Separating Substance From Hype

Tech startups and data wizards are claiming to make insurance modern, agile, and friendly. Will they succeed where other tech waves have failed?
By: | August 29, 2017 • 13 min read

Silicon Valley, the land of startups and innovation, is invading the insurance industry under the banner of “Insurtech.” Data scientists and technologists, financed by venture capitalists, are claiming to be able to dramatically transform the industry, from underwriting and claims to customer service, sales and administration.


The insurance industry has heard similar claims of a technology revolution before. From mainframes to the web, each successive technology wave claimed to be able to transform the business. But the lasting impacts of these efforts has been mixed, with many enterprise level IT projects costing millions of dollars with little to show. Add to that history the industry’s heavy regulatory burden and it’s easy to understand why many firms remain skeptical.

“Insurance is highly regulated. It has so many legal and compliance hurdles and is fraught with political risk, so the culture is naturally risk-averse,” said Ellen Carney, a Forrester analyst.

“There are systemic issues in the industry that prevent new tech-driven products and services from being widely commercialized,” she said.

Martha Notaras, partner, XL Innovate

While the term Insurtech refers to a wide range of technologies and approaches, almost all these efforts focus on the ‘connective tissue’ of insurance — data, distribution and customer service. They are not looking to actually take on risk — the very heart of the business.

And there is a lot of opportunity to improve these functions.

According to research by the InsureTech Connect conference, there was a 156-percent increase in venture capitalists investing in the insurance technology space over the past year, contributing to a total of about $5 billion in investment dollars.

Some traditional carriers have created their own investment arms specifically to back the Insurtech firms they see as promising — XL Catlin, AIG, Travelers and Munich Re among them. Many others have created in-house innovation labs to develop their own technologies.

The industry appears to be at an inflection point. Beyond the hype and buzzwords, the traditional insurance sector does see value in Insurtech’s promise to materially impact the industry across its entire value chain. Here are some ways change is beginning to take hold.

Policy Administration

The insurance industry is hundreds of years old and the business was literally built on huge stacks of paper. But paper can’t keep up with the pace of business in the modern world. On its administrative back end, insurers grapple with overhead and inefficiencies that could be minimized if processes were digitized and streamlined.

Referred to as “digitization” or “digital transformation,” this is an area where Insurtech shows great promise.

Ilya Bodner, CEO, Bold Penguin

Gathering information from clients, updating policies, incorporating industry standards, sending and receiving contracts, soliciting feedback from stakeholders, and other tasks take valuable time and resources when done manually.

Legacy policy administration systems are often siloed and do not always communicate well with other systems within an organization. Layering new technology solutions on top of them may create more IT problems than they’re worth.

Digital systems are slowly beginning to replace these dinosaurs. Delphi Technology, for example, has digitized and automated policy administration with its Accelerator workbench and Delphi Policy admin system. Ultimately, this allows insurers to get products to market faster — a key competitive advantage.

Even simpler technologies can make a big difference in helping carriers increase efficiency while cutting costs. DocuSign, for example, saves time and money by eliminating paper. This speeds up communication between insurers, brokers and clients, boosts productivity and increases efficiency by streamlining transactions.

These technologies aren’t necessarily flashy or disruptive. They simply take existing processes and give them a modern makeover.


But there are other innovations on the horizon. Blockchain, though still not well-understood by many in the industry, shows potential as a communication and compliance tool.

AIG, through a partnership with IBM and international bank Standard Chartered, recently completed a pilot phase of a multinational “smart contract” policy, managed using blockchain.

The program consisted of a master global policy supplemented by three local policies.

“People think they can throw a lot of money at technology to build a better customer experience, but that’s just the tip of the iceberg.” — Ilya Bodner, CEO, Bold Penguin

“As with any multinational coverage, there are multiple stakeholders involved, and a regulatory minefield to navigate,” said Carol Barton, president, AIG Multinational.

“There are lots of moving parts, and communication is the pain point.”

Blockchain technology allows every party to see the policy and view updates in real time. Because every party in the blockchain needs to vote on a change in order for it to be approved, there are no surprises. Using blockchain for this type of policy makes communication easier, eases friction and improves transparency.

“Transparency is something insurance buyers want more of. Blockchain has the potential to create a new level of communication, trust and transparency, which is key in this business,” Barton said.

Underwriting & Pricing

Smart homes and cars, wearables, fleet telematics, and a host of other sensors and systems connected to the Internet of Things provide the insurance industry with a stream of valuable data. Insurtech firms, untethered by legacy systems, are better positioned to capture and leverage data for incumbent carriers, or so they say.

But for the most part, data collected via the IoT, social media, and other new sources cannot directly influence commercial underwriting or pricing because regulators do not allow it. As promising as it sounds, the truth is that regulatory constraints will make it difficult for underwriters to incorporate data from new streams into their underwriting and pricing process for some time.

“The level of government regulation across the U.S. is complex. It’s 50 states and 50 rules based on line of business and coverages. As you begin to add distinctively unique coverages it becomes a challenge with individual line-of-state filings. Consequently, much of these creative ideas must be non-admitted coverages. I think it’s an area that Insurtech investors could be underestimating,” said Jamie Miller, head of property & special lines North America at Swiss Re Corporate Solutions.

Currently, the clearest way to incorporate new data streams into the underwriting process is through the development of parametric coverage, which is triggered by characteristics of an event, rather than characteristics of a loss. Swiss Re has pioneered parametric policies to respond to unpredictable events with large losses like natural catastrophes.

Big Data can help to identify new triggers, which ultimately helps to solve coverage gaps and enables faster claim payment.

Machine learning can help mine the vast expanses of data for those nuggets that will be most useful for insurers, and fine-tune the underwriting process over time so it becomes more automated.

In July of this year, Milliman completed a study with DRTS Ltd., examining “multi-criteria decision-making using an iterative process of advanced computing and human input.” It asked, in other words, can we make better decisions if human knowledge and intuition is combined with machine learning?


Milliman used DRTS Ltd.’s DACORD platform to study a complex dataset.

“DACORD contains a range of tools to look for non-linear relationships between variables and study the dynamic relationships as they vary over time,” said Neil Cantle, principal, consulting actuary, Milliman.

“The study was designed to show that a combination of humans and computing can deliver a superior result for complex problem solving than using either on their own.”

Claims and Risk Management

Where Big Data and machine learning can make a profound impact is in claims, and more specifically, claim prevention.

According to Willis Towers Watson and CB Insights’ Quarterly Insurtech Briefing Q2 2017, about 90 percent of claims management is controlled by incumbents. But Insurtech is helping incumbents leverage data and technology to streamline and automate the process.

WeGoLook, which dubs itself the “Uber of inspections providing on-demand field services,” taps into its network of 30,000 “Lookers” or field agents who can inspect a loss and upload photos through a mobile platform within hours of notification.

Backed by the resources of claims management provider Crawford & Company, it uses the crowd sourced data to speed up claim resolution and ease communication between claims managers and clients, again improving the transparency that insurance buyers increasingly demand.

Allstate similarly is developing a platform to automatically process smaller and more straightforward claims, so that notification, determination of coverage, predictive damage estimates, fraud detection, and electronic payment all happen automatically — and quickly. At the Bank of America Merrill Lynch Insurance Conference in February 2017, and as cited by the WTW and CBI report, Allstate’s president Matt Winter said payment could be delivered to clients within moments of them uploading photos.

“In 2010, we were the first domestic insurer to enable small businesses to get quotes and buy insurance online, although in recent months, established players are now stepping off the curb and coming into the same space.” — Kevin Kerridge, executive vice president of small business insurance, Hiscox

The platform will also refine its process and rules over time using machine learning.

When it comes to risk mitigation and claim prevention, machine learning can be a boon to both insurers and risk managers looking for more targeted strategies to reduce their risk.

“We aren’t always looking for companies that are creating new sources of data, but that are mining data with machine learning so they can deliver the data to insurer clients and help them understand the risk better,” said Martha Notaras, partner, XL Innovate.

Cape Analytics, an Insurtech firm backed by XL Innovate — the Insurtech arm of XL Catlin — uses machine learning to derive more accurate property data from aerial geospatial imagery, gathered by drones and satellites.

“We have previously deployed systems mining techniques on insurance portfolios to reveal the interactions between the risks being underwritten and how these vary over time. This insight can help to ensure that the risk profile of the portfolio is consistent with your expectations and that there are no underlying relationships between the risks which you need to take into account. You can also extend the dataset being studied to look for risk drivers which might help to identify new behaviors or shifts in risk profile,” Neil Cantle of Milliman said.


Examples of this include property sensors that detect moisture, so home or business owners can detect and fix a leak before water damage occurs.

Fleet telematics systems show safety managers which drivers or specific behaviors are causing losses, so they can tailor their driver training to prevent accidents. AIG’s internal innovation and technology branch partnered with the City of Atlanta and used such a system to examine a “compilation of traffic and weather patterns” and learn how to “leverage that data to drive down accident rates,” Barton said.

Customer Experience

Front-facing, mobile claims management systems have as much to do with customer experience as they do with streamlining operations for insurers and claims managers, and indeed the most visible aspect of Insurtech is its quest to revamp the front-end customer experience through streamlined websites, mobile apps, automation and self-service capabilities.

The on-demand economy has elevated expectations regarding ease of use and a more pleasant buying experience across the board. Customers want to find what they’re looking for in just a few clicks, see all of their insurance options and buy directly through a portal, making the transaction easy and fast.

Kevin Kerridge, executive vice president of small business insurance, Hiscox

“Insurtech is driven by consumer preferences. There is a demand for a different experience and a new way of buying insurance. Technology is developing to address these unmet needs,” said Puneet Kakar, partner, Monitor Deloitte.

Creating an improved experience is the bread and butter of Insurtech startups. Their websites and apps are clean and simple – stripped of industry jargon or too much detail. That’s by design.

“Part of it is not wanting to give away our secrets to competitors; part of it is because we want customers to have questions, and reach out to us with those questions,” said Ilya Bodner, CEO of Bold Penguin, whose website consists of a single page separated into vibrantly-colored blocks of information. A request to enter an email address to learn more sits at the very top.

“They are trying to make the insurance experience delightful, which is a high bar to set,” said Martha Notaras of XL Innovate.

While this is a big factor in modernizing the insurance industry, some say it’s a surface level fix.

“People think they can throw a lot of money at technology to build a better customer experience, but that’s just the tip of the iceberg,” Bodner said.

Sales & Distribution

Insurtech was born in personal lines, where the peer-to-peer sales and distribution model works best.

In this space, Lemonade leads the way.  Simplicity has proved a strong marketing and customer retention tool.

In commercial insurance, that model is more difficult because of greater risk complexity… but it may be adaptable for small businesses which bear greater resemblance to an individual buying personal insurance than to a large commercial account.

“In 2010, we were the first domestic insurer to enable small businesses to get quotes and buy insurance online, although in recent months, established players are now stepping off the curb and coming into the same space,” said Kevin Kerridge, EVP of small business insurance, Hiscox.

Hiscox delved further into that space through its partnership with Bold Penguin, which caters to brokers of small business accounts.

And while the direct-to-consumer nature of Insurtech threatens to take the broker out of the insurance transaction altogether, it seems unlikely that this will happen in the commercial space, especially for larger businesses.

“In commercial lines, there is more complicated risk assessment, risk placement, appetite, claims, adjustments, payouts. It’s more fragmented and there is less consistency,” Bodner said.

“At some point, a human being is involved. Bold Penguin’s goal is to empower the broker, not cut them out. The end goal is to use AI and machine learning to better predict the day-to-day workflow of the broker and streamline processes for them.”

That means brokers’ jobs are secure… but they can’t rest on their laurels.  Insurtech will shift the broker’s role from that of a buyer to that of a consultant or trusted advisor, guiding clients through their risk and coverage options and determining which carrier policy fits best.


“We don’t buy into the idea that agents are dead,” Kerridge said. “Their role will change, but not disappear. They’ll become digitally enabled. We’re leveraging the $250 million we’ve invested in our direct-to-consumer infrastructure to help them with that.”

Some Insurtech firms are in fact not just catering to brokers — they are the brokers.

Julie Zimmer, COO of Embroker, said Insurtech companies like hers should be treated as a separate distribution channel. Embroker collects data from insureds’ existing policies to find areas where coverage or contract terms and conditions could be improved, and finds products on the market that could fit the bill.

The Challenges Ahead

The biggest thing preventing incumbent insurers from jumping into the Insurtech pool with both feet is corporate culture. Tech startups are used to “flying by the seat of their pants” and fixing glitches as they go, Sam Friedman of Deloitte said. Insurers don’t operate that way.

It is also true that the Insurtech market remains highly fragmented, with lots of small players doing lots of different things. Several sources said it’s likely that many startups here today will be gone in 5-7 years as more consolidation and cohesion takes hold.

“There’s nothing broken about insurance,” said Jay Weintraub, Founder and CEO of NextCustomer, which operates InsureTech Connect. “It doesn’t need to be upended or replaced, but there is a desire to invest in innovation and transformation.” &

Katie Siegel is an associate editor at Risk & Insurance®. She can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Alternative Energy

A Shift in the Wind

As warranties run out on wind turbines, underwriters gain insight into their long-term costs.
By: | September 12, 2017 • 6 min read

Wind energy is all grown up. It is no longer an alternative, but in some wholesale markets has set the incremental cost of generation.

As the industry has grown, turbine towers have as well. And as the older ones roll out of their warranty periods, there are more claims.

This is a bit of a pinch in a soft market, but it gives underwriters new insight into performance over time — insight not available while manufacturers were repairing or replacing components.

Charles Long, area SVP, renewable energy, Arthur J. Gallagher

“There is a lot of capacity in the wind market,” said Charles Long, area senior vice president for renewable energy at broker Arthur J. Gallagher.

“The segment is still very soft. What we are not seeing is any major change in forms from the major underwriters. They still have 280-page forms. The specialty underwriters have a 48-page form. The larger carriers need to get away from a standard form with multiple endorsements and move to a form designed for wind, or solar, or storage. It is starting to become apparent to the clients that the firms have not kept up with construction or operations,” at renewable energy facilities, he said.

Third-party liability also remains competitive, Long noted.

“The traditional markets are doing liability very well. There are opportunities for us to market to multiple carriers. There is a lot of generation out there, but the bulk of the writing is by a handful of insurers.”

Broadly the market is “still softish,” said Jatin Sharma, head of business development for specialty underwriter G-Cube.

“There has been an increase in some distressed areas, but there has also been some regional firming. Our focus is very much on the technical underwriting. We are also emphasizing standardization, clean contracts. That extends to business interruption, marine transit, and other covers.”

The Blade Problem

“Gear-box maintenance has been a significant issue for a long time, and now with bigger and bigger blades, leading-edge erosion has become a big topic,” said Sharma. “Others include cracking and lightning and even catastrophic blade loss.”

Long, at Gallagher, noted that operationally, gear boxes have been getting significantly better. “Now it is blades that have become a concern,” he said. “Problems include cracking, fraying, splitting.


“In response, operators are using more sophisticated inspection techniques, including flying drones. Those reduce the amount of climbing necessary, reducing risk to personnel as well.”

Underwriters certainly like that, and it is a huge cost saver to the owners, however, “we are not yet seeing that credited in the underwriting,” said Long.

He added that insurance is playing an important role in the development of renewable energy beyond the traditional property, casualty, and liability coverages.

“Most projects operate at lower capacity than anticipated. But they can purchase coverage for when the wind won’t blow or the sun won’t shine. Weather risk coverage can be done in multiple ways, or there can be an actual put, up to a fixed portion of capacity, plus or minus 20 percent, like a collar; a straight over/under.”

As useful as those financial instruments are, the first priority is to get power into the grid. And for that, Long anticipates “aggressive forward moves around storage. Spikes into the system are not good. Grid storage is not just a way of providing power when the wind is not blowing; it also acts as a shock absorber for times when the wind blows too hard. There are ebbs and flows in wind and solar so we really need that surge capacity.”

Long noted that there are some companies that are storage only.

“That is really what the utilities are seeking. The storage company becomes, in effect, just another generator. It has its own [power purchase agreement] and its own interconnect.”

“Most projects operate at lower capacity than anticipated. But they can purchase coverage for when the wind won’t blow or the sun won’t shine.”  —Charles Long, area senior vice president for renewable energy, Arthur J. Gallagher

Another trend is co-location, with wind and solar, as well as grid-storage or auxiliary generation, on the same site.

“Investors like it because it boosts internal rates of return on the equity side,” said Sharma. “But while it increases revenue, it also increases exposure. … You may have a $400 million wind farm, plus a $150 million solar array on the same substation.”

In the beginning, wind turbines did not generate much power, explained Rob Battenfield, senior vice president and head of downstream at JLT Specialty USA.

“As turbines developed, they got higher and higher, with bigger blades. They became more economically viable. There are still subsidies, and at present those subsidies drive the investment decisions.”

For example, some non-tax paying utilities are not eligible for the tax credits, so they don’t invest in new wind power. But once smaller companies or private investors have made use of the credits, the big utilities are likely to provide a ready secondary market for the builders to recoup their capital.

That structure also affects insurance. More PPAs mandate grid storage for intermittent generators such as wind and solar. State of the art for such storage is lithium-ion batteries, which have been prone to fires if damaged or if they malfunction.

“Grid storage is getting larger,” said Battenfield. “If you have variable generation you need to balance that. Most underwriters insure generation and storage together. Project leaders may need to have that because of non-recourse debt financing. On the other side, insurers may be syndicating the battery risk, but to the insured it is all together.”

“Grid storage is getting larger. If you have variable generation you need to balance that.” — Rob Battenfield, senior vice president, head of downstream, JLT Specialty USA

There has also been a mechanical and maintenance evolution along the way. “The early-generation short turbines were throwing gears all the time,” said Battenfield.

But now, he said, with fewer manufacturers in play, “the blades, gears, nacelles, and generators are much more mechanically sound and much more standardized. Carriers are more willing to write that risk.”

There is also more operational and maintenance data now as warranties roll off. Battenfield suggested that the door started to open on that data three or four years ago, but it won’t stay open forever.

“When the equipment was under warranty, it would just be repaired or replaced by the manufacturer,” he said.

“Now there’s more equipment out of warranty, there are more claims. However, if the big utilities start to aggregate wind farms, claims are likely to drop again. That is because the utilities have large retentions, often about $5 million. Claims and premiums are likely to go down for wind equipment.”


Repair costs are also dropping, said Battenfield.

“An out-of-warranty blade set replacement can cost $300,000. But if it is repairable by a third party, it could cost as little as $30,000 to have a specialist in fiberglass do it in a few days.”

As that approach becomes more prevalent, business interruption (BI) coverage comes to the fore. Battenfield stressed that it is important for owners to understand their PPA obligations, as well as BI triggers and waiting periods.

“The BI challenge can be bigger than the property loss,” said Battenfield. “It is important that coverage dovetails into the operator’s contractual obligations.” &

Gregory DL Morris is an independent business journalist based in New York with 25 years’ experience in industry, energy, finance and transportation. He can be reached at [email protected]