Last week we attended a masterclass by Tom Holkenborg aka Junkie XL, aka JXL. Once a world famous DJ who sold millions of records with number 1 hits in more than ten countries. Now a sought after composer of soundtracks for Hollywood blockbusters such as Mad Max, Batman - and Kung Fu Panda. Tom also took care of the music score in FIFA18, the new edition of the popular video game, that was released last week as well. When someone in the audience asked what on earth got into him to compose music for a video game, Tom answered that at the day of the launch of FIFA18, no less than 36 million people listened to his music for hours. "An audience that big ... impossible to reach on a single day via traditional media such as radio", he said.
Not only the media have changed in less than a decade. The business model of artists totally shifted as well. Ten years ago, an artist got 70 cents on the dollar for every song downloaded at iTunes (downloading a song typically costs 0.79 to 1.29 USD). Nowadays, in the age of streaming services like Spotify, an artist receives a tiny 0.0022 USD for every streamed song, just a 0.03% (!) fraction of the royalties received for a single download.
Photo: Tom Holkenborg NFF Masterclass
It just shows how the music industry has changed because of digitalisation. And so has for instance the media sector, banking and the travel industry. Insurance may well be next. Insurtechs offer fresh ideas, intuitive concepts, and are close and quick to market. A few years ago there were only a handful of these insurtechs, now there are over 1,500 worldwide according to our DIA database and our research team is adding new startups each day. Although new entrants have not yet succeeded to force incumbents out of the market, sooner or later that may happen, of course. To many insurers this is reason enough to become jittery, and feel the need to have a better overview, more understanding of, and grip on what goes on in the insurtech world, and what developments and players to take less or more seriously.
Better overview is required
15 minutes of Google will give you already dozens of insurtech classifications that try to create the so much needed overview of the constantly growing insurtech landscape. Each and every one of these show how difficult that is. None of the classifications is 'MECE', Mutually Exclusive, Collectively Exhaustive. Some insurtechs fit in more than one category. And if you want to plot a new groundbreaking insurtech into a classification it often turns out to be impossible. Apparently, real innovations are very hard to categorize. On top of that, these insurtech-classifications are usually rather superficial. Dimensions used to categorize are for instance the various technologies used, or the number of steps in the value chain. But often the true essence of a new company is the deeper underlying business model.
New insurtech classification
Alexander Braun and Florian Schreiber from the Institute of Insurance Economics of the Swiss University of St. Gallen have brought this to a whole new level in their survey ‘The Current InsurTech Landscape: Business Models and Disruptive Potential’. The academically substantiated classification they introduced ensures a better understanding of what an insurtech really involves by looking at the different business models. The degree to which an insurtech is financed can subsequently become the grade for the actual disruptive potential of an insurtech. In insurance above all others, the available funds determine the stamina.
Limited number of disruptors
Braun and Schreiber not only created a new classification, they also plotted more than 100 insurtechs in the model to gain insights in the current state of the insurtech sector. We asked Alexander Braun and Florian Schreiber about the real level of disruption we may expect.
Alexander: “The vast majority of insurtechs currently pursues a cooperative approach. Only a small portion are potentially disruptive game changers with a powerful new business model. Think of genuine peer-to-peer concepts such as Etherisc that directly link capital to the risk of customers, and therefore render traditional insurers redundant. Or think of truly personalized insurance services, such as Sherpa, which rely on an individual risk analysis and a 360⁰ tailor-made coverage, as opposed to the one-size-fits-all approach that is still common practice in the insurance world. However, it is not only about a promising approach alone, as success will also depend on the ability to attract sufficient funding.”
Disruption by combination
Of course now having the perfect MECE insurtech classification in place leads to the question what specific categories are the most attractive? In which category can we find the best and most game changers?
Alexander: “Looking at potential game changers our study revealed that real innovations go beyond a 'simple' digitization of the classical insurer or broker model by adding an own twist to it. In other words, pure technological improvements are not sufficient – they need to be embedded in a smart business model to unlock economic value. The much-praised Lemonade for instance, combines several business model patterns. Lemonade can be classified as a digital insurer with a quite special peer-to-peer aspect. They break up the inherent conflict of interest between policyholders and shareholders by taking a fixed fee rather than keeping unclaimed premiums. This means that the insurer and its customers do not have to 'fight over the same coin'. Furthermore, instead of returning any unclaimed premiums to policyholders like some other peer-to-peer companies do, Lemonade disburses this money to charities that are selected by the customers upon the purchase of their insurance contracts. Lemonade calls this 'partnering on purpose'. In doing so, it takes advantage of insights from behavioral economics and is thereby able to speed up the claims process while at the same time reducing fraud risk. These business model innovations are paired with technological innovations such as the application of artificial intelligence, bots and machine learning to ensure rapid paperless processes without the need for intermediaries.”
Check the ‘Lemonade First Anniversary Interview’ that we had with founder and CEO Daniel Schreiber to learn more about Lemonade.
What we also liked about the study is that it also surveyed the strategies established players – insurers, intermediaries and reinsurers – are deploying in answer to the insurtech developments. Florian: “Established players use very different strategies. Ranging from active cooperation or investing to observing, in-house developing, and competing. Reinsurers (the insurer’s insurers) are the pioneers, as is proven by the investments and partnerships made by the likes of Munich Re and Swiss Re. Traditional insurers prefer a neutral stance, while intermediaries view insurtechs as a threat, and get ready to compete.”
It is remarkable that the reinsurers, furthest in the chain from the customer, are the ones most to embrace insurtechs. The closer parties are to the customer, the more they seem to feel the pressure and see insurtechs as competitors. All these new technologies change the customer’s expectations, wishes and behaviour. Established insurers have to deal with that. Since quite a number of insurtechs are better at anticipating and serving future customer needs, cooperation is becoming the strategy of choice for insurers. This makes it much easier to overcome the gap between what customers expect and what the traditional industry can currently deliver.
What holds incumbents back?
Firstly, we think there is insufficient overview and understanding on what is - literally and figuratively - on sale. That is exactly why we have set up DIA (Digital Insurance Agenda); to provide this overview and to connect insurers with 50 insurtech leaders, all handpicked by us, to accelerate innovation. And apparently, providing this overview strikes the right chord. The last edition attracted 850 visitors from forty countries and six continents.
Secondly, a strong 'immune system'. There is a notion among many insurers that ‘we can do that ourselves’. That may be the so, but often not as fast and not as well as an insurtech that has specialized on this particular square inch. We quite often see insurers that look at an insurtech, and start to find reasons as to why it’s not going to work anyway, even when that insurtech is part of the same family. Not invented here, of 'a strong immune system', as an insurer worded it more favorable. Because we deem cooperation with insurtechs essential, we’d rather call it 'acute organ rejection'.
Insurtechs want to team up
In contrast, Braun and Schreiber argue, insurtechs are eager to cooperate. That corresponds with our own analysis of the 1,500 insurtechs in the database.
Alexander: “The bulk of them aims mainly to accelerate digital transformation and innovation in the insurance industry. In the UK, Trōv is working with AXA, with Suncorp in Australia, and with Munich Re in the United States. By teaming up with incumbents, Trōv makes use of the scale of these large established parties. And in turn, those big insurers can take a look behind the scenes and acquaint themselves with an entirely new business model. Trōv’s partnership with Munich Re in the United States is especially interesting, because in this business model Trōv handles distribution, with reinsurer Munich Re handling the risk. Traditional insurers play no part.”
Insurtech capital Munich
The ultimate in cooperation can be found in Germany. Twelve insurers, ranging from multinationals such as Allianz and Munich Re, to local players like Die Bayerische, HUK Coburg and Nürnberger Versicherung, have all put money into Werk1; ten insurtechs located in an old cookie factory in Munich. And because these insurers are convinced that it is about continuously developing a stronger ecosystem, they have launched Insurtech Hub Munich in July 2017. The Insurtech Hub Munich initiative is unprecedented, in terms that twelve insurance carriers, big and small, are working closely together with leading universities and research institutions, with the State of Bavaria, the City of Munich and with blue chip corporates from adjacent industries such as automotive and health care.
Our DIA database shows that no less than 180 insurtechs have ties with Munich. To put that into perspective: California, where Silicon Valley is situated, host exactly 160, according to Braun and Schreiber’s survey. That makes Munich the de facto insurtech capital of the world. The activities of Insurtech Hub Munich will strengthen that position even further. For us, it’s reason enough to have the next DIA take place in Munich.
By the way, Etherisc, the blockchain insurtech that Alexander mentioned as well as the sensational peer-to-peer insurer Lemonade are both part of the lineup
Back to Tom Holkenborg's masterclass
Tom vividly shared how biometrics played a key role in creating Mad Max. Imagine a theatre packed with fans for a full blown consumer test. But the viewers are not interviewed afterwards whether or not they liked the movie. Instead, using all sorts of sensors patched to their body, every physical and emotional reaction is registered throughout the whole length of the film. Heartbeat, respiration, perspiration, muscle tension, skin tension, eye movements, and much more, are combined with what's on the screen that very same split second. The data analysis yields magnificent insights on the effects of the music and sound, on how to cut to maximize the effect and much more - to improve and finalise the movie to perfection.
It immediately came to our mind that it would be extremely interesting to apply this research method with the same passion for detail and quality to the customer journey of let's say an insurance claims process.
Please note this is a picture from the Mad Max movie, not the sensors used in consumer testing.