If you are selling liability insurance to someone, it might be useful to know if they have been up in front of a judge before.
When InsurTech start-ups like Next Insurance make underwriting decisions, therefore, they are not reliant on the client for information.
InsurTech companies are using data from every corner of the internet to make better underwriting choices, often double-checking information a client has given while they are at it.
It can be as simple as checking to see if a plumber buying professional indemnity cover has ever been sued before, by getting a robot to scan every public court record in a state.
But the technology has applications at every level of the industry, including reinsurance and retrocession.
Sending robots to scrape the internet for information is a feature of many of the newest generation of InsurTech companies, such as Next Insurance, Zesty out of California and Cytora in the UK.
“Anybody who is not working on this is missing out,” says Sofya Pogreb, chief operating office of Next Insurance.
And reinsurers are paying close attention. Munich Re has been heavily involved in Next Insurance, as both an investor and capacity provider. Although the commercial insurance start-up mainly operates as an MGA, it is now a licensed insurer in the state of Delaware.
Using external data to help underwrite will have a massive impact on the future of insurance. But artificial intelligence (AI) is just one of a whole range of technologies set to transform insurance and reinsurance.
From machine learning and voice recognition to blockchain and the fabled Internet of Things, tech is very much in fashion.
The iGeneration
Claude Yoder, chief innovation and product development officer at Guy Carpenter, helps reinsurers navigate the weird and wonderful world of InsurTech.
“There are currently more and more capabilities that are useful to reinsurers,” he tells IQ.
Yoder’s challenging task is to search through thousands of start-ups to find technologies that are useful to reinsurers.
“These start-ups don’t necessarily put their hands up and say ‘I’m an InsurTech’,” he says.
The former Marsh executive, who moved to Guy Carpenter in September, reminds us that InsurTech has not been around very long.
“If you even look at the term ‘InsurTech’, it only really came onto the scene two to three years ago.”
Yoder says he is now seeing InsurTech companies turn their focus from personal lines into other lines of business, with commercial P&C interest growing rapidly. His thesis is that a new generation of commercial insurance buyers will have very different expectations of carriers than their predecessors.
He argues carriers need to be ready for what he calls the iGeneration – digital natives born in the late 1990s and early 2000s – to join the job market.
“A lot of changes will have to occur in terms of how quickly interactions need to take place,” he says. “That will greatly accelerate as this iPhone generation really becomes the insurance buyer of tomorrow.”
Problem solvers
For McKinsey consultant Valentino Ricciardi, InsurTech is about problem solving.
Ricciardi writes in ‘The InsurTech Book’, published this year, that InsurTech is about using technology to help fix problems across the insurance industry.
Zesty, a company that provides property data to insurers, has now caught the attention of reinsurers, because it does just that.
Zesty’s co-founder and CEO Attila Toth believes bad data is costing the (re)insurance industry billions.
His start-up pulls together satellite imagery, light-aircraft photography and drone pictures to understand risks to property. He criticises big insurers that advertise at the Superbowl, but are still relying on customer inputs and maps drawn from the 1980s to underwrite.
Once he has the images, Toth uses AI to spot patterns in the pictures, and analyse them. Want to know where the nearest flammable bushes are to 742 Evergreen Terrace? Zesty can tell you.
Toth didn’t start out in insurance. He was a McKinsey consultant before moving into the solar power industry. He was inspired to set up an InsurTech company when he was trying to buy home insurance and was asked what angle his roof sloped: a question that baffled him.
His pitch to reinsurers is that he can give data on thousands of properties aggregated together. So a reinsurer with a treaty containing a California wildfire exposure, for example, could evaluate its risk based on real-world data, rather than forms filled in by buyers and agents.
The same principles can also be applied to the commercial (re)insurance market.
Look, for example, at Cytora, a Cambridge University spin-off that counts XL Catlin and Starr Companies among its investors.
The firm’s risk engine has data on every building and every company in a given area. Detailed data from local government fire reports, health and safety inspections, building materials and financial filings are added to an insurer’s own loss records to provide a risk score.
Like Zesty, Cytora is a service provider to carriers, rather than an underwriter itself.
Cytora says this data has enabled one of its clients to improve its underwriting on its commercial property book to the point that its loss ratio has improved by 5%. It also says it has cut the costs of underwriting SME business by 8% for a UK carrier.
Cytora co-founder and CEO Richard Hartley says the company is also helping carriers to enter into new lines of businesses that they don’t have loss data on.
The company offers a discount to carriers entering uncharted underwriting territory, but takes a 3-7.5% cut of new gross written premiums.
Reinsurance backing
The kind of AI technology Next Insurance, Zesty and Cytora are using is being closely monitored by reinsurers, which are getting a taste for InsurTech by providing funding and capacity to start-ups.
Munich Re is probably ahead of the game: Munich Re Digital Partners provides venture funding and insurance capacity to a plethora of start-ups.
Swiss Re is also providing capacity to digital MGAs like Silicon Valley start-up Hippo.
And the Bermuda reinsurance market is getting in on the primary game. Arch recently agreed to provide paper to C-Quence, a financial and professional lines start-up founded by former AIG UK CEO Jacqueline McNamee. FloodFlash, a start-up founded by a pair of RMS cat modellers, has been incubated by Hamro Perks InsurTech Gateway for the last year and now has venture-capital funding and paper from Everest Re.
Reinsurers are not helping out start-ups just to be nice; carriers have an eye on the future.
As Adrian Jones, head of strategy and development at Scor Global P&C, puts it: “We want to create a customer and help them grow. Start-ups need a combination of expertise, reinsurance and equity, which reinsurers are able to provide in the right form for each stage of the client’s development.”
It makes sense for reinsurers to makes relatively small bets on InsurTech companies by taking an equity stake and supplying capacity.
The investment has management risk associated with it and some operating risk.
However, says Jones: “Owning 10% of a start-up is like having a 10% whole-account quota share that’s not subject to annual renewal. And the stake could be sold for a capital gain, which in a sense is like having right of tenure at Lloyd’s.”
He thinks the market has room for more start-ups over time, even in markets currently crowded with InsurTech businesses, like renters’ insurance.
Jones sees parallels between the InsurTech world and the dotcom boom of the late 1990s. The first technology companies to come into the market set the pace of change but did not always survive into the long term.
“The great tech-driven insurance companies of 20 years from now might not have been founded yet,” says Jones. “Or they may be 100-year-old carriers who reinvent themselves. It’s still very early.”
This article was first published in the Autumn 2018 issue of Insider Quarterly.
