in healthy operating spaces. There is no shortage of money already in the market.

But, that’s the big guys - what of the modernisers? In recent years the newest kid on the block that is getting all the hype is US start-up Lemonade, a New York-based specialist home and contents insurer aimed at renters and millennials. In June, it announced it was going public at an approximate $2bn valuation.

Lemonade had previously raised capital in April with a $300m round led by Softbank (TYO: 9984). Lemonade is seeking up to $500m in the initial public offering (IPO) to fuel its global expansion plans. Reports were that Lemonade had selected JP Morgan to lead the IPO. Lemonade currently only operates in the US and Germany but announced plans in early 2019 to open in more European territories. The company’s profitability had long been seen as hit and miss – indeed its owners still see that as a work in progress.

Lemonade’s reported written premiums for the full-year 2018 were $46.8m - compared with $9m in 2017. "Despite impressive growth from Lemonade, there is still much debate in the market on whether it will be successful or not, given their high loss ratios and no loss history," Clarke says. "However, these issues have been factored into Lemonade’s plan. If they are able to raise enough money to survive the loss ratios and become profitable then the company could be a big disruptor to the way the insurance industry works. Should they find success the real question will be if they have the staying power to remain relevant and if they can stay unique for long."

Looking to the future

But Lemonade is just one aspect of a rapidly changing – and highly profitable – market. In PwC’s 2019 Insurance Outlook report they noted and how it was finally starting to modernise for small business owners.

“Commercial insurers are finally making significant investments in the digital space,” the report states. “Historically, the market was largely free from disruption – overlooked, in fact – so there wasn’t much incentive to change. However, because small commercial insurance is a large and profitable market for carriers who understand it, it’s now attracting a great deal of attention – and pressure to modernise,” it adds.

This shows that there are already profitable sub-sections of the insurance market that are being scoped out by investors keen to learn more on how to disrupt it. “Both established players and new entrants realise there’s still too much manual work, inefficiencies in distribution, and inconsistent levels of customer service and interaction [in insurance],” adds the PwC report. “Fast movers recognise that, if they are able to overcome these shortcomings, they’ll be more efficient, attractive to customers, and profitable.”

Other big areas to watch out for include Metromile, a fintech company that offers pay-per-mile private auto insurance. Despite that it started operations in 2009 and is yet to generate an underwriting profit, it still has optimism in the market that it can become a feasible alternative to others in the giant US auto insurance market.

Another company that is causing a lot of talk is Root, also a pay-as-you-drive auto insurer that has raised $350m on a $3.65bn valuation in a Series E funding round in early September. "The key driver behind any disruption should be client satisfaction and demand," says Clarke. "We have seen it outside of the financial markets – look at how Airbnb has disrupted the hotel industry, for example. Insurtech should be a gamechanger but the industry has yet to see any enterprise that has been truly disruptive."