Research

Quarterly InsurTech Briefing Q2 2018

How InsurTech is impacting the global Life & Health landscape

September 20, 2018
| United States, United Kingdom, Canada +1 more
  • Bermuda

Rafal Walkiewicz, CEO of Willis Towers Watson Securities, discusses InsurTech’s impact on three areas within the global Life & Health landscape.

In this edition of our quarterly InsurTech report, we take a break from a Property and Casualty (P&C) insurance focus to take a deeper look into the Life & Health insurance sector. Life & Health InsurTech has attracted more than $5 billion in funding over the last five years, 20% more than P&C over the same time period.

The complexity of change occurring within the Life & Health insurance value chain is much greater than in other insurance subsectors and the potential positive impact on the quality of life for the consumer is much more profound.

As we are seeing a growing overlap between Life & Health insurance, we combined these two markets into the theme for this quarter. InsurTech has the potential to bring them even closer. In our Q2 2018 Industry Theme, we focus on three key areas of Life & Health disruption: data, customer and product.

Data: Can Life insurers go alone?

Incumbent Life insurers sell a combination of protection (injury or death benefits) and accumulation (future income) products. The former group of products is primarily underwritten by using morbidity and mortality tables — a concept first used by insurers in the U.S. beginning in the 19th century. The latter group of products primarily leverages inefficiencies of various tax and regulatory regimes to design and sell asset management products.

The amount of data that can be used to underwrite insurance products is growing exponentially as a result of advances in the understanding of the human body and the proliferation of wearable sensors that can track activity and monitor behaviors in real time. There have also been significant advancements in information handling infrastructure and data science, which have coincided with the explosion of data. Electronic medical records are inevitably going to be a part of our future, regardless of the challenges of implementation and blockchain technology is already being used in human genomics to facilitate integration of health information.

The universe of players that access, collect and analyze these new forms of information is expanding as healthcare providers, pharma and wearable sensors manufacturers are increasingly competing for data with incumbent Life & Health insurers. For incumbents to be successful in the future, they must become a part of the ecosystem of collecting and analyzing information. In the Devices and Data Generation section of the report, we highlight dacadoo as an example of an InsurTech company that helps insurers navigate through vast amounts of data in order to generate easily accessible information that can be used to enhance life and health products.

As new forms of data become increasingly core to the Life & Health industry, there will be associated legal and ethical complexities that arise (e.g., Health insurers cannot use genetic tests for pricing, while Life insurers are free to use such information in a vast majority of the U.S.). But even leaving legal aspects aside, there is enough complexity in the data to make it difficult to imagine that one group of companies can independently control data collection and analytics for the entire industry. In the future it is possible that we will see a reversal of historical trends leading to greater convergence between Health insurers and Life insurers that will in turn result in increased M&A activity. Many developing countries embrace this conjoined model already, and it is hard to imagine that regulation will preclude convergence from happening in the developed world.

Customer: Automation making insurance personable

Life insurers face similar challenges to those of their P&C counterparts when it comes to building customer relationships, since their primary customer touchpoints occur at the time of original sale or in the event of claims processing. While customer interactions with Health insurers are more frequent, they mostly involve a negative event (e.g., illness or medical emergency) or even worse, a claim dispute. Also, the original interaction when purchasing life or health products does not happen between the insurer and the insured. In many countries, including the U.S., life products and a large volume of health products are distributed through employers.

Insurance products are complex and difficult to understand and, as such, mainstream offerings are designed with a cookie cutter approach and limited consideration for the changing needs of an insured over time. Customer interests are rarely aligned with those of sales professionals, which results in a number of sales practices and compliance challenges for the industry. Simplification and customization are expensive and often not feasible for implementation by incumbents. As an example, due to limited customization, there is an entire market of Accident & Health and supplemental offerings in the U.S. that are primarily used to fill protection gaps and to manage the existing incompatibility between life insurance and health insurance coverages.

Technology can help build customized products that are economically viable, better align sales incentives and solve compliance issues challenging the industry. It can also help to build more effective distribution channels and to close the protection gap driven by the rising costs of health care that are driving employers out of the middleman position.

In the Customer Centric Products section of the report, we highlight three examples of digital sales companies that are fueling this trend. Anorak starts with the process of purchasing the insurance product, and its digital sales assistant helps customers make better buying decisions with coverage that is tailored to individual needs. Ladder offers a term life product that is designed to adapt with the changing needs of the insured while also becoming a partner in the life journey of the customer. Regard offers a supplemental health insurance product that focuses on existing protection gaps and aims to offset rising out-of-pocket expenses associated with high-deductible health plans. All three companies leverage advances in data analysis, machine learning and artificial intelligence in order to automate the sale process where it can be automated, leaving the rest to traditional channels and agents. As with P&C insurance, where underwriting of more complex risks is unlikely to be fully automated, Life & Health automation will not crowd out all traditional channels and products. However, with advances in technology more and more of the premium pie will be captured by automated distribution.

We will also eventually see more targeted underwriting. It may be difficult to imagine pay-per-use products like we see in the P&C industry (e.g., insurance premium included in the price of a cigarette), but it is not inconceivable that negative reinforcement will eventually make its way into the pricing of Life & Health insurance soon after incentive-based pricing becomes more mainstream (e.g., discounted life insurance for runners). We believe that digital sales companies, with their ability to integrate into other products and services, will be at the center of the pay-per-use revolution.

Product: Selling a longer, healthier life

Industry practitioners are very comfortable identifying technology trends that impact the value chain of P&C insurance. Most will agree that the emergence of autonomous vehicles presents a long-term challenge for personal lines insurers. It is easy to see how the manufacturers of autonomous vehicles or the eventual autonomous infrastructure will be better equipped with data to underwrite insurance risk than insurers who rely on existing pricing models. Most will also agree that manufacturers of smart homes will be better positioned to analyze property risk than incumbent insurers. We can clearly see how technology is pushing the value of the P&C insurance product from protection and claim payment toward risk mitigation and risk advisory. But what about Life & Health insurance? Can it be any different?

Over time, advances in medicine and behavioral choices have driven life expectancy in the U.S. from 69 years in 1950 to 79 years in 2012. As genetics and smart wearables become increasingly intertwined with our daily lives, life expectancy may be pushed out further. As Greg Solomon points out in his Thought Leadership piece, diabetes was once considered a chronic illness, but now can often be cured with a combination of medicine and behavioral changes. Results can be even more groundbreaking when integrated with genetics. Today we have increasingly better tools to predict life expectancy and probability of illness, which aid in the development of tailored solutions to extend life. Genetic testing is already mainstream. Over one million Americans have had their DNA sequenced, and the number is only expected to rise rapidly. It costs less than $1,000 to have to have a full genome sequenced, down from more than $1 million less than 10 years ago. It is impossible to imagine that the health care evolution will not transform Life & Health insurance in even more profound ways than technology is transforming P&C insurance.

Moving from risk protection to risk mitigation and risk advisory, P&C insurers have a chance to develop real-time dialogues with their customers, but this opportunity hardly compares with that for Life & Health insurers. While it is hard to imagine an insurance company engaging in a strategic conversation with a customer about a new type of smoke detector, it is easy to envision customers responding to a value proposition designed to help them live longer and healthier lives. P&C can certainly make our lives easier, but Life & Health insurers can offer to make us live longer, and that is a powerful value proposition.

We believe that the eventual winners in the Life & Health industry will be the ones who shift their attention from primarily offering death benefits, investment support and coverage for protection gaps to offering customers a true partnership to live healthier lives.

In the Digital Advisory Services section of the report we highlight two examples of companies that are leading this change. Boundless provides insurers with a white label solution designed to stimulate changes in behavior. Thanks to its offering, incumbents now have a tool to better engage with their customers that also facilitates an ongoing dialogue on how to live longer and healthier lives. However, if risk mitigation and advisory services are going to define the competitive advantage of insurers in the future, is white label outsourcing of this function going to help incumbents survive the technological revolution? Another example is Oscar, a full-stack digital Health insurer. In addition to using data to manage efficiencies across provider networks and to improve the patient experience with a variety of services, Oscar also manages a mobile platform that includes advisory services, fitness tracking and telemedicine — one fully integrated solution to efficiently help us live longer and healthier lives.

Funding flow continues

In the Transaction Spotlight section we focus our attention on several Life & Health transactions to highlight investment activity in the space and also how automated distribution is best positioned to capture a larger share of the insurance premium economics. Life & Health InsurTech has raised $5.1 billion of funding in approximately 380 funding rounds leading to an average funding round size that is 45% larger than the average for P&C. All being equal, we expect the larger average funding rounds in Life & Health insurance, combined with a transformational market opportunity that far surpasses P&C, to increase investment activity from non-incumbents who are willing to make larger bets on transformational changes rather than investments solely for marginal process improvements.

As always, we conclude our report with the InsurTech Data Center. While $579 million of InsurTech funding in Q2 represents a 20% decline over the prior quarter, the 71 transactions in the quarter represents the highest number of transactions ever recorded. With 34 transactions sponsored by (re)insurers, Q2 also set a new record for the volume of incumbent participation in InsurTech investment. Also, (re)insurers generally invested in later rounds, with seed investments contributing to only 3% of transactions.

Thank you for your continued support for this publication. As ever, we welcome your feedback and suggestions.

The Life & Health ecosystem for living longer and healthier lives

Graphic showing what drivers and tools are available to a longer and healthier life data ecosystem

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