Will Tech Be A Boon To Insurance Firms, Or Threaten Their Existence?

In the not-so-distant future, the insurance industry could find itself under siege from interlopers large and small.

During the first nine months of 2015, insurance technology startups such as San Francisco, CA-based Zenefits and New York-based Oscar took in more than $2.4 billion in funding, a 250 percent increase over the total amount raised by such tech outfits in 2014. That’s according to data from CB Insights, where Matthew Wong is a research analyst. During a presentation last month, Wong said funding totals are on the rise, as is the number of startups raising money to commercialize insurance-related products and services. “The deal trend is hitting new highs,” he said.

Meanwhile, said Wong, some of the world’s foremost tech companies are also entering the insurance business. They include Alibaba (NYSE: BABA) and Baidu, the Chinese leaders in e-commerce and search, respectively. Another company observers are monitoring closely is Alphabet (NASDAQ: GOOGL), which in March launched a service for comparing the rates of selected auto insurance providers.

Given this feeding frenzy, it seems a safe bet that new entrants will continue to develop novel methods and models for buying and selling policies. If these gain enough traction, the thinking goes, traditional insurers could eventually join taxis, hotels, and others on the list of groups marginalized—or, in Silicon Valley speak, “disrupted”—by technology.

But it’s not all doom and gloom for large insurance companies. Many of them have been in business since the 1920s, and over the years they’ve built large war chests and customer bases. Industry officials say the regulatory and capital requirements to become an insurer, along with the modest returns typically seen in the business, make radical change improbable. More likely, they say, is that companies will introduce ancillary services like Alphabet’s comparison tool than attempt to compete with State Farm, Allstate (NYSE: ALL), and others head-on.

Plus, some incumbent insurers already appear to be in the vanguard of technological innovation. Madison, WI-based American Family Insurance has engaged the tech sector through partnerships—including one with Alphabet subsidiary Nest Labs—and investments in startups, through its venture capital arm American Family Ventures.

There’s a logic behind the alliance between the big insurer and Nest, whose smart thermostat is a prime example of the “Internet of Things” movement, where formerly offline devices can connect to the Web and to each other. These devices in the home and in vehicles can alert users remotely to dangers such as fire and burglary. An insurer’s goal, of course, is to minimize its chances of having to pay to repair or replace the assets it backs. Given these overlapping interests, experts say supporting Internet of Things technologies could have a positive impact on insurers’ bottom lines, and help them stay on the cutting edge.

Knock, Knock

One of American Family Ventures’ portfolio companies is Santa Monica, CA-based Ring, whose flagship product is a connected doorbell with a built-in camera. The $199 device is designed in part to alleviate worries that can creep in when one is away from home. When a visitor rings the bell, residents receive a smartphone alert and, if they choose, can see and talk to the person at the door, says Ring CEO James Siminoff. They can remotely tell a solicitor “no thanks”—or to come back at a particular time—or authorize a courier to leave a package at the door.

Ring can also help make homes more secure, Siminoff says. It’s equipped with motion sensors that can activate the camera’s recording function. The images captured are automatically uploaded and saved on the company’s servers, he says, so that evidence is preserved even if a would-be intruder destroys the device.

“Almost every day, we get a report from somewhere in the country that our footage has caught, apprehended, or stopped a burglary or package theft,” Siminoff says. “Our mission is to reduce crime in communities.”

Like many startups, Ring has used outside financing to help get its gadgets onto store shelves faster. In August, it raised $28 million in a Series B round from three California-based funds—True Ventures, Upfront Ventures, and Shea Ventures—and a group of angel investors that included Richard Branson, the British business magnate and Virgin Group co-founder. The other marquee participant was AmFam Ventures.

“I think they realized that this fit their model,” Siminoff says of AmFam Ventures. “To them, crime essentially equals dollars. If you’re an insurance company, every time there’s a crime, you have to pay for the stuff that was stolen.”

In November, American Family—the larger company, not its investing arm—announced a collaboration with Ring aimed at incentivizing policyholders to install smart doorbells. Under the program, eligible AmFam customers can purchase Ring at a $30 discount, and may qualify for a 5 percent deduction on insurance premiums.

The Ring partnership, along with a similar one offering free Nest smoke detectors to qualifying Minnesota customers, suggest that AmFam views smarter homes as safer homes. And as Siminoff says, for an insurer, making homes safer is good for business.

A History Of Investing

Insurers investing in companies with only tangential connections to the industry isn’t a new development, says Robert Hartwig, president at the Insurance Information Institute, a trade association.

“This dates back to the mid and late 19th century, when insurers were one of the largest investors in the railroads, which were expanding across the United States,” Hartwig says. “They also benefited by insuring the cargo and all of the industrialization that occurred along the rail lines from coast to coast.”

Decades later, he says, insurance companies invested in real estate. In particular, they helped fund the construction of houses and apartment complexes for World War II veterans returning home to American soil. “Life insurers rode the growth curve very on, in terms of providing accommodation for people who would become their clients in the future.”

The Disruption Zone

Hartwig says that today, many in the traditional insurance industry are wary of consumers increasingly buying policies directly using online services like Oscar, rather than going through an agent. Indeed, this could be one patch of the insurance landscape where lines of computer code replace some humans, similar to how flight-booking websites have rendered many travel agencies obsolete.

“There’s concerns about the potential disintermediation of insurers,” he says. “There are other entities out there that collect information historically only collected by insurers. There’s some worry about entities like Google perhaps playing that role.”

But to frame this as a battle between old-line companies and newer, more innovative ones would be reductive. Insurers have long relied on sophisticated actuarial models to estimate risk and price policies. And they’re not performing these calculations using an abacus and pencil. “We are in the era of big data and insurers are the original big data industry,” Hartwig says.

If insurance endures major disruption, no one can be quite sure what the result will look like. One outcome Hartwig doubts we’ll see is Alphabet and other high-tech companies becoming insurers themselves.

“The margins in the insurance business are lower than the hurdle rate accepted by Google’s various ventures,” he says. “For a business to be accepted into the Alphabet soup that is now Google, it’s going to have to have a higher rate of return than is typically seen in property and casualty insurance. I don’t think Google has any more interest in becoming an insurer as it does becoming a washing machine maker.”

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