Neo-Insurers Riding the Digital Wave

The convergence of technology and fluctuating consumer preferences in the insurance industry has led to a slew of neo-insurers being created: licensed insurance carriers that have begun to offer customers an end-to-end digital service to manage all their insurance-related needs.

Traditional InsurTechs may operate as a managing general agent, relying on other companies for their license and underwriting capital. This arrangement has drawbacks, including expensive fees, little autonomy in decision-making, and licensing contracts that could be terminated with little notice. As a licensed carrier, neo-insurers can write policies independently, giving them more freedom over setting prices, underwriting, and configuring policy wording.

On average, neo-insurers, like regulated insurance carriers, must maintain cash reserves equal to at least a third of revenue and require time to launch and capital to grow. The payoff, however, can be rewarding in the long run: neo-insurers can now focus on identifying customer preferences and develop products and services to meet their constantly evolving needs.

In contrast to incumbents who rely on a manual interface, neo-insurers adopt a quicker, AI-driven approach to automate the entire life cycle of an insurance policy fully. According to a report by Autonomous NEXT, AI can drive cost savings of up to $390 billion in the front and back offices of insurance companies by 2030.

Neo-insurers allow their customers to purchase policies online, offer digital documentation and proof of insurance, and provide electronic billing and payment options. The multitude of digital touchpoints affords neo-insurers the luxury of harvesting data generated from the customers’ actions, allowing them to customize solutions and pricing. The more data the company accumulates, the more risk patterns emerge, and more precise assessments can be made.

Traditional insurers entrenched in restrictive software, manual workflows, and prone to human errors have found it difficult to take advantage of advancements in technology without major disruptions to their underlying architecture. Neo-insurers view the insurance value chain – from product design to claims servicing – through a digital lens.

A McKinsey report claimed digitization could raise customer satisfaction by 10 to 15 points, improve claims adjustment expenses by 30%, and increase the accuracy of payments – using machine learning to recognize fraudulent claims – by around four percentage points. It will be interesting to take a look at some of the players in the space, with a focus on what they do differently:

Lemonade is a licensed B-Corp carrier offering homeowners and renters insurance policies. It uses big data and machine learning to predict risks and quantify losses by placing each customer in a risk group and quoting a relevant premium. Lemonade’s claim bot ‘A.I. Jim’ runs multiple anti-fraud algorithms and has a world record for settling a claim from approval to payout in three seconds.

Next Insurance is a leading neo-insurer for small businesses. It offers Live Certificate, the industry’s first real-time insurance verification certificate, as well as creates policies that are comprehensive, transparent, and customized to each business’s needs. Next works with state insurance regulators to develop innovative solutions for small businesses, including on-demand coverage and more sophisticated uses of AI/machine learning for underwriting and claims settlement.

After a successful $47 million Series B funding round, Kin Insurance recently launched Kin Insurance Network to become a licensed home insurance carrier in Florida. Since 2016, Kin is committed to serving coastal homeowners most impacted by climate change, an underserved segment in the insurance industry.

Metromile offers a pay-per-mile car insurance model and uses data to optimize how they use their car to provide instant access to detailed vehicle diagnostics via the driving app. In 2018, Tokio Marine Holdings Inc licensed Metromile’s Connected Intelligence Platform, which leverages AI to provide insights into a customer’s lifetime value and improves their claims journey by integrating targeted data throughout their lifecycle.

Neo-insurers have recognized their customers prefer immediacy, accessibility, and speed when it comes to dealing with insurance, and have thus shifted the pressure onto incumbents to transform their own customer journeys radically.

The pursuit of digitization has placed the insurance industry on the precipice of a paradigm shift. At the core of a neo-insurer’s value proposition is a digital transformation of the customer’s journey. Neo-insurers have grasped the concept of providing an innovative customer journey by integrating artificial intelligence (AI), digital technologies, data-driven claims handling, automation (reducing the cost of a claims journey by almost 30%), and a continuous feedback loop with customers.

Global InsurTech funding reached $1.4 billion in Q2 2019, with Lemonade alone raising $300 million. As the industry matures, incumbent insurers will continue to exist as they support profitable businesses that insurers would rather not disrupt. However, their sustainability will be questioned as the enormous operational cost will prove untenable. Partnerships with neo-insurers could loom on the horizon, especially those who have identified opportunities to industrialize their platforms for a broader set of customers.

This kind of emphasis on customer-centricity has appealed to a younger generation of first-time insurance buyers. Going forward, it seems likely that these digital natives will continue to seek neo-insurers for simple and affordable policies, convenience, and a frictionless customer experience backed by intuitive digital processes.