[Thesis] Insurers will not disappear but… change drastically! (1/3, Distribution)

Five years ago, the term “InsurTech” didn’t exist. When the word first appeared as a hashtag on social networks, it was all about “Who will be the Uber of insurance?”. Insurers started being very active in that space either by investing, collaborating with young startups or even by building their own InsurTech ventures, from scratch.

Over five years, we’ve spotted and met thousands of startups in Europe (2.300+ last year only) working hard on revamping the insurance industry, leveraging technologies alongside the entire value chain:

  • most of startups in our dealflow (75% in 2016; down to ~50% in 2018) were addressing the distribution part of the value chain
  • less (35% last year) were addressing the price/product part
  • only few (15% last year) were trying to reshape the claims process

Several European startups have raised significant rounds of funding: Wefox or more recently Coya in Germany, Shift Technology or +Simple in France, Tractable in the UK. But only few neo-insurers are sharing detailed KPIs on what they have achieved, the French health insurer Alan leading the pack.

Now it’s time to think beyond trends, technology and buzz words and try to imagine what could be the future of insurance. To do so, let’s remind three main forces of insurers: 1. huge customer bases (distribution), 2. capacity to predict risk and price it (risk assessment), 3. huge balance sheets to cover these risks (risk carrying).

The question is how technology will reshape the future of the insurance value chain and how these three forces are going to be challenged. Will insurers retreat or stay in the game?

Let’s start with huge customer bases (distribution).

The CAC challenge

Over time insurance companies have gathered huge customer bases: AXA, FR — 100m customers; Allianz, DE — 85m customers; Lloyd’s of London, UK — 22m customers; PZU, PL — 22m customers; MAIF, FR — 3.5m customers; DFV, DE — 500k customers.

The majority of these customer bases were acquired with traditional direct sales methods, supported by armies of insurance agents, who until today, know the majority of their customers by name and created a personal relationship with each of them. It’s nothing like fully digital customer acquisition of Facebook or Amazon. The Customer Acquisition Cost (CAC) in insurance is huge!

When building an Insurtech business from scratch, customer acquisition is then the main challenge. Most of InsurTech startups which decided to distribute insurance in a B2C model, even through online channels, will be challenged by the immaturity of digital acquisition and low churn in the sector. Both are resulting in high CAC. Therefore, creating a sustainable customer base is a huge challenge and reducing the CAC below incumbents’ one is the only way to have a chance to build a long-lasting business.

However it doesn’t make the reshaping of distribution of insurance products impossible!

Who owns the customers

First, let’s look beyond InsurTech startups:

  • The ridesharing platform BlaBlaCar gathers 65m+ users
  • The health-tracking FitBit devices are used by 25m+ active users
  • The driver navigation and communication app in Easter Europe called Yanosik gathers 1.5m+ monthly users
  • The French matchmaking platform for freelancers Malt reunites 100k+ gig-economy workers

These services and platforms are creating value for their customers, which has nothing to do with insurance. But it is obvious how to embed insurance into their value chain.

Beyond the number of customers, these platforms have the capacity to deeply understand who these customers are, how they behave and what they need thanks to collecting data about their users in their niches. FitBit for instance has gathered 150B hours of cardiac monitoring data to this day!

And most of all, these platforms have many more touch points with their customers than any insurer has. Insurers usually interact with customers either to collect premiums, renew a policy or negotiate claim reimbursements. Yanosik — for instance — is a trip companion in everyday drives.

By leveraging these three assets: 1. big segmented customer bases; 2. deep customer understanding, 3. many touch points, platforms have real strengths when it comes to distributing insurance products. With many of these platforms, still looking for business models to monetize their user bases, insurance appears to be among the most obvious way to generate additional revenues (and margin!) on top of their core activities.

And actually, it’s already happening!

Let’s take the example of BlaBlaCar. The platform started generating sales leads for AXA (details here). It moved then deeper into the value chain by getting an MGA license (insurance broker) in France and selling insurance policies branded as “BlaBlaSure” though the product is built by AXA (details here).

In Poland, Yanosik uses platform’s data about users driving habits and its interface to distribute ERGO Hestia insurance to the top 10% of the best drives. That’s a great example of how new entrants could leverage their user knowledge (few insurers today are capable of gathering drivers’ dynamics data) to do a positive risk selection, sell to “good risks”, and leave “bad risks” to incumbents.

API: the tech layer

Is it a threat or an opportunity? It all depends on the positioning of insurers, who need to get ready to plug into these niche platforms and use them to distribute their products. That’s where APIs (Application Programming Interfaces) are coming into the picture. APIs are tech plug-ins supporting this interconnectivity between different digital services.

Very recently, the banking industry was forced by the PSD2 regulation (a.k.a. Open Banking) to open doors to third party apps and services and create and easy and instant access their customers’ data (upon customer request). There is not yet such (PSD2) regulation in insurance, but it might be a huge business opportunity for platforms to be the next insurance distribution channel. That’s why API initiatives are starting in the insurance industry: the Open Insurance Initiative is working on spreading API understanding among incumbents.

From the insurers standpoint, beyond working with neo-brokers (e.g. Lovys in France, Brolly in the UK, GetSafe in Germany, etc) we believe that insurers should start leveraging APIs if they want their products to be available on platforms.

In Europe, Qover (Belgium) or Kasko (UK) are working hard on creating the API technology layer either to enable any platform to distribute insurance, or the other way around to help insurers plug into digital platforms. But there are also startups in niche sides of the sector, like UK startup Hokodo, which created a family of APIs to sell shipping and payment insurance on B2B trade platforms.

In case of all of these startups, the technological change is also followed by cultural shift. The old-world partnership managers are replaced by API designers, business model changes from B2B/ B2C into business-to-developer (B2D) and Developer Experience may be more important than financial terms of the partnership.

Long story short, there is a huge opportunity for the distribution part of the insurance value chain to be dramatically revamped in the coming years. Not necessarily by neo-insurers offering new user experience or better calibrated SEM, but mainly through vertical platforms gathering masses of users already. Developing APIs will be the way for insurers to stay in the game by enabling quicker product design and easier integration.