Would an IPO by any other name taste as sweet as Lemonade?

The recent IPO (initial public offering of shares) by Lemonade Insurance was on its face not much different from any other- a filed S-1 that tells the company’s story, advises of potential risks, denotes which firms are acting as advisors or underwriters, provides historic and pro forma financials, and acts as an appetizer for the […]

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AI- hot water for insurance incumbents, or a relaxing spa?

The parable of the frog in the boiling water is well known- you know, if you put a frog into boiling water it will immediately jump out, but if you put the frog into tepid water and gradually increase the temperature of the water it will slowly boil to death.  It’s not true but it […]

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Life insurance in the digital age, well, digital/analog age

There’s good news for the life insurance market and there’s the same news- the market potential is dramatic, the product mix is profitable, customers understand the basic product pretty well, there’s not much for a carrier to do once a policy is sold, benefits aren’t paid for years, and there are clever folks coming up […]

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Misconceptions regarding pandemic business interruption cover- contributing to preconceptions for future programs?

These may not be ideal times for the U.S. commercial insurance industry.  Sure, that is stating the obvious as COVID-19 business interruption claims encounter denials of cover, and now civil unrest damage claims overlay the undercurrent of BI disappointment. It is hard to imagine that the trillion-dollar Covid-19 issue can be significantly affected by a billion-dollar […]

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NPV be damned- here’s a delightful IPO you can love

Using-Behavioral-Economics-To-Optimize-Pricing-at-Grocery

One can seldom say that reviewing an SEC Form S-1, IPO registration statement, is interesting.  Sure, you can learn much about a company that is planning an initial public stock offering, but that level of excitement is reserved for financial banks and investors.  But that expectation has been shattered by the form recently filed by digital insurer, Lemonade, Inc.  Not only is its filed Prospectus Summary a full eighteen pages long, it contains the words ‘delight’, or ‘delightful’ ten times.  As was the case five years ago, Lemonade has taken what was stodgy and made it, well, different.   image

Patrick Kelahan is a CX, engineering & insurance consultant, working with Insurers, Attorneys & Owners in his day job. He also serves the insurance and Fintech world as the ‘Insurance Elephant’.

Lemonade is a company that started with two entrepreneurs, Daniel Schreiber and Shai Wininger who knew little of insurance, but knew much about launching a company, were veterans of digital innovation, and were experienced in marketing unique concepts.  And, the two determined early on that the administration and selling of insurance was not the key to entry into the market, but that marketing to and building interest from similar insurance neophyte customers was.  In addition, the early vision for the firm was as a peer-to-peer insurer, bypassing the monolithic traditional carrier sells and customer buys model.  The firm’s P2P model was not quite that pure but the concept of mutual benefit remained a cornerstone- if claims are not made in typical frequency then charitable organizations will gain a benefit from surplus.

Fast forward from 2015 to June 2020- the firm’s concept is ingrained within the insurance industry, may just be the most discussed insurance topic other than COVID-19 business interruption, and is now the current talk of the IPO town.

I am not going to belabor an analysis of financials for the firm- right now the most optimistic assessment is there are some fundamentals that are trending in the direction the market would like to see.  The company cedes a majority amount of premiums and claim costs to reinsurers otherwise this conversation would not be occurring.  The firm has been able to leverage the experience and effectiveness levels of officers in building an investment total to date of $480 million (including $300 Mn from SoftBank).  The raise has allowed the firm to grow its geographic footprint to include many US states and now an entry into Europe.  Here is where a typical IPO filing for a financial firm is off track- Lemonade is growing its profits in a wrong direction.  If 2019 indicated a $109 million net loss for the firm, and Q1 for 2020 is showing a $36 million net loss, the growth valuation of $2 billion is more tenuous.  Upon announcement of the IPO there were insurance observers of the InsurTech sort who were asking how they could short the stock offering.

For this article the traditional assessment of the IPO supporting financials will be diminished in importance because few expect Lemonade to be profit generator based on prior year’s financial reports.  A traditional extrapolation of financial value based on NPV of future earnings can’t get past the no worth valuation.  But then, Lemonade has followed a non-traditional path since its inception.

 

Looking back at the advent of its value proposition- digital sales and service founded on cutting edge technology and information analysis, and on the firm’s early adaptation of behavioral economics, a different view can be taken of the IPO action.  The firm engaged a world-renown behavioral economist, Daniel Ariely,  who in collaboration with the founders’ vision leveraged the concept of game theory in selling its premise- insurance as an iteration of the Prisoner’s Dilemma, a decision pathway where no one really wins because there is distrust of the other party in a decision, or game’s outcome.  Daniel Schreiber publicly took the concept further, stating the firm employed a ‘Ulysses Contract’ approach to the distrust relationship, tying its financial hands  such that there would be no ability to succumb to temptation of traditional insurers and denials of coverage being a flow of premiums to a firm’s bottom line.  I have had prior discussions with Mr. Schreiber about same and published perspective here, and while during the past two years game theory and behavioral economics have been not on the firm’s public radar, we just might be seeing the return of the softer sell within the IPO summary.

 

In previously stating the prospectus summary having inclusion of ‘delight’ ten times there was a point to be made- most IPO prospectus summaries provide in a few pages the vision or mission of the firm, how its operational functions are tied to the pursuit of the mission, its financial performance to date and how its future performance is planned to support the investment of those who subscribe to the IPO.

Lemonade does not have the option of leveraging financial results on a sure path to NPV calculable to the IPO proceeds.  It’s early days for the volume of shares offered and the expected price per share to be published, but even the marker amount of $100 million will be eclipsed by 2020 net losses (Q1 net losses already at $37 million.)  IPOs can be used for many reasons, and even though the firm notes that proceeds will be used for growth operations, the proceeds could be applied to ensure conversion of 31 million preferred shares to common at a value that the holders could choose to be an exit value (resell of shares) that is favorable, or perhaps retirement of SoftBank’s $300 million investment in order to add some liquidity to SoftBank’s balance sheet. (This is conjecture only- the author has not specific knowledge of any post IPO scenarios.)

What I suggest- the IPO’s story is being told in the twenty or so pages in a  clever IPO marketing scheme that is not dissimilar to the roll-out and growth of the firm- behavioral economics with a dose of group psychology.  Consider- in the Lemonade prospectus summary text one finds beyond the ten uses of ‘delight’, the following atypical IPO verbiage of:

  • Love– four uses, as in “Why we love insurance”
  • Giveback– four uses, as in “Giveback is a distinctive feature”
  • Graduation– two uses, as in “found in a phenomenon we call ‘graduation’ “
  • Breezy, playful, values, encourage, attractive, and encourage

 

The prospectus summary is less a financial and business conceptual document as it is a comfort manifesto, reassuring potential investors that the purchase of shares is a collective good. It’s no longer the Prisoners’ Dilemma because the firm has built a customer base and industry cohort that trusts the firm and its leaders.  The fact that financial success is not there yet- immaterial if the closed loop data aggregation machine is functioning and claims can be settled virtually and in seconds.  There is a value to the method and that is the apparent underpinning of the offering.  Growth of the digital access concept has driven web traffic to the firm’s site in a pace more than double of three years ago (page views more than quadrupled) and if nothing else, the value of the firm’s domain is in the high five figures 🙂 . Company leadership acknowledges that product mix must evolve (or customers need to graduate to more lucrative lines than renters), CAC cannot remain excessive, and reinsurance ceding of more than 50% of premiums and loss costs can only last so long for a full stack carrier.

A post-COVID environment might be a springboard for a favorable IPO, as might be interest of private equity (plenty of capital in the market), or from existing investors.  The firm’s concept is five years’ old and at the prior threshold of involvement for the co-founders.  Plenty to consider outside of pesky financials.  Many delightful, playful, re-imagined, breezy, loved and attractive concepts to perhaps ensure full subscription of the IPO.

 

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Life insurance as seen through the informed eyes of industry experts

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Consider- a business that with a 5% increase in 2020 will add $100 Bn to its annual revenues, a business that has a customer growth potential of billions of customers, a business that in spite of billions of dollars of technology investment in the past few years remains a product that is most effectively sold person to person, and a business that in developed countries has average policy face values of more than $100,000 yet has the most effect on its growing market with policies that are sold with face values of hundreds of dollars.  Yes, we are talking about life insurance.  This week Daily Fintech discusses life insurance with four industry experts (and background from another) representing life insurance business on three continents.

Patrick Kelahan is a CX, engineering & insurance consultant, working with Insurers, Attorneys & Owners in his day job. He also serves the insurance and Fintech world as the ‘Insurance Elephant’.

 Please allow me to introduce the four industry experts:

And my background resource who has significant life insurance experience in multiple global markets, and the life reinsurance market.

Rather than trip over my relative paucity of knowledge of the global life insurance world I asked the experts a series of questions, knowing full well their responses would be far more informed than what I could research but would be more than would reasonably fit into an InsurTech blog.  Their respective answers have been entered verbatim as much as space allows.

For their involvement I am grateful, and it is certain the reader will benefit.

What is a ‘fashionable’ life sector innovation or discussion that might be over-hyped, or might not be the ‘world beater’ that it is being shown as?

FG-         Thinking too much in target groups.  Frank’s thought- think in modular needs (independent from age) and in a way to make the need more ‘visible’.  DF Not cookie cutter, understand the customers’ needs. How novel!

FG and background-      Fitness trackers, AI, new savings opportunities are just not right yet.  Wellness has shown the most promise but not yet delivered the results. Personal IoT- who pays for the devices, who owns the data, and why would customers not simply acquire their own wellness devices?

AB          In India carrier/complementary company partnerships that bring term life cover for a period of one year, essentially a group policy that primarily benefits the platform owner.  Plenty of policy churn.

 

Insurance as an industry is experiencing change or pressure to change.  What aspect of the life product do you see remaining the same in spite of the tides of change?

JT-          There are an increasing number of insurtechs and incumbents investing in innovation, but almost all of the focus has been on process efficiency. The cost to distribute life insurance has increased 17 % in the same time period where sales commissions for mutual fund products declined 75%.  I see this as a warning that the life product value proposition is getting less meaningful to customers.  DF Interesting point- life policies in force in the US have declined by ten million policies in that last five years.

AB-         Annuity and savings products will remain the same due to having little scope for innovation due to their structure.  DF  I wonder if Frank has an opinion on this based on his proposed new venture?

What might be the most under-served life market/sector?

BS-         Gen Z/Millennials- they have less grasp and understanding of the products.  DF  Well that sounds like an education and sales opportunity if the right marketing approach is applied!

JT-          In the US it’s middle income families, whose use of life insurance has been steadily decreasing for fifty years or more.  This study from the Chicago Fed found that in 1989 two thirds of households in the middle income quintile held at least one term life policy; now fewer than one half do.

AB-         Most of Africa, SEA, and South Asia are lacking penetration, mostly due to lack of data to properly price products.

 

What is the greatest challenge for the life/pension sector?

FG-         The transformation from ‘old’ to new’ itself.  DF Well that’s a broad concept- wonder how it could be fine tuned.

BS-         Legacy systems!  DF  And associated tech liabilities.

DF-         On background digital sales methods have not significantly change the premise that insurance remains a ‘sold, not bought’ product.  Life sales have a substantial emotional aspect; individual needs need meaningful identification to have a product resonate with a customer.

Is there a life cover line that is missing from the market?

BS-         Not a line, but a person- the beneficiary.  I would do everything around the beneficiary, from sales to claims.  DF-   A life policy purchaser does not benefit from its face value aspect, the beneficiary does.  Why not make the beneficiary more of a focus?

AB-         A lot of work needs to be done for the woman customer, especially for India, Africa, South Asia and SEA.  DF-                Seems similar efforts would be useful in Europe, North America, and South America.

 

What project/partnership/actions are you or your firm working on that you would want to the insurance world to know of?

BS-         Benekiva is integrating with two of the leading admin systems, with the goal of allowing carriers to partner with best in claims solutions without the overburden of integration logistics.        

JT-          Everyday Life recently launched the first offering of Predictive Protection, a feature that empowers customers to design individual coverage and allows adjustments to cover automatically over time.

AB-         We continue to focus on bridging the gap between traditional insurance and micro insurance, with efforts in integrating data and analytics to open the mid segment of customers who are currently underserved due to missing medical and financial underwriting norms.

FG-         We are on episode 8 of the journey to introduce Futuro Vorsorge, a new savings product to be introduced in Germany but is designed for application across Europe.  DF  Frank has masterfully composed and presented a series of videos recounting the formation and implementation of a new insurance product offering.  Episode 1 is here .

 

Who, or what firm do you look to as a leader in its/her/his approach to the industry and its customers? Is there a why for that mention?

AB-         ICICI Prudential for their aggressive digital strategies, and Maxlife for their customer and employee centric approach.  DF-  Maxlife stands above most Indian carriers for their empathetic and supportive culture.

BS-         Menlo Innovation. While not an insurer per se, the company inspires Benekiva to apply Menlo’s mission to “end human suffering in the world as it relates to technology” in the firm’s efforts to mitigate the effects of gaps between carriers, policy holders, and beneficiaries through claims transformation.

JT-          MassMutual.  The company is leveraging intrapreneurial efforts like Haven Life and LifeScore Labs to challenge traditional innovation boundaries.

What is the most fundamental change you have seen/experienced in the life/pension market since your first days in the industry?

BS-         While my start in the life in insurance relatively recently, I am witnessing the industry becoming less fixated on fashionable but ambiguous concepts like ‘digital transformation.’

AB-         Adoption of APIs and willingness to digitize front end and middle flows.  Back end is still a mess, though.  DF-       Opportunity abounds- still- in process improvement.  Have to work on that whole inertia thing.

Well I’ve read the full scope of the experts’ input multiple times and I learn something new each time.  And then I remember- there are dozens of similarly skilled persons within the insurance from whom we can learn.  As for you life insurance pros- there is huge potential for growth within the life industry, and there’s no need for magic- so say the experts.  Customers are waiting!

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Can’t know the pandemic fund players without a scorecard

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It’s getting more and more difficult to keep track of economic responses to COVID-19 without a scorecard; new or updated grant, loans, fund discussions and press releases fill the news each day.  And why shouldn’t that be the way?  It’s a multi-trillion (fill in currency of choice here) issue for economies with current and future ramifications.  This column has discussed COVID-19’s effects in depth since February; let’s consider a response score card as this week’s effort. And for those who are patient to the end- some bonus business interruption content!

Patrick Kelahan is a CX, engineering & insurance consultant, working with Insurers, Attorneys & Owners in his day job. He also serves the insurance and Fintech world as the ‘Insurance Elephant’.

Before we fill in the current scorecard let’s agree that governments’ central monetary authorities have been throwing a lot of liquidity into the markets, and treasuries have been distributing direct funds and issuing loans to buoy up businesses during lock down periods.  That’s all well and good but it’s reactionary, inefficient, and ignores in most part the resources of private capital markets.  Ironically in some fashion government efforts have been ‘sending riches to the rich’ through distributions that end up in those same cap markets.

Setting government actions aside we again find not much from the indemnity world of insurance, although John Neal of Lloyd’s and Evan Greenberg of Chubb might disagree since their published assessments estimate that COVID-19 insurance exposure is $100 billion.  Place that estimate in perspective of the pre-COVID insurance market that approximates $5 trillion annual revenues and its magnitude becomes less impressive.

Let’s not belabor what is known and focus on how the industry and governments are working to anticipate responses to future like events. Any chosen option needs to be affordable for businesses, provide prompt and/or efficient payment, not be politically expendable over time, have stable, uniform funding, and not be complex to administer. That’s all.

There are several prominent fund/backing proposals and while the exemplars are not exactly all apples or all oranges, we can contrast them by:

    • Sponsor
    • Constituency
    • Fund size
    • Distribution model
    • Backing /funding
    • Admin

First chart

*Proposed

**Proposed by coalition of the National Association Mutual Insurance Companies, Insurance Information Institute, American Property Casualty Insurance Association

That scorecard shows the who’s, how’s and how much, but what of potential fund efficacy?

second chart

Review of these general data prompts some caveat observations:

  • Often the correct answer is not the right answer, as is suggested for option C. Having pre-purchased recovery insurance at a level supported per each customer’s business activity is smart, but will the program be caught by moral hazard issues, and what of those businesses that do not participate?  Another (yet smaller) PPP experience?
  • Option G is untried collaboration in private insurance and capital markets, but will government backing be available for early years of the program?
  • A, C, and D require significant government funding or admin. Considering that administrations change and budget issues crop up, will the finds have political interest that outlasts short memories?
  • F existed before COVID-19 was known, with no takers. What will change that reality now?
  • Will B have the buy in of the balance of the EU, or will the members need to revert to individual plans?
  • How scalable are E and F, or will other carriers need to come on board?
  • Are any of the plans looking to leverage private capital markets?

There are scores but we don’t know the score- yet.  What is certain after the discussion is as was at the beginning- it’s a multi trillion (fill in the currency here) concern that needs one or more solutions.  Status quo keeps all with zeroes on the board.

(Full disclosure- the author is a co-founder of the Ten C’s Project, but is agnostic on which type of fund is supported as long as insured companies benefit.)

Now for your bonus-

I came across a fascinating infographic representing COVID-19 insurance around the globe  published by P2P Protect Europe :

infography-covid-insurance_orig

I reached out to the firm for any further comments they may have to accompany the infographic and my expectations were exceeded by the comments made by P2P President/Managing Partner, Tang Loaec.

Mr. Loaec provided a different view of business interruption (I’ll use the full quotation):

“As regard property insurance and the embedded business interruption insurance, there is a catch 22 between the desire to exclude the massive concentrated financial impact – which can threaten insurance stability – and on the high frustration of the insured which remains exposed while they thought their business interruption insurance was ensuring their business continuity.

What  P2P Protect Europe recommends to its insurance clients is to approach it from an assistance logic. For example, if you want to include a mechanism protecting a university against the impossibility to use its premises when pandemics strikes, you may extend the coverage not by opening you to monetary claims (the sky is the limit sometime), but by integrating a pedagogical continuity service with a dedicated online classroom provider such as for example LiveClass.fr to deliver protection against the business interruption risk without opening up to massive liabilities. Similar approaches can be envisaged for many other types of business activities. Through innovative assistance services, we can improve the resilience of our society to pandemics, reduce the negative impact on the insured business, while not bankrupting insurance either.”

Well that gives the issue a whole new viewpoint.

You’re welcome.

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Dominoes have fallen – what insurance learnings have we so far from COVID-19 business disruption?

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When this article was first posted in late February 2020 the COVID-19 outbreak was still focused on China, but its effects were menacing the globe.  At that time the concern was supply chain issues and a less than one hundred coronavirus cases distributed primarily on the east and west coasts.  As this article is reread one can consider what parts were on point, and if on point, was there anything that really could have been done to mitigate the then unimagined scope of what was to come?  Let’s revisit three months ago, think of what might be done next time, and also discuss with insurance agents how the market’s customers have changed in the ensuing time period (if at all.)  Text from the original article will be noted in italics.

 

Patrick Kelahan is a CX, engineering & insurance consultant, working with Insurers, Attorneys & Owners in his day job. He also serves the insurance and Fintech world as the ‘Insurance Elephant’.

February 27- It’s clear there is much of which to be concerned regarding novel Coronavirus 2019 (aka COVID 19), including  the direct impact of illness and death among those who have contracted the disease, and the indirect effect of closure of travel, quarantine, closures of schools, businesses, and frontiers. 

Who is considering the effect of the virus on local, regional, and global business?  Whether you believe in the extent of virility of the virus or not, one thing is certain- businesses across the globe are showing symptoms from COVID 19.  Is this an insurance disaster or unexpected new market?

Disaster or opportunity?  Sun Tzu notes in “Art of War”, “In the midst of chaos there is also opportunity.”  Certainly Sun Tzu’s intent was far from discussion of business and insurance, but the principle still applies- when there’s turmoil purposeful persons leverage opportunities.  My agent colleague, Brett Fulmer of Maxwell Agency Insurance Services in southern California recounted in a recent discussion, “I have been able to develop a broader presence within my connections and local industry through hosting and participating in virtual sessions.”  In essence, Brett capitalized on the new ‘Zoom environment’ to become an influencer, an action that has resulted in some unexpected business referrals.  Would this have happened outside a forced virtual new world? Perhaps, but in contrast to many who may have retracted into a safety zone that agent saw beyond just the next sale.

Bradley Flowers of Portal Insurance in the state of Alabama (and co-host of the Insurance Guys Podcast) advises his agency’s business has held its own so far during the work from home period, and he has been able to find opportunity in that virtual chaos by ‘patching up holes in the business’ since he has some unexpected management freedom by not being collocated with staff.  He didn’t say so, but one might say his staff have grown in their ability to make decisions, their initiative to serve, and through forced learning due to separation from colleagues’ input.  Perhaps the virtual model will be found to be an unexpected boon for the agency.  Ryan and Andy Mathisen founders of Glovebox, a virtual tool for agents’ and customers’ use in organizing insurance information, reiterated Bradley’s point about virtual work- many are wondering about the utility of offices and requirements thereof, not full disappearance of analog offices, but growth of remote work options based on COVID-19 environment experiences.

The business world lives with the two-edged sword of global interaction; on one edge a manufacturer in Barcelona can economically design and digitally source machine parts from a ten person shop located in Hubei Province in China, on the other edge is the disruption that may occur to the Spanish manufacturer if the machine shop is inactive or unable to produce a custom part. What of the cascading effects of supply chain disruption?

This has been proven true in more ways than can be considered.  Access to personal protective equipment is the poster child instance of this actuality- the bulk of the supply chain for PPE is housed in China, and a combination of business shutdowns there, ill-preparedness and slowness to act in most markets caused those products to be of dangerously low supply when most needed.

Unless your business was affected by the SARS outbreak in 2004, affected by the more localized (but terrifying) Ebola virus, or mosquito borne diseases like Dengue or Zika, the business effects of outbreaks are typically small- unless you are immersed in the outbreak.

For this article a deep dive into what’s covered by insurance and what’s not will not be taken- that would be too lengthy an effort for a Daily Fintech reader who needs an overview.  I can say that Business Insurance and Marsh and McLennan have a good summary document here, “Liability policies may respond to coronavirus” .  Travel insurers typically do not afford coverage if a traveler simply decides not to travel due to perceived risk (some policies have the ‘cancel for any reason’ option but it’s an exception placement.)  Suffice it to say that effects of outbreaks do no not fit well into insurance cover.

So what’s the point for this article?  Or, in this case, an updated version?

Awareness and consideration of how outbreak ‘dominoes’ can affect your business, and are there insurance options that might provide financial protection?

Let’s consider the potentials for risk management working backwards from end businesses: 

      • Most business interruption covers are based on an occurrence of direct physical loss, either on premises or within a supply chain. Unfortunately, disease outbreaks are seldom considered direct losses, and in most cases are excluded causes of loss.

Hasn’t this been proven to be the COVID-19 economic disaster for every economy?  Business interruption cover was never designed for pandemics, even to the point of minimal reinsurance capacity being present for that risk.  As such a multiple month shutdown in the U.S. has caused unreimbursed trillion dollar ripples across the twenty five million or so small and medium sized businesses, local and state governments, has overwhelmed banks as they work to administer federal response programs, and even has a ripple effect with health care organizations.

Continuing, we still are uncertain of effects that will be produced from:

    • Worker’s compensation
    • Liability from infection from customers being on premises
    • Directors and Officers cover if business results flag due to alleged poor planning
    • Supply chain risk- all along the supply and transportation chain? Has just in time become a liability
    • Loss of suppliers due to failures of businesses in the worst outbreak areas
    • Actions of governments? Legal ramifications of non-compliance
    • Employee actions due to extended periods of no work
    • Loss of key staff due to inability to maintain salaries
    • Interest rate risk from speculation
    • Inability to travel to affected areas where management oversight is critical
    • Increase of cyber risk due to reduced attention to risk and opportunistic bad players
    • Reduced productivity due to requirements for and inefficiencies of virtual work

There were other items listed in February’s version but if you are purposeful and look back to this article you’ll see we are all too well knowing of those issues’ outcomes.

John Neal of Lloyd’s recently published an estimate of COVID-19’s estimated effects on the global insurance industry across all lines- $200 billion.  Even if the $100 billion or so of investment portfolio losses are set aside from that number the remaining projected underwriting loss of $100 billion remains an unprecedented amount for the industry.  The terrible national catastrophe years of 2017 and 2018 did not reach that level.  The unique nature of the insured losses due to COVID-19 effects will not be fully realized for years as many of the affected covers produce long-tailed claims.  Recognition of the extent of the potential claim costs will prompt significant reserve levels being  marked by carriers, which will be an anchor on profits and constriction on ready capital.

It was just a few months ago that global broking houses were eyeing the hardening commercial markets favorably in terms of rising rates and growth of available products.  Contrast that outlook now with carriers rebating premiums and global brokers pulling P&L guidance.  If a main global firm like Aon acts to reduce staff and executive suite salaries (see PC360 article here ) due to the outbreak, there is clear indication that the pandemic’s effect goes well beyond SMEs’ business interruption cover concerns.

Going forward there are learnings for the risk management industry, and for any business that might be affected by issues related to outbreaks.  The availability of parametric insurance may become more commonplace, and the practicality of its inclusion in insurance plans will increase. 

There is no practical answer for pandemic insurance cover within the indemnity model.  Even a parallel fund such as was established by the U.S. Congress for terrorism effects (TRIA) would potentially fail under the weight of the volume of claim handling, and under the enormous gravity of trillion-dollar severity.  Claim administration of just ten percent of potential SME customers’ claims would potentially consume fifty million man hours of adjuster labor. And, since TRIA backstopping is legislated to cap at $100 billion, extending TRIA claim demands at the level of what is an average Paycheck Protection Program principal of $200,000, times 2.5 million claims and the ask of the fund becomes $500 billion, an amount that would need legislative approval.  Industry capital would be fully consumed addressing the claims, and government reimbursement would be- uncertain at that level.

Carry the parametric principle to supply chain interactions, or any business interaction where a disruptive trigger, or index can be identified, and a risk amount can be applied.  Business disruption due to a specific government command, for example, or supplier closure due to a WHO declared outbreak.  There may be many reasons why indemnity covers are unable to be written, but parametric options must be considered. 

The key is that global outbreaks do occur, and while perhaps not as potentially costly as COVID 19, significant none the less. 

Global reach, fragility of supply chain interactions, and business continuity demand different approaches, and provide the insurance industry new opportunities for risk products.

We are three months and a lot of economic heartache separate from our initial discussion of coronavirus’ potential effects.  Three months from now it would be good to be focusing on the opportunities the industry has found in the COVID-19 chaos.

I appreciate the additional input received in preparation of the article from insurance consultant and innovator extraordinaire, Chris Carney .

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Best to be a skilled juggler to be an insurer in today’s environment

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It’s no longer just a water balloon; insurance has become a water balloon morphed with a Rubik’s Cube.  Squeeze here, bulges there, twist row here, colors change there.  Insurance is not a business for the faint of heart but needs to be an industry WITH heart.  Focus has been on COVID-19 issues but all those other perils and occurrences must still be attended and planned for, and the industry’s reputation- always a fragile characteristic- needs consistent effort to prop up.

Patrick Kelahan is a CX, engineering & insurance consultant, working with Insurers, Attorneys & Owners in his day job. He also serves the insurance and Fintech world as the ‘Insurance Elephant’.

Contrarian’s reality of business interruption cover

The insurance world sat on its hands during the early emergence of the coronavirus outbreak, aware that supply chain issues were occurring in China, businesses were being shut down, and economic ripple effects were being felt into western economies, comfortable in the exclusion of cover for systemic risks.  However, as the insurance effects of COVID-19 became more acute when business interruption cover was being considered and denied for cover, insureds, legislators and the plaintiffs’ bar held sway over the narrative.  Seems the concerns have gone a little underground but that just may be a fools’ game to believe.  Insurance companies defend the multi-hundred billion dollar issue on a 9-5 basis; plaintiffs and eager attorney firms team up 24/7.  Sure, insurance industry orgs like NAMIC and APCIA have put out position papers describing the many problems ex post facto changes to insurance contracts re: business interruption insurance changes would cause the industry, and of late the US Treasury Department has advised it is in opposition to having insurance companies take undue responsibility for the BI claims, but of course insurance in the U.S. is not regulated by federal law, and zeal within local jurisdictions is swayed by sentiment.

In addition, policies and coverage differ across the spectrum of carriers’ contracts and certainly across what bespoke risk underwriting provides.  I wonder if insurance carriers are taking the issue seriously enough to have internal ‘war games’ where policies need to be defended provision by provision? Determining cover with a lean to the customer now is much less costly in terms of direct financial cost and indirect reputational cost litigation would present, even as the issue in the U.S. potentially progresses toward a constitutional battle.

Even with this news today out of the state of Louisiana via Business Insurance, Louisiana-lawmakers-scrap-bill-to-make-interruption-coverage-retroactive, insurers need to find other ways to provide risk management service for their customers.  Just because some peril or circumstance isn’t covered- now- doesn’t mean other avenues to assistance can’t be considered.

Insurers in the UK are dealing with a similar issue and business sentiment, just to a lesser economic degree per the Evening Standard.  Whether the concern is a “shortcut to insolvency” as the Association of British Insurers stated in response to U.K.-based risk management association Airmic Ltd’s remarks urging carriers to be responsive to insureds’ needs:

With many corporates facing an existential threat from global governments’ lockdown measures and a deep recession likely to follow, we expect brokers and insurers to demonstrate fairness and flexibility with regards to claims and renewals. The harsh market is already straining relations with many corporate clients, and insurers’ rigid interpretation of wording regarding the pandemic could accelerate this deterioration.

Airmic believes insurers have a choice. They can either interpret ambiguous contract wordings with their balance sheet in mind, or they can act as partners to long-standing customers who seek business protection. All parties will benefit from a partnership approach to the current crisis.

 

it’s clear that the concern remains on the front burner per reporting in Business Insurance.

24/7 efforts and networking of attorneys, insureds, and plaintiff advocates vs. 9-5 defense. Perhaps still a false security (digital communication works, collaboration is effective, and 33 1/3 % of tens of billions of USD is a lot of motivation.)

Insurance and reinsurance company capital buffers have become smaller as a result of stock markets being down 20% or more- does that matter?

Insurance companies are often considered more holders of float than risk managers; a less than stellar underwriting performance in a given year can be mitigated for effect by effective investment of premium float- use of premium dollars paid in that have yet to be accounted for as earned based on policy duration.  Berkshire Hathaway’s founder and CEO, Warren Buffet has been the industry’s float cheerleader for many years, and that attitude has served him and his company well.  However, even the estimable Mr. Buffet’s firm has been rocked by the loss of value due to the effects of COVID-19 and volatility within stock exchanges (see below.)

Sample of insurance company performances- US P&C carriers

Ins Perf 2020

One quarter does not a trend make, but it’s expected investment results for the second quarter of 2020 will be as volatile, and long-term expectations for P&L performance is uncertain.  Underwriting performance for personal lines may reflect better than average based on auto usage and stay at home efforts lessening some homeowners’ policy claim severity.  U.S. Fed actions will settle markets some, but carriers have less appetite for higher return but higher risk vehicles for that portion of float that is not bound to Stat accounting requirements. Perhaps carriers need to begin to plan for intangible asset variances from a risk management standpoint, something that seemed a very company-localized concern just a few months ago.  Is there now a market for parametric products that deal with trigger events relative to macro consideration of intangible assets?  Another look at the work of John Donald  and Dr. Marcus Schmalbach (See “Heartbeat in the Fog” ) gives some thought on the subject.

There are aspects of insurance reserves that do not get as much scrutiny, that being reinsurance and insurance linked securities (ILS).  Rei authority Artemis noted recently that as global stock markets ran 20% or more lower along with impairment of other assets classes the “capital buffers of reinsurance companies have become smaller as a result.”  Lesser values for primary insurers’ securities portfolios, and potentially less capacity in and higher cost for reinsurance- certainly not an ideal short or mid-term prospects.  As for ILS- even though that aspect of risk financing is a relatively small part of the whole that sector remains tight from significant events from 2017-18 (thanks for the perspective, Tom Johansmayer of Verisk PCS.)

For now P&C carriers have wiggle room on the claim side, but new territory to navigate in terms of investment.  If for some significant reason carriers feel they need to establish large reserves to defend and potentially pay BI claims that will affect loss and expense ratios.  Managing core businesses- sales, claims, and service needs to continue with a weather eye on securities’ markets.

 

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Enough of COVID adversity- how about enjoying some insurance innovation diversity?

GIA

Enough for now on COVID-19- let’s consider what can the insurance industry expect as the world slowly pivots back to normalcy, whatever that will be?  The insurance industry is a five trillion USD business, and while aspects of the industry remain in flux as of this date, insurance does carry on as a foundation of business, ownership, contracts, transportation, life, etc. Insurance has been undergoing innovation focus for some years so in anticipation of what’s next, let’s take a look at one organization’s view of that very thing- ideas that are made to influence insurance change- the Global Insurance Accelerator (GIA).

 

Patrick Kelahan is a CX, engineering & insurance consultant, working with Insurers, Attorneys & Owners in his day job. He also serves the insurance and Fintech world as the ‘Insurance Elephant’.

The GIA functions as “a mentor-driven business accelerator designed to foster innovation in the insurance industry by supporting InsurTech startups targeting the global insurance industry.”  As such the GIA hosts a selected cohort of startups over a one-hundred-day period at their facilities in Des Moines, Iowa, a full-immersion environment of mentored development of the respective firms’ concepts. GIA Managing Director, Nicole (Cook) Gunderson notes another key aspect of this accelerator- sponsorship by established carriers and a token equity position being taken by the sponsor firm(s).

The recent graduating cohort was comprised of seven firms from diverse insurance line focus:

  • DenScore, software solution for dental insurers, leveraging dental claims data and patient feedback to measure dentists’ clinical performance
  • Caregiven, digital engagement and support tool offered as a group benefit by employers, ensures aging or ailing loved ones benefit from a higher quality of life.
  • Kiwi Insure, a social media focused analytics firm that risk scores customers before engagement in outdoor or sports activities and distribute personalized insurance products to customers on a demand or ‘gig’ basis.
  • Summary Medical, innovation to search and auto-review medical records, a hub for the review of medical records in life insurance underwriting.
  • Insurevite, virtual claim service focused on medical claims utilizing claim bot technology.
  • UdoTest, at home health screening developer and marketer with a full suite of do at home health tests.
  • Gerald Technologies, B2B digital SaaS acting as an info bridge between the insured and insurer.

With the GIA’s goal of providing a fertile development environment and intensive advisory services within the Accelerator’s 100 day period, the cohort went full steam ahead January 14 of this year.  As with the rest of the business world, the GIA began its required virtual operation March 16.  The apparent success of the virtual adaptation was evident in the Virtual Pitch Event the program sponsored on day 100, as the reader can access here on the presentation video- 2020 GIA Cohort Companies’ Presentations.

 

As I listened to each org’s pitch I considered the respective firm’s goals, the approach and delivery as currently exists, and then posed a question  or two by email for each founder.  While I was unable to obtain responses from all of the cohort’s members, I did receive information from a majority.  My thoughts- no matter how engaging the idea there has to be a purpose customers see and are willing to pay for.

DenScore

Knowing that DenScore’s focus is helping program enrollees make better choices about dental care based on a ‘best dental providers’ network, I asked founder KyleGernhofer:

DF          “Does the proposed rating service provide information that carriers will pay for absent immediate proof of financial worth?”

KG          “Absolutely! In addition to DenScore’s financial appeal, most of our conversations with dental insurers circle back to their desire to better serve their stakeholders (ie. enrollees, employers, dentists, brokers) which has been so refreshing to hear! Dental insurers love the fact that we’ve designed DenScore to provide added value to their entire customer base because this will ultimately lead to a stronger network and a resulting boost in net earnings.”

So it seems the ongoing potential benefit of the firm’s concept is through continuing assessment of patients’ experiences, carriers’ use of real-time ratings monitoring dental providers in not only knowing who is a good performer, but in providing under-performers feedback to improve how they serve clients.

Caregiven

A provider of a safe, convenient and easy to use caregiving platform for family members to use for structure, support, and guidance needed to manage the final years of a loved one, Caregiven is the idea of founder Candice Smith.  The service is marketed to life and health insurance companies, and to employee benefits providers as a digital engagement and support tool.

DF           “Soft benefits can get lost in the suite of benefits an employer can provide.  Seems awareness is the first hurdle for Caregiven; what other marketing avenues are being considered besides employee benefits presentations to build exposure for the firm’s services?”

CS           “One of Caregiven’s values is to reach those individuals who need it, when they need it, in as frictionless a way as possible.  Therefore we are going-to-market as an employee benefit because there is such a gap in the services offered to employees caring for an aging or ailing loved-one.  Caregivers themselves suggested this channel as one of the first entities impacted by their new family caregiving obligations and proclivity they have to trusting benefits provided by their employer.”

Build the tool as a soft benefit an employer provides and build from the employee community aspect one can get from one’s employer and leverage the organizational and prompting aspects an application can provide a family caregiver.  That’s the firm’s unique approach.

Kiwi Insure

Per Kiwi Insure’s founder, Evgeny Aleksandrov, “Insurance is hard. It’s hard for customers because it’s poor experience, confusing and prefer to not think about. It’s hard for insurance companies because it’s expensive to sell, takes long time and often times the ultimate customers are not clear.  Using analytics to distribute with personalized offers at the time the product is most relevant to the customer and the design innovative products that fit people’s lifestyle.”

DF           “Kiwi Insure provides a variety of covers- are they all indemnity-based, or are some simply triggered by an occurrence?  Kiwi has an insurance partner; is Kiwi an MGA, full stack carrier with rei backing, or other?  Is the insurance partner also assisting with claim handling and severity spikes?”

EA           “Kiwi offers product that fits people lifestyles. They are easy to understand, fit for purpose, and on-demand. We currently focus on offering individual indemnity accident / injury product that insured can turn on/off whenever they need it most. Kiwi acts as an agency passing on the capital risk to our carrier. Our carrier assists with claims.”

Clever social media analysis that can prompt a customer to trigger cover for the ‘adventure’ period and can provide additional intelligent ‘nudges’ for cross sold products.  As a sort of MGA the firm’s utility to its carrier partner(s) is essentially prequalified leads.

Summary Medical

As many others have found there is a need to better organize medical records for use in many healthcare or insurance tasks, including wrestling the demon of unstructured data- both in volume and in accessibility.  Summary Medical’s founder, Clint Laskowski, has first hand knowledge of the challenges being an IT professional working with large life carriers.

DF           “OCR, NLP, and security/privacy protection are not entirely unique concepts.  What differentiation does Summary Medical provide that would be a discouraging barrier to entry for other firms with similar AI tech?”

CL           “With regards to the excellent points in your second question, I can’t get into specifics other than to say that we believe we have some advantages, but (1) we are not ready to share these yet, and (2) we see a bright future in the application of NLP and ML when it comes to understanding unstructured data.”

I like the no-answer answer- confidence in the pursuit, not yet at proof of concept but cognizant that at first blush the idea appears to be more of the same.  Looking at the three words, “understanding unstructured data” hints at the firm not only organizing medical records/data, but doing it in a manner leveraging NLP and ML such that the access software provide an optimized search tool that is superior, less costly, and faster than competition.  How they look in the Fall of 2020 will tell.

The other firms in the cohort, Gerald Technology (Ola Okeshola), Udo Test ( Allison Martin ), and InsureVite (David Yeng ) had not had time to finalize their responses to the DF questions prior to publication, but it’s certain the answers would have ‘fleshed out’ the short pitches the firms’ founders provided in the virtual presentation.  I recommend watching the pitch video to get an idea of what projects the GIA found meaningful, and the projects that some major carriers found useful to support.

Credit is to be given the GIA and the cohort for adapting to the virtual environment needed to complete the session, and for the successful virtual pitch finale.  Whether the startups’ respective success carries on to integration into the insurance and customer service environment- that we will all wait to see.

What is certain- innovative ideas will carry on past the immediate COVID-19 period.

 

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