Insurance is centuries old, and it is a service we engage in with daily; however, like in the recent past, where we've seen developments in fintech and watched it reform financial spaces, insurance too has evolved. Neo insurance, or insurtech, has paved the way for solutions, ones that give rise to new business models; so we’re seeing an age-old insurance space change as well. For instance, neo insurance providers, and parts of this value chain, focus on digitalized, AI-based, personalized, personal lines insurance. In short, more tech involvement and reduced human interaction are used to accelerate insurance needs. Our coverage includes automobile, homeowners, and life insurance. Today, we’ll be digging down on an overview, the startups in the arena, and a brief outlook of the industry.

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Why is this happening?

Consumers of today are the young, tech-savvy millennial and GenZ populations. They tend to demand more personalized solutions. The lag in personalization among legacy insurers is the problem AI-based and automated insurance models are trying to solve.

Most neo-insurance startups operate entirely digitally, with no agents (no human agents), or physical branches—users can get on board instantly through apps by just filling out a form.

What spurred this on? During the pandemic, young consumers showed that they wanted to pay for things they use. Sounds logical, of course, but strangely not the way ‘things always worked’.

Take auto insurance, for example; with AI and Machine Learning, new business models like usage-based insurance arrived. It looks at how much an individual drives, how they drive, the distance they travel, breaking patterns, and such to determine the pricing of their insurance policies. 

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Look at the numbers

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The total addressable market (TAM) is at USD 143 billion, which is our estimation of the total revenue from digital insurers of segments in automobile, home, and life.

The current penetration is estimated at 22%, which is relatively high compared to other industries; this figure comes as no surprise as neo insurance has a relatively large reach. Insurance is a commodity, so most users choose the cheapest alternatives. Some of these usage-based products can give 40% savings, which appeals to consumers.

Despite this relatively high penetration, we’re expecting double-digit growth in the next few years. We’re seeing USD 10 billion in funding, of which 40% coming in after 2021, which shows that investor interest is still hot.

We’ve divided our coverage into two broad areas: digital insurance providers such as auto homeowners/renters, and life; secondly, providers of the infrastructure, like white label solutions, which allow traditional insurers and other startups to purchase the solution to initiate their digital life insurance as well. The latter area reaches providers along the value chain, underwriting, claims processing, etc.

For this post, we explore a few startups. For the full story, access the LinkedIn Live video  here

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Key startups in the space

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Let's look a run-down briefly.

Usage-based insurance has materialized as mentioned before. Startups such as Root and Metromile use smartphone sensors through an app. It can track how one drives, their times of day, breaking patterns, (as mentioned earlier), and helps determine the premiums an individual has to pay. Safer drivers drive on traffic-free roads and will pay a lower premium.

‍Metromile calculates premium based on the number of miles you drive; it considers whether an individual commutes less than average, and if so, they pay a lower premium. Metromile is being acquired by Lemonade (homeowners and renters) 500MN deal is said to close by this quarter—Lemonade is slowly trying to build a product portfolio across different segments. They've started their auto insurance product as well.

Life insurance solutions, like Ethos, don't rely on agents or medical exams; these startups automate the end-to-end process. An individual has to just fill in details of the medical history, their age, and lifestyle, instead of doing tests and waiting for results, they can apply for insurance. The providers use big data and compare profiles against other individuals of similar lifestyles and use data to determine premiums. Essentially, it converts an arduous process that would take weeks into hours. Some even offer the same-day cover if straightforward!

The last two segments are those that offer turnkey solutions—tools to offer insurance products without investing in HR or individuals to develop software.

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What’s next?

What can we expect? A lot of the digitization was driven by Covid-19 pandemic; owing to the remote working and stay-at-home orders, insurers started adopting digital solutions to avoid sending against to process claims manually. For instance, visiting accident sites. Now, individuals can take a picture, which can be analyzed by an AI program, which will estimate the cost of repair and automate the whole process–this trend is expected to be adopted.

A McKinsey survey stated that AI solutions will be underwriting by 2030. Even small business insurance could see automation underwriting function about 50% of all claims in the future will be automated. The human element is to reduce, and the ease of processes will improve customer experience. We also believe the adoption of usage-based insurance to increase, and the demand for these insurance products will increase—the appeal of savings will drive it.

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There are some challenges…

• Privacy concerns around the data such as tracking the locations, the times of day you drive, in some cases, it is sensitive information. For life insurance, individuals also fills in personal information that could be highly private.

                Linking it to the point previously mentioned–digital generation being ok with it. Capco consulting firm reported that 70%  of                customers are willing to share data  for a lower premium; however, we note that if a data breach is to happen it will lose                credibility.

• Market shifts will also affect neo insurance/insurtech. Companies like Lemonade, Root, and Hippo have gone public, but their share prices and valuations have come down, largely due to market factors. 

               Insurtechs have been affected in public markets. For instance, on the first day of its IPO, Lemonade, which was was valued at USD                3 billion is now USD 1 billion. Hippo has seen 85% of its valuation come down. 

• We also feel Rising interest rates funding will be subdued in the short to medium term.

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