Author: Tong Sun
In 2017, interest in insurance technology began to rise due to the increase in the popularity of specific industry trends. WeChat launched its “Weibao WeSure” platform in November, led by the WeSure medical insurance and WeSure car insurance products. On September 28, 2017, ZhongAn Online Property & Casualty Insurance Co. went public in Hong Kong, bringing its market value to exceed RMB 100 billion. The company’s subsidiary branch, ZhongAn Technology, focuses on technological research in the InsurTech area. In July, Ant Financial announced that it would reveal the technology behind its Dingsunbao, or Loss Assessment Master app, which uses artificial intelligence (AI) to assess damages and claims.
Technology giants have begun to deploy and nurture the insurance market, while investments and financing of insurance startups have also become active. These are signs that InsurTech is on the verge of a revolution.
As a component of Internet finance, InsurTech is one of the most important fragments for Source Code Capital. In the past year, we have looked at more than a hundred insurance technology-related startups, which helped exponentially increase our knowledge about the insurance industry. From a single dimension to the combination of multiple dimensions, we have gradually and systematically teased out a few concepts.
Similar to other financial industries, insurance is regulated. As a large-scale fiscal platform outside of banks that interact with large-quantities of consumers, insurance requires licenses in order to operate. Therefore, these licenses are the first entry barrier as they are difficult to acquire.
At the same time, the existence of many non-standard and long-extending products makes insurance seem like an ancient concept and unfit for e-commerce. These factors contribute to why the “Internetization” process of the insurance industry did not gain in size or speed. Instead, other iterations were explored.
There are, however, obvious macro trends that have brought new dividends for entrepreneurs. Let’s take a look at some of these changes.
- From “6070” to “8090”
Change began from customers who were themselves undergoing changes. According to data published by Ant Financial and CBNData, consumers of Internet insurance consist of the younger generation, 47% of whom were born after 1980, and 33% after 1990.
These changes took place rather quickly. In fact, this is the effect of the synergy between insurance and consumption where insurance promotes a new form of consumption, which in turn, stimulates consumer demand for insurance. This concept has been spearheaded by individuals born after 1980 and 1990 who want to learn about insurance in an early age. This is the new user dividend.
- From “passively promoting” to “actively consulting.”
Changes in user base have brought a shift in spending power and in the willingness to spend in dealing with selecting insurance products. As the user base becomes progressively younger, the demand for insurance products also increased. The level of knowledge and spending habits among users determine how the insurance product is purchased. At the same time, it has also brought about some changes.
Instead of being bombarded with an overwhelming number of insurance employees promoting products, consumers are leaning towards a more logical choice based on transparency. This new group of consumers are attracted to more cost-effective products and objective recommendations. This is where Internet+ will thrive. Internet+ is a term used to describe the application of Internet and other information technology to traditional industries, bringing insurance from offline to online.
- From “aggregating traffic” to “distribution center”
It is understood that the front-end of insurance requires a steady stream of users and traffic to be converted to effective insurances. However, this is just the first step.
By analyzing experiences from across the globe, there is an understanding that insurance acts as a connector. It can be used for many reasons, from life experiences such as travel and retirement, to fixing mistakes like a broken phone screen or the return of purchase. If there is an opportunity to turn “insurance liability” into “associated services,” it will double the value inside the industrial chain.
The combined powers of the Internet and advanced technologies result in connecting the industry in a way that has never been done before. As front-end traffic innovations become more systematic, the value and dividends in back-end distribution will also be created.
Based on this information, Source Code Capital has developed the following analysis that divides Internet insurance into four different dimensions, some horizontal and some vertical. The mixture of these distinctive dimensions can be combined to pinpoint unusual and small sectors.
We can also try to imagine what the big opportunities are that will push the industry to revolutionize. Some questions we would want to ask are: What kind of company can connect these four dimensions? Also, will this company become the next giant?
1. Categorized by insurance type
Understanding insurance classification will help identify potential opportunities in each category.
According to data from the China Insurance Regulatory Commission, premium revenue in China is constantly growing at an uncontrollable rate. In 2016, gross premium revenue reached RMB 3,095.91 billion; this is an increase of 27.5%. Property insurance premium revenue reached RMB 872.45 billion, which is not an outstanding increase in growth. However, individual insurance premium grossed RMB 2,223.4 billion with an increase of 40.2%, the first time in five years that the growth rate exceeded 40%.
Compared to social insurance under the social security system, we are more focused on opportunities in the area of commercial insurance, specifically in the large markets of property and personal insurances.
(1) Car insurance is the main focus of property insurance, with space for innovative liability insurance
Car insurance is a Red Ocean market consumed by price wars. The channel costs are high, but with most being shouldered the consumer. Adding on the policy changes in car fees, the profit margins are thin, and the space is small. A potential focus would be on service claims, with the help of AI and data; opportunities exist in the various segments of insurance that correspond to collisions. It is likely that liability insurance will gradually replace car insurance with the advent of new technologies, such as autonomous driving.
Other types of insurance include individual property, corporate property, and agricultural insurance. Individual and corporate property insurance make up a small percentage of the market. Not to mention that the development of agricultural insurance is run by government subsidies, which require increased focus.
(2) Life insurance makes up the largest portion of individual insurance, while health insurance is close behind
We are more optimistic about the big opportunities within the health insurance market. There is room for improvement among Chinese domestic health insurance providers and the medical expenditure structures. These providers specifically lack experience, data acquisition, actuarial, fee control and resource integration abilities, which gives way to third-party service organizations. We should pay attention to opportunities related to upstream and downstream data companies and service companies. In addition to that, we should study the changes and applications throughout the health maintenance organization (HMO) model, which has been used by the U.S. for years.
2. Categorized by the value of the industry chain
This is the most important dimension.
Essentially, insurance is business underwriting and asset management. Insurance companies primarily make money through a mortality margin, expense margin, and an interest margin. An interest margin is comprised of investment income for insurance companies and its license value, which is a challenge for start-up companies. A mortality margin can be broadly understood as the risk probability and payout ratio, which requires work in product design and data. An expense margin is the difference between additional premium and actual operating cost, which begins with cost reduction and efficiency improvements. Therefore, we are trying to pull apart the interlinking industry points to find valuable targets and new opportunities.
(1) Product Innovation:
One of the main responsibilities of insurance companies is to design products, which is the daily work of actuaries. In other words, insurance companies are extremely capable of designing and replicating the best-selling insurance products on the market. However, this capability does not protect insurance companies or make them stand-out.
We believe that one aspect of true product innovation comes from discovering new scenarios. In some scenarios, for example, start-ups are stronger than insurance companies when it comes to using a heavier approach in integrating scattered needs. Another aspect of product innovation is the ability to source unique data in order to support actuarial models and pricing. This gives a cost performance advantage since many insurance products are still fairly expensive. Therefore, if start-ups can use data to weaken product obstacles, then their product could not be easily duplicated by insurance companies.
(2) More Effective Channels:
Insurance companies rely greatly on sales channels. In the past, due to similar products created by conservative actuarial assumptions, companies relied on hiring a large number of people to drive sales. The higher the insurance premium, the more expensive labor costs will be. In the life insurance sector, other than low-cost bank insurance channels, most other agents take 20-35%, while the mid-level executives take another 40%. In car insurance, with the claim rates at 40%, insurance companies make only 5%, and the rest goes to the cost of sales. This is why the sales process is inefficient and unprofitable. The question then becomes, how do we lower costs while increasing efficiency?
One possible solution would be to acquire customers at a low cost through content by having users better understand insurance products as information becomes more symmetrical. At the same time, companies should standardize the purchasing procedure and adjust technological capabilities within the process. These technological changes would include making the buying process smoother and faster by cutting out the middleman. These changes would enhance the user experience immensely.
Another possible solution would be to empower professional agents. These are the salespeople who have established themselves within the development of the industry. Their responsibilities would include acquiring, managing and servicing customers, which is the key to improving efficiency. Looking solely at the agency, there is an opportunity for the Internet to handicap these organizations which just act as the middleman.
(3) Service Optimization:
Whether it is the process of underwriting or settling claims, insurance products need the full support of service optimization. Yet, the departments responsible for underwriting and claim settling are not profit centers. Therefore, the staff is limited, preventing the capability to provide outstanding service.
We believe that future opportunities in this area will move from sales channels to services. Whether it is a third-party administrator (TPA) or a data and technical company imbedded within InsurTech, they are going in the right direction. InsurTech is gaining value as they help insurance companies realize more effective processes. These processes include automating data, image recognition and processing, which helps implement anti-fraud early warnings and claim settlement fee control. However, what investors need to consider is the benchmark for value realization, and where this will end up.
If a company can achieve these tasks, then they are ready for the next phase. By taking care of front-end product design, product sales, and the integration of back-end claim settlement services, insurance companies have the chance to implement the managing general agent (MGA) model. We look forward to seeing innovative companies use this model.
3. Categorized by 2B or 2C
During the early stages, we experienced mass amounts of direct consumer-facing (2C) products with “scenario risk” as the breakthrough. Their logic was that the 2C market is large enough for customers to be acquired at a relatively low cost in some high-frequency scenarios. However, we quickly realized that traffic belongs to the scenario and the inability to control the scenario means that there is a failure to control customers. This allows for the possibility of being replaced once sale volume grows. At the same time, customers acquired at an extremely low cost are likely to look for bargains rather than those with the ability and willingness to purchase insurance. With this information, it can be understood that it will be fairly difficult to generate more conversions from those individuals in the future.
Afterwards, we analyzed many business-facing (2B) products which we segmented into two groups. The first serves insurance companies or agencies, such as developers of software as a service (SaaS) systems or tools for agents. The second group services companies and can be understood as indirectly 2C, designing products that fit certain scenarios. The commonality between the two groups is that there are no obvious competitive advantages on the technological side. There is more value in looking for the head instead of the long tail of the business market. However, the bigger the company, the harder it is to negotiate and a large amount of their time is spent trying to communicate between the two. In addition to low efficiency methods, another major risk includes changing personnel. The strong network effect is especially visible when collaborating with large insurance companies, which makes this difficult for many startup companies.
With that said, we came back to evaluate 2C opportunities. As we mentioned earlier, there is a gradual but unforgettable trend which is that consumer demand is starting to transition from passive purchases to ongoing consultations. The “lack of high-quality products” and “the long-term imbalance of insurance knowledge” has been gaining consumer demand for some time now. Internet+ for financial products and services is bound to expand into other areas such as insurance and wealth management. If someone can solve the above problems, for example, by having more appropriately priced products or more objective content and consultation services, they will slowly permeate and educate the market, thus revealing many opportunities for high conversion rates in the 2C market.
Of course, 2B opportunities were re-evaluated as well. If we understand the players who can quickly establish industry connections, or if all sectors are tied by relationships, then certain scenarios can be avoided. However, we must also have the ability to access data while easily integrating and educating. Then, ingenious product breakthroughs will be generated and there will be a rush in demand from the business end.
4. InsurTech Infrastructure
Like FinTech, InsurTech is the source of innovation that will fuel the industry’s future development, akin to the infrastructure and source of strength and similar to the Internet’s role in the industrial revolution. Since there is still room for a buildup of insurance systems and innovative technologies in China, we need to have a more global perspective to capture cutting-edge technologies and industry applications.
Possible areas of focus:
(1) AI + Insurance: ex. Lemondade, Tractable, Insurify
Position replacement: Utilize image recognition and natural language processing technologies. This technology must be used in areas such as underwriting, customer service and claim settlement in order to replace humans and decrease operating cost.
Smart Insurance Consultation: Data and algorithms can more accurately promote insurance products to users, therefore, enable more effective consultations and customized solutions.
Anti-fraud: Utilize technologies such as image and facial recognition.
Investment Abilities: Leverage data and vast amounts of research to increase the efficiency in insurance asset allocation and improve transaction strategies.
(2) Blockchain: ex. Tradle, Safeshare
Blockchain will change the working principles of the insurance industry from its underlying structure.
The main focus is on smart contracts to identify personal authentication, claims against insurance fraud and real-time insurance based on the shared economy.
(3) Internet of Things (IoT) & Data: ex. Aviva, RiskGenius
Based on the acquisition of new data sources in IoT, there must be a relationship between the insurer and the insured to allow for modern risk management capabilities. This segment will take time.
Underwriting Risk: This includes data on patients with chronic diseases or usage-based insurance (UBI) collected on car owners.
Claim Settlement Risk: Using facial recognition to identify duplicate photos in order to prevent insurance fraud or other related issues.
This article encompasses some insights from Source Code Capital on the insurance industry. Due to article length limitations, additional details will not be included. The insurance industry is complex and profound, and we will continue to iterate our understandings by tracking and staying in tune with changes and opportunities within the industry. If you share some of the same thoughts, please contact us as we look forward to exchanging ideas and learning from others.