Investments in Online Insurance Sales Booming
There is a gold rush going on among both start-ups and established insurers to stake a claim in the booming market for online, direct sales of insurance to small and medium-sized businesses.
“We’ve seen the rest of the old economy disrupted over the past decade, first by the internet, then by mobile, while traditional insurance business has marched along largely unchanged, protected by complexity, regulation and inertia,” said Josh Stirling, Boston-based managing director and senior vice president, U.S. insurance, Sanford C. Bernstein & Co.
But with the inexorable advance of technology unlocking the power of big data and inspiring a new wave of customer-centric insurance, he said, many entrepreneurs are looking to disrupt the $250 billion-plus commercial insurance industry market.
Many industry titans, not wanting to be left behind, are pouring money into R&D and big data and deploying capital through strategic venture funds in an attempt to catch up in this market.
“Insurance companies are up against serious existential challenges as increased market disruption continues,” wrote the authors of a new Deloitte Center for Financial Services report.
“If insurers don’t re-invent themselves in fundamental ways, they stand to lose significant market share to new players.”
Sabitha Majukumar, UK-based senior research analyst, worldwide insurance strategies at IDC Financial Insights, said, “Third-platform technologies — mobile, social, cloud and big-data — are paving the way for small-business insurers to establish a direct connection with consumers in a market once exclusively dominated by intermediaries.
“With a clear shift in consumer preferences to buy online, insurers are presented with a great opportunity to complement their existing distribution system with online sales.”
IDC’s recent report, “MaturityScape: Digital Transformation in Insurance” noted that success in such ventures “depends on offering an omni-channel model where simple, transparent and configurable products are sold through company websites, mobile channels or aggregator sites with an option to also connect to an insurer’s contact center or agent for after-sales queries and service.”
New Companies Sprouting Up
As a sign of changing times, an impressive amount of new capital is invested in start-ups in this space: $13 million in venture funds going to Next Insurance in March, $2 million in start-up money from a number of angel investors for New York-based CoverWallet also in March, and $2 million in seed money for just-launched Bunker of San Francisco.
Add to this investments in their own operations by such big players as Berkshire Hathaway, The Hartford, and AIG (as part of a joint venture).
That’s in addition to those from the initial pioneers of selling insurance to small businesses in the U.S., Insureon (which attracted $31 million in venture money last October) and Hiscox USA.
“We continue to see small businesses, especially those with fewer than five employees, turning to online resources to research and purchase insurance.” –Stephanie Bush, executive vice president of small commercial insurance, The Hartford
The joint venture announced in late April by AIG, Hamilton Insurance Group Ltd. and affiliates of Two Sigma Investments LP seeks to establish a technology-enabled, customer-centric insurance platform to serve the market for small and medium enterprises (SME).
It is banking on Two Sigma’s data science and technology platform, Hamilton’s technology and underwriting expertise in the SME market, and AIG’s SME expertise and reach to make its mark.
At The Hartford, the goal is to combine new online capabilities with its traditional agent-focused resources to serve the small business sector.
“We continue to see small businesses, especially those with fewer than five employees, turning to online resources to research and purchase insurance,” said Stephanie Bush, executive vice president of small commercial insurance at The Hartford.
“We provide these customers with the option to obtain a quote from an agent or through our internal sales team.”
Online quoting is available for the group’s Business Owner’s Policy (BOP), workers’ compensation and commercial auto insurance, Bush said.
“The product features and pricing are the same whether they decide to purchase insurance through one of The Hartford’s independent agents or our internal sales team,” Bush said.
“With both options the customer can make a purchase with the live advice from a licensed agent.”
“Cover Your Business,” a new division of Berkshire Hathaway serving the small business market, was launched in February, offering BOP, workers’ compensation and commercial auto by way of an online, direct platform, said Pete Shelley, recently promoted to president of the group.
“We plan to eventually add umbrella and professional lines,” said Shelley.
The rise of a tech-savvy millennial generation is playing a significantly growing role in the rise of the SME market.
“Much of today’s investment in technology start-ups is targeted at millennials, who would rather access insurance online than meet with an insurance broker,” said Peter Breitstone, former EVP, sales, programs and facilities at Insureon, and now CEO of Breitstone & Co. Ltd., a New York-based firm that advises technology companies, insurance carriers and brokers in the SME markets.
“The assumption is millennials will want to buy insurance online the same way they buy financial services and other products,” Breitstone said.
This growing phenomenon to market insurance via online, direct channels to small and medium-sized businesses was set in motion in the U.S. when New York-based Hiscox USA launched a version of its current model in 2010 under the direction of Kevin Kerridge, who led the launch of a similar service in Great Britain prior to that.
Hiscox launched its service with professional liability, said Kerridge, executive vice president of the direct and partnership division at Hiscox USA.
“Since then the program has expanded to offer BOP and general liability coverage through our online coverage,” he said.
“We have expanded to 49 states and D.C. and later this year we will make our Artisans Contractor [plumbers and electricians] product available.”
Since its launch, Hiscox USA has invested $200 million in its operations, all coming from internal funding by its Bermuda-based parent company, Hiscox Insurance Co., Kerridge said.
Another early entrant in this now-rapidly developing space was Chicago-based Insureon, which launched its online, direct service to sell insurance to small businesses five years ago. The company is growing at a pace of about 30 percent a year, according to CEO Ted Devine.
Devine said that at its launch, Insureon offered three products: BOP, workers’ compensation and general liability. Since then it has added commercial auto, homeowners, farm and ranch, and cyber.
Insureon got a major venture capital boost last October when it received $31 million in new funding from a group led by Oak HC/FT, a venture capital fund investing in financial technology companies.
Also participating in that round of financing was Accretive, a private investment firm specializing in funding disruptive technology companies, which built Insureon and led the company’s previous rounds of financing.
“The financing will enable Insureon to increase its technology development and enhance its sales and marketing activities targeting small business,” said Devine.
For most of its existence, Insureon marketed its services strictly online. But recently the company has expanded into television advertising and the use of billboards.
But Devine, like Kerridge, stressed that traditional agents will always be part of the insurance sales proposition. He noted that it took online sales of auto insurance, driven by companies like GEICO, 10 years to reach a tipping point at which more sales were consummated online.
“Given the complexity of the commercial product, it’s always going to have to be delivered with a lot of advice,” Devine said.
“Whoever delivers the best advice will win.”
“Venture Capital-focused Bets”
In the past three months or so, three venture capital-supported tech start-ups have emerged in this space.
First, in early March, there was CoverWallet, which received $2 million in seed money to launch a software platform that will offer risk analysis, coverage recommendations, claims support and data analytics.
Then in early June, Bunker also received $2 million in venture capital to launch what it claims is the first-ever contract-related marketplace aimed at offering insurance tailored specifically to freelance workers.
“We were able to get up and running very quickly by teaming up with Hiscox as a carrier. Getting our platform out there and getting customers on board is allowing us to develop with real-time customer feedback.” — Lacey Pevey, vice president of insurance, Next
The start-up’s first product, scheduled to launch sometime this summer, will focus on the increasingly widespread “gig” economy, in which organizations contract with independent workers for short-term engagements.
But perhaps the most compelling start-up model to emerge recently to serve the small business market is Palo Alto, Calif.-based Next Insurance.
First came deeply rooted technology expertise from the company’s three top officers, CEO Guy Goldstein and his co-founders, Nissim Tapiro and Alon Huri.
The trio worked together at mobile payments company Check until it was acquired by Intuit for $400 million in 2014.
Then, in late May, the company received $13 million in venture seed money from another trio, Rabbit Capital, TLV Partners and Zeev Ventures.
But there was one more essential wave needed to pull it all together. Enter Lacey Pevey, recruited from AIG where she was chief underwriting officer for its financial institutions group, to become VP of insurance for Next.
“Next-insurance.com is live and we are already offering general liability and professional liability for many different classes of business,” Pevey said.
“We were able to get up and running very quickly by teaming up with Hiscox as a carrier. Getting our platform out there and getting customers on board is allowing us to develop with real-time customer feedback.”
Breitstone, a veteran of senior executive positions at Aon and Zurich North America, said the recent developments in the North American SME sector are “a race to make venture capital-focused bets, believing that InsurTech is the logical next frontier after FinTech.”
“In the FinTech arena, many start-ups focused on building the technology platform first and then only after that factored in ‘domain’ or specific subject expertise.”
Breitstone questions that approach.
“What the tech-oriented start-ups are beginning to discover is that insurance is different than finance,” he said.
“In insurance there are other drivers which suggest that they need to be much more mindful of the vagaries of insurance or the uniqueness of insurance so they can factor that into how they build their platform from the outset.
“If you are going to offer choice, you have to make sure you are satisfying each market’s unique requirements, while at the same time offering a streamlined experience that allows users to answer fewer questions and therefore make the buying experience much less challenging.”
New Policies Fill Gaps in Green Energy
Ambitious underwriters are learning to make hay while the sun does not shine. And when the wind does not blow, and the rain does not fall on watersheds.
For years, the intermittent nature of nature vexed the green energy industry. Until recently it was addressed as a technical problem of storage and backup generation.
But recently, several insurers developed coverage that offer a financial recovery approach. To be sure, the demand is coming primarily from lenders and capital investors that back green power projects. The effect, if the markets grow, will be to help normalize both power and profitability.
While the mechanisms for the new programs are new, financial weather instruments are not, said Michael J. Perron, senior vice president for Northeast property placement at Willis Towers Watson, and a 2016 Risk & Insurance Power Broker® in the alternative utilities category.
“Wind productivity was down over the last couple of years, and banks are requiring some type of protection from insureds. The industry has these wind curves and they are just not performing.”
Generators themselves are not yet asking for coverage, said Perron, “but banks are saying, ‘your charts are nice but we need protection.’
“Risk managers at the generators may feel very comfortable with the long-term performance, but banks are asking for more. In some cases the lenders or investors are named as loss payee.”
In general, Perron said, the new demands from backers and the coverage being offered to meet them is beneficial in direction, if not always in degree.
“We do push back on occasion,” he said.
Using an analogy from earthquake coverage, he noted that “we had one client for which the bank demanded $100 million of protection. We modeled the case and found that the 500-year event would cost $20 million so we suggested buying $35 million in coverage.”
Weather Risk Transfer
Underwriter GCube brought its “weather risk transfer mechanism” to North America to respond to “increasing demand from U.S. project-financed wind operators, notably those refinancing or going through acquisitions,” the company stated.
“Utilities and independent power producers have directly cited below-par wind resources as a contributing factor to net losses in 2015 and the first quarter of this year,” it said.
“This financial underperformance, if left unchecked, threatens to undermine the reputation of wind energy as a low-risk, reliable investment — particularly with the emergence of new investors with less tolerance to lower returns.”
“There can be a straight trigger payment, or more complex arrangements more like a cash flow swap or collar.”– Bill Hildebrand, executive vice president, GCube
The basic concept, said Bill Hildebrand, executive vice president of GCube Insurance Services, is a contract with wind or hydro power generators. If the wind or rain is insufficient for the generators to provide the power that they have contracted to deliver, then parametric triggers would result in a payment under the contract.
“We are seeing increased requirements from insureds on behalf of their capital providers for revenue certainty,” said Hildebrand.
“At the same time, we have had carriers come to us with contracts they would like to distribute. Weather insurance has been around for a long time with the same interest in consistency and smoothing of revenue. What is new is this type of flexible contract that we are bringing on behalf of the capacity behind us.”
GCube is using Lloyd’s syndicate papers for backing. As a result contracts can be made on different terms.
“There are options,” said Hildebrand.
“There can be a straight trigger payment, or more complex arrangements more like a cash flow swap or collar.”
The contracts are being offered only to wind and hydro generators, not solar at this point. That is for two reasons: Solar has not seen the dips that the other green energy types have, and because the performance data on solar is not as extensive.
Early in May, a consortium of carriers executed a 10-year proxy revenue swap with a large U.S.-based wind farm. The arrangement allows for hedging wind volume risks for wind farms, to try to ensure stable revenues despite uncertainty of intermittent wind.
Advances in risk modeling and maturity of risk appetite were credited with making the deal more long-term in scope.
The 10-year agreement is designed to secure long-term predictable revenues and mitigate power generation volume uncertainty related to wind resources for the 100-plus MW farm.
But solar is not being neglected. Early in May, specialty insurer Sciemus launched a policy to protect the owners of solar farms against a lack of sunlight.
The policy pays if levels of sunshine fall below an agreed amount, and it is available as a hedging instrument for solar farm operators for up to 10 years.
Other lack of sun insurance schemes are available, but they are tied into property damage programs, experts said. The Sciemus insurance can be purchased as a stand-alone.
The insurance is index-linked and pays a fixed price per unit of lost sunlight at the end of each 12-month period. It is calculated on the sunlight either at the solar farm or at the nearest weather station.
The coverage is available in Europe and North America, and Sciemus plans to roll it out into the Middle East and North Africa later this year.
Electronic Waste Risks Piling Up
The latest electronic devices today may be obsolete by tomorrow. Outdated electronics pose a rapidly growing problem for risk managers. Telecommunications equipment, computers, printers, copiers, mobile devices and other electronics often contain toxic metals such as mercury and lead. Improper disposal of this electronic waste not only harms the environment, it can lead to heavy fines and reputation-damaging publicity.
Federal and state regulators are increasingly concerned about e-waste. Settlements in improper disposal cases have reached into the millions of dollars. Fines aren’t the only risk. Sensitive data inadvertently left on discarded equipment can lead to data breaches.
To avoid potentially serious claims and legal action, risk managers need to understand the risks of e-waste and to develop a strategy for recycling and disposal that complies with local, state and federal regulations.
The Risks Are Rising
E-waste has been piling up at a rate that’s two to three times faster than any other waste stream, according to U.S Environmental Protection Agency estimates. Any product that contains electronic circuitry can eventually become e-waste, and the range of products with embedded electronics grows every day. Because of the toxic materials involved, special care must be taken in disposing of unwanted equipment. Broken devices can leach hazardous materials into the ground and water, creating health risks on the site and neighboring properties.
Despite the environmental dangers, much of our outdated electronics still end up in landfills. Only about 40 percent of consumer electronics were recycled in 2013, according to the EPA. Yet for every million cellphones that are recycled, the EPA estimates that about 35,000 pounds of copper, 772 pounds of silver, 75 pounds of gold and 33 pounds of palladium can be recovered.
While consumers may bring unwanted electronics to local collection sites, corporations must comply with stringent guidelines. The waste must be disposed of properly using vendors with the requisite expertise, certifications and permits. The risk doesn’t end when e-waste is turned over to a disposal vendor. Liabilities for contamination can extend back from the disposal site to the company that discarded the equipment.
Reuse and Recycle
To cut down on e-waste, more companies are seeking to adapt older equipment for reuse. New products feature designs that make it easier to recycle materials and to remove heavy metals for reuse. These strategies conserve valuable resources, reduce the amount of waste and lessen the amount of new equipment that must be purchased.
Effective risk management should focus on minimizing waste, reusing and recycling electronics, managing disposal and complying with regulations at all levels.
For equipment that cannot be reused, companies should work with a disposal vendor that can make sure that their data is protected and that all the applicable environmental regulations are met. Vendors should present evidence of the required permits and certifications. Companies seeking disposal vendors may want to look for two voluntary certifications: the Responsible Recycling (R2) Standard, and the e-Stewards certification.
The U.S. EPA also provides guidance and technical support for firms seeking to implement best practices for e-waste. Under EPA rules for the disposal of items such as batteries, mercury-containing equipment and lamps, e-waste waste typically falls under the category of “universal waste.”
About half the states have enacted their own e-waste laws, and companies that do business in multiple states may have to comply with varying regulations that cover a wider list of materials. Some materials may require handling as hazardous waste according to federal, state and local requirements. U.S. businesses may also be subject to international treaties.
Developing E-Waste Strategies
Companies of all sizes and in all industries should implement e-waste strategies. Effective risk management should focus on minimizing waste, reusing and recycling electronics, managing disposal and complying with regulations at all levels. That’s a complex task that requires understanding which laws and treaties apply to a particular type of waste, keeping proper records and meeting permitting requirements. As part of their insurance program, companies may want to work with an insurer that offers auditing, training and other risk management services tailored for e-waste.
Insurance is an essential part of e-waste risk management. Premises pollution liability policies can provide coverage for environmental risks on a particular site, including remediation when necessary, as well as for exposures arising from transportation of e-waste and disposal at third-party sites. Companies may want to consider policies that provide coverage for their entire business operations, whether on their own premises or at third-party locations. Firms involved in e-waste management may want to consider contractor’s pollution liability coverage for environmental risks at project sites owned by other entities.
The growing challenges of managing e-waste are not only financial but also reputational. Companies that operate in a sustainable manner lower the risks of pollution and associated liabilities, avoid negative publicity stemming from missteps, while building reputations as responsible environmental stewards. Effective electronic waste management strategies help to protect the environment and the company.
This article is an annotated version of the new Chubb advisory, “Electronic Waste: Managing the Environmental and Regulatory Challenges.” To learn more about how to manage and prioritize e-waste risks, download the full advisory on the Chubb website.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Chubb. The editorial staff of Risk & Insurance had no role in its preparation.