MILLIMAN WHITE PAPER Emerging risks and opportunities in insurance: Technology and innovation George Barrett As innovation continues to transform the Then follows the United Kingdom, with over 190 insurtech companies, three-quarters of which are found in London. The transparency, availability and consumer- geographical distribution of insurtech companies can be seen friendliness of insurance products, slow in Figure 1 below. reactions can leave traditional FIGURE 1 PROPORTION OF INSURTECHS BY HEADQUARTERS companies trailing behind. COUNTRY Developing new solutions to manage complex risks has underpinned the culture of the insurance market for centuries. United States Constant innovation to suit the changing needs of its customers has always been particularly evident in the London United Kingdom insurance market. Germany Canada The explosion of funding for insurtech companies in recent years France demonstrates that the insurance industry will continue to evolve. Insurance provides a natural platform for technology. Companies Other Countries seeking new opportunities to take advantage of AI, big data and autonomy may do very well while others will be left behind. Although risk management will need to adapt existing risks and controls for the changes that innovation brings, emerging risks Source: Crunchbase should not be ignored. This paper investigates innovation in the THE SCALE OF INSURTECH global insurance market driven by insurtech, and considers the Over the course of the last decade, the number of insurtech emerging risks faced by insurance companies. companies being founded has increased from fewer than 10 per year, to almost 100 in each of 2015 and 2016. The level of Insurtech funding continues to escalate. From 2010 to 2012, global Insurtech is a term used to group innovative, technology-driven publicised funding averaged approximately $250m p.a. This solutions in the insurance sector. It can cover a wide range of reached in excess of $3.5bn in 2017 and $4.5bn in 2018. functions from front-to-end operations within start-up tech- Figure 2 below shows the trend in funding. minded insurance companies or it can be restricted to one or more components of the insurance value chain. For example: FIGURE 2 NUMBER OF INSURTECH COMPANIES FOUNDED AND VOLUME OF FUNDING PUBLICLY ANNOUNCED BY YEAR (IN Brolly is an AI-driven app providing insurance advice for CONVERTED USD) personal lines products in the UK. It was founded in 2016, 500 $6.0bn raising £1m of capital in the first year. The company focusses on one specific area of the insurance value chain: 400 $5.0bn distribution. Fast purchasing and management of insurance $4.0bn 300 products is its key aim. Insurance partners include Ageas, $3.0bn 200 AXA, and LV=. $2.0bn Lemonade offers home insurance in New York and several 100 $1.0bn other US states. The business model aims to achieve social 0 $0.0bn good by donating reserve surplus to non-profit organisations 2010 2012 2014 2016 2018 selected by policyholders. The company has attracted over Number of Insurtech Companies Founded $180m from investors such as Softbank and Allianz. Volume of Funding Announced (USD) Lemonade maintains its customer relationships via an app, Source: Crunchbase downloaded over 50,000 times each month. There has been a downturn in the number of newly founded WHERE IS IT HAPPENING? companies during 2018 and the early months of 2019 but funding Insurtech start-ups have sprung up worldwide, with companies for 2018 exceeded $4.5bn and 2019 is on track to exceed $5.0bn, headquartered in 50 different countries. The largest insurtech suggesting that the insurtech industry has established strong hub is the United States, with over 800 insurtech companies. foundations within the insurance world and is maturing. Emerging risks in insurance: Technology and innovation 1 June 2019 MILLIMAN WHITE PAPER WHICH AREAS OF INSURANCE? CASE STUDY: DINGHY Investment in insurtech companies is greatest within health Dinghy was founded in 2017 by three entrepreneurs in London. insurance. Life insurance appears to be dragging behind on They had identified a gap in the market for flexible, on-demand insurtech activity, although the prospect for many exciting professional indemnity insurance for contractors and other innovations remains positive. Within general insurance, personal fixed term workers in technology. Within a year, they had lines insurance companies have received large investments. raised £1m in seed funding. Figure 3 below shows the number of funding rounds for Dinghy’s strengths lie in flexibility, interacting with policyholders insurtech companies operating in different sectors of insurance: using their mobile phones and offering an on/off switch for cover which enables a pay-as-you-use insurance arrangement. FIGURE 3 NUMBER OF INSURTECH FUNDING ROUNDS BY INSURANCE Such pay-as-you-go arrangements are seen by many industry SECTOR AND YEAR professionals as an inevitable next step for many personal lines insurance products. 80 70 HOW IS THE INDUSTRY REACTING? 60 Innovation is not limited to start-up companies and new product 50 types. Incumbent insurance companies are creating innovative 40 products which capture data in new ways. Health insurance companies in the UK can now provide more focussed health 30 benefits to their customers using data collected from smart 20 devices provided to the policyholder at discounted costs. 10 Traditional insurance classes such as marine are also using 0 Blockchain technology to improve the sharing of data between 2013 2014 2015 2016 2017 2018 the insurer and the insured so that risks can be covered more Life Health Motor Property Commercial quickly, with more transparent pricing, and with a quicker claims management process than ever before. Source: Crunchbase Figure 4 below shows the announced volume of funding We discuss below some of the other ways in which insurance incumbents are reacting to innovation. rounds for insurtech companies operating in different sectors: Venture Capital Subsidiaries FIGURE 4 VOLUME OF PUBLICLY ANNOUNCED INSURTECH FUNDING Large companies are reacting to insurtech by forming venture BY INSURANCE SECTOR AND YEAR (IN CONVERTED USD) capital subsidiaries and investing in start-up companies. For $1200m example: $1000m AXA’s subsidiary, AXA Venture Partners, has made 46 $800m investments in companies innovating in insurtech (Limelight Health), Blockchain technology (Blockstream), cyber security $600m (Contrast Security), digital authentication (Futurae), data- $400m driven recruitment (Zenjob) and many other areas. XL innovate, another member of the AXA XL group, has $200m invested in companies including Windward, a marine analytics $0m company, and Slice Labs, which offers an on-demand insurance 2012 2013 2014 2015 2016 2017 2018 platform to support the on-demand economy. Life Health Motor Allianz X, a subsidiary of Allianz, has invested in a number of Property Commercial start-up companies including the aforementioned Lemonade. They have also invested in companies innovating in virtual Source: Crunchbase reality (Drone Racing League), cyber security (Argus Cyber Security), wealth management (Moneyfarm) and an on- Figure 4 shows only disclosed information. The details of many demand app covering ride-hailing, food delivery and funding rounds, particularly seed rounds, are often not public. payments & financial services (Gojek). Figure 4 also shows a dramatic uptick in the funding of Aviva Ventures, the venture capital arm of Aviva, has insurtech companies in the Motor Insurance sector during 2018 invested in companies building solutions for autonomous driven by a $500m investment in Cambridge Mobile vehicles (AppyParking), home security (Cocoon) and medical Telematics, a leading analytics and mobile telematics provider, diagnostics (Owlstone medical). from the Softbank vision fund. Emerging risks in insurance: Technology and innovation 2 June 2019 MILLIMAN WHITE PAPER It is clear from these examples that incumbent companies are Complexity of Models and Systems: investing in up-and-coming technologically focussed Insurers are using increasingly complex models and businesses within and on the periphery of the insurance space. automated processes, making best use of machine learning These wider technology companies are developing solutions algorithms for pricing and underwriting. Automation of that could be integrated into the insurer’s products or used to underwriting, claims handling and policy servicing will reduce operating costs. continue to improve Sponsoring Insurtech Competitions The additional complexity of systems leads to risks arising from a lack of transparency; future business decisions based on a This approach is to create internal platforms for insurtech large array of underlying factors could become impossible to companies to pitch their ideas and compete for capital. For understand. This is similar to the search algorithms used by example: Google and YouTube, which are based on machine learning to Lloyd’s of London has created the Lloyd’s Lab, providing an the extent that the justification for any individual decision is environment where technology-driven concepts, ideas and impossible to fully explain from the ground up. products can be tested and, if successful, introduced to the Unconstrained increases in model complexity can also lead insurance world to meet the demands of a rapidly changing to algorithmic bias, where algorithms used to train models and unique insurance market. The support and active can lead to selection