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Going Digital



COVID-19: INNOVATION, YOUR TIME HAS COME

Maybe, at last, we can move beyond accepting that pet insurance is the best we
can do when it comes to introducing innovation.

Matthew Grant
March 24, 2020
Image


Insurance has a fatal flaw. Few of us want to be reminded of how dangerous the
world is. Cars crash, buildings burn, accidents happen. Usually to other
people. So, unless we are highly sensitive to risk, unless we are unusually
thoughtful about the future or unless regulation requires it, we don’t care much
about insurance.

Recently, that all changed. The WHO declared COVID-19 a pandemic. Suddenly, we’d
lost a big chunk of our savings, the rest of the world didn’t want to see us,
most events planned for the coming months were canceled and the pandemic pushed
everything else off the BBC evening news. Now we care about insurance.

For the last five years, the celebration of the emergence of innovation in
insurance and the invention of insurtech has had to battle with a fundamental
problem. How to change an established industry, reliant on legacy, which most
people don’t really care too much about and which is, most of the time, good
enough?

Successfully driving any change without a major shift in how we see the world is
really hard. Often, we need a shock to the system. Our view of how our lives
might change – for better or worse – radically alters if we directly experience
disasters (personal, national or global). The emergence of new technology can
also drive massive changes. Sometimes, very quickly. And not just recently. The
Liverpool to Manchester Railway opened in 1830, and, within three months, over
half the 26 horse-drawn stagecoaches on the route had gone out of business.

COVID-19 will bring many challenges, but it may be the reset button for
insurance innovation. It's happened before.

Hurricane Andrew hit Florida in 1992, the most destructive hurricane ever to hit
the state. The claims bankrupted 12 insurance companies. Soon after, the
insurance rating agency A M Best required every insurer to prove that it had
sufficient capital to withstand a “one-in-100-year” loss. No actuary had enough
claims data to figure out what that meant. Andrew, and then the California
Northridge Earthquake in 1994, gave birth to the specialized techniques of
catastrophe modeling and led to the founding of RMS and AIR (now part of
Verisk). The power of first-mover advantage, and the difficulty of building
credible catastrophe risk models, is demonstrated by the fact that almost 30
years later both companies still dominant this space, with combined revenues of
around $500 million.

Fast forward a decade or so. Despite 2019 being a record year in funding for
insurance technology start-ups and scale-ups, with over $6 billion
invested, it’s getting hard for some of the best-known business ideas to gain
traction. Trov and Wrisk have announced recently they are shifting from being
insurers (or, more accurately, MGAs) offering contents or device insurance, to
becoming platforms. Their clients will now be other organizations with
established insurance offerings or existing distribution and customers.
Lesser-known companies have quietly packed up or are stuck in insurtech zombie
land, never quite launching. Other well-known entrants such as Bought by Many
and Lemonade appear to be doubling down on pet insurance. A perfectly acceptable
strategy, but a future defined by our love of furry animals is not quite where
were many people expected us to have got to by 2020.

See also: How Coronavirus Is Cutting Connections  

Innovation is really hard. We may have heard of the H1N1 variant known as
Spanish flu from 1918, but, until we started to experience the impact of
COVID-19 virus, few of us gave much thought to the possibility that a pandemic
was something we would need to deal with in our own lives. I haven’t done a
comprehensive search of Google, but I’m struggling to find any insurtech-like
company that has been building solutions to model the risk of pandemics.

A quick editorial note here. I write “insurtech-like” because there is no
universal agreement on what the word actually means these days. I’m using it
here as a shorthand for any company launched within the last 10 years or so that
is using new technology or data or analytics to help with distribution, pricing,
risk management, claims and probably a lot more. Please don’t quote me on that
definition, though -- the topic probably merits a full article in itself, and I
prefer Andy Yeoman of Concirrus’s definition from when I interviewed him
recently: “Every insurance company is insurtech, some just have bad tech.” But I
digress.

RMS started building pandemic models in 2012 to help price “excess mortality,” a
polite actuarial term to describe too many people dying at once. The idea was to
help insurance companies manage their capital and get access to tools to help
them buy reinsurance more effectively. The problem was that the rather
simplistic capital models accepted by the regulators gave a lower risk price,
and less capital requirement, than the sophisticated RMS models, which
ultimately would have led to more costs for the insurers. There wasn’t much
interest from the catastrophe bond market, either. There are a couple of
parametric bonds in place just now, but few companies really worried enough
about pandemics to justify the cost of buying protection.

Metabiota, founded in 2008, uses real-time data collection and analytics to
model epidemics. A partnership was announced with Munich Re in 2016 to develop
models and insurance solutions for property and casualty insurance designed to
mitigate the economic losses caused by epidemics. Marsh has tapped into the
Metabiota relationship with Munich Re to create PathogenRX. According to its
website, this is index-based insurance that offers protection to US clients
against losses resulting from a pandemic or epidemic affecting international
travel, study-abroad and research programs. I’m not sure how successful this has
been (watch this space) but anyone that has bought the cover is going to feel
pretty smart just now. Techcrunch mentions that Metabiota is also working with
African Risk Capacity (ARC), the agency using parametric insurance to provide
cover for a number of African countries.

By the way, if you don't already know what an epidemic is, it's a sudden
increase in the number of cases of a disease, more than what's typically
expected for the population in that area. A pandemic is an epidemic that has
spread to several countries. 

SparkBeyond, an artificial intelligence company formed in 2013 that I spoke to
recently, has been commissioned by one major country to help it understand how
to use analytics to minimize the pandemic spread. The company operates across
many industries, so it's not really an insurtech (by whatever definition you
use) but does hint at what could be on offer for those currently in the
insurance world. (Check out the Instech London podcast to learn more.)

One system shock that may give the London market the jolt it needs is the
potential for Lloyd’s to close for an extended period, forcing insurers and
brokers to exchange risks electronically. The market shut for the first time
recently for one day to test its resilience to a longer shut down, and at least
one London company, Canopius, announced that it was asking all staff to work
from home starting Monday, March 16. The recently launched PPL system for
placing insurance contracts may not work as smoothly as it needs to, but it's
unlikely that the Lloyd’s market could ever have contemplated working remotely
without it. 

As we start to understand the far-reaching implications of this pandemic, and
adjust our lives to cope with it, remember that with every crisis comes an
opportunity. I was working the phones recently, speaking to some of the experts
from modeling, medicine, insurance, supply chain and AI to help put some context
around the news and record their insights for a pandemic podcast special. I
explored what has been done around analytics and what could still be done to
give some pointers to those of you looking for new business ideas or even just
consulting work. I asked what the insurance implications would be, and I
discovered how vulnerable the supply chains are. I found out that there are
massive amounts of data available related to the pandemic, much of which is open
source, and I reveal where to go to get the best insights.

See also: Innovation: Top Down/Bottom Up  

The podcast is number 72 on the Instech London series. It's 40 minutes long and
a chance to hear what Robert Muir-Wood (RMS), Dr. Chris Martin (medical), Nick
Wildgoose (supply chain), Sam Casey (Insurance Insider) and Alex Easaw
(SparkBeyond) have to say. You can find it at any decent podcast channel (search
"Instech London") or listen directly from here on the podcast section of the
Instech London website (www.instech.london). Now with the added benefit of
gaining Chartered Insurance Institute CPD credits while you listen.

Of one thing we can be sure, however the world looks in a few months, we are
going to be thinking very differently about the threat of pandemics and what
this means for insurance. Unfortunately, for many people and companies,
insurance cover will be found to fall short of expectations in compensating
losses, and when life returns to normal we might see a fundamental rethink of
what insurance is all about. But maybe, at last, we can move beyond accepting
that pet insurance is the best we can do when it comes to introducing innovation
into insurance. 

--------------------------------------------------------------------------------


MATTHEW GRANT


MATTHEW GRANT

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