Quick Hits:
1. Notre Dame was preventable.
2. Loss prevention creates a lot of value.
3. Sometimes the best “innovations” are improving what already exists rather than creating something new.
4. Loss prevention as a service could be a great insuretech business model.
Don’t “Disrupt”, Solve a Problem!
I have generally rolled my eyes at most “insuretech” startups. For the most part, they are form over substance and trying to create an answer for a question nobody asked.
While making insurance “easier” to buy is nice, it’s not a game changer. People typically don’t pay for convenience. Amazon Prime is the exception not the rule (e.g. nobody pays more for food that has more functional packaging even though food companies spend a fortune on better lids and easier ways to open things).
What people pay for is solving a problem. Meet an unmet need! Make an opaque market more transparent. Reduce hurdles to price discovery.
Insuretech has generally pushed these ideas aside to focus on “sexier” things like magical underwriting or claims processes that make things “faster” and “simpler”. These aren’t bad things certainly. They’re just not enough to be more than a niche business. More importantly, they’re pretty easy for bigger companies to copy if they succeed.
So what’s an example of solving a problem? Preventing losses in the first place. Surely nobody wanted to see Notre Dame burn to the ground so we could create some GDP by rebuilding it!
Avoiding Losses >>> Paying Claims
I know if I could divine the future and knew with certainty my house would burn down, I would pay a lot more than my current insurance premium to have the loss prevented even though it would mean forgoing a claim payment and thus “benefiting” from my insurance.
The obvious problem with that logic is I can’t tell the future so I don’t know if loss prevention is worth paying for in my case. Fair enough.
Yet, many people pay for home security service (~25% of homes) to prevent a break in (and get insurance discounts for doing so!) even though the odds of a loss are pretty small (~2%) so there is a clear market for loss prevention.
IOT To The Rescue?
We’ve all heard of the “Internet of Things” (IOT). It probably seems obvious to anyone reading this that “hey, we can use these sensors to prevent insurance losses“. Slap a sensor on a pipe or a boiler and tell us when it is about to break. And, indeed, we can but yet adoption seems slow.
When there is an offering from an insurer, it’s something like “we’ll give you a discount if you have Nest” which is the traditional backwards looking way of loss prevention. This can lower loss but it also lowers premium rather than finding a way to get paid for preventing losses.
I’m sure some will some will argue that I am underestimating the pace of adoption but let’s go back to the case of Notre Dame. Given the huge financial cost of replacement and the immeasurable social cost of losing an iconic building, how were there no sensors to alert the church or the government of the structural weaknesses years before the fire? Why weren’t there satellites taking frequent pictures of the roof to tell someone it was a mess?
The only reason repair work was even being done was because an architect (I believe, can’t find the source right now) wanted to make a model a few years ago and climbed up to get pictures and alerted others to the holes and other damage to the spire and roof that he found. Otherwise, the risk would have been completely ignored.
While sensors may get most of the attention, the opportunity in aerial imagery seems at least as significant. Yes, this can include drones but there are less invasive methods like new lower cost satellites that can take frequent pictures and look for changes.
These are not very expensive anymore (e.g. retail investors use them to assess store traffic by taking pics of how full parking lots are) and would seem to be a pretty easy way to figure out whether important relics have holes in their roofs.
Concluding The Obvious
Let’s jump ahead to the fairly obvious conclusions before doubling back to how to implement it and what the challenges are.
1. Commercial property losses could be significantly reduced by smart use of technology (e.g. sensors, satellites, drones, etc.).
2. Insureds would find great value in this.
3. Insurers would initially find great value in this, but then they would complain about all the premium they are losing (see “aviation insurance pricing”).
OK, I’m sure there are a few of you jumping up and down saying “there is already a company who does extensive loss prevention for commerical property…FM Global!!!” Yes, you are absolutely right.
FM has done some incredibly innovative things over the years. For all I know, maybe they are leading the charge in using new technologies to modernize their process and I have just provided a commercial on why all property owners should use FM.
Loss Prevention As a Service
If not, then what am I suggesting is someone update the FM approach and take it to the next level, call it loss prevention as a service (remember, be the security monitoring company), get a fancy multiple, and act as an MGA where you can get paid profit commissions for generating low loss ratios for insurers.
There does appear to be somebody trying to do something like this (maybe more than one, but this is the one I found)! Corvus is an insuretech broker who is trying to use IOT for loss prevention and marketing better outcomes as a way to gain clients.
Interestingly, they backed away from a commercial property product to focus on cargo which proves my ideas aren’t original and maybe not even good! Or maybe that the opportunity is still out there if one comes up with a better approach?
The Cannibal Risk
Now, the main objection to going down this path is you cannibalize yourself. Again, look at the aviation industry as planes became safer. The premium disappeared.
The truth is someone is going to figure out how to reduce losses with technology eventually and it may not be an insurer. So you can either let a tech startup get all the rents and still watch your premium disappear or you can do something about it.
The “do something” is re-assess how value is created. It’s not just receiving premium and paying claims. Use your expertise in understanding losses, figure out how to prevent them, and get paid for helping clients avoid losses.
It’s admittedly a hard mental concept to get one’s head around but there are ways of proving the absence of a loss statistically versus a benchmark. One only needs to look at what Progressive has done with telematics and their subsequent loss ratios to see you can demonstrate that losses can be predicted and avoided.
And while Progressive trades at a healthy valuation vs. most other traditional insurers, service companies without big balance sheets tend to trade a lot higher. Building a recurring revenue stream from loss prevention monitoring could quickly create a market cap that dwarfs a traditional insurer that only uses prevention to give premium discounts.
Wrapping Up…
OK, let’s wrap up. Did I click bait you talking a little about Notre Dame and a lot more about loss prevention? Sure did. My apologies. However, the genesis of the topic did come out of “if all this technology is really so disruptive how come it’s not used in places where there is an obvious need”? There is a very wide gap between ideas and execution!
If any insuretech VCs are reading this and want to fund my brilliant business plan, I’m not hard to find! For the rest of you, when some day you see someone pull this model off, try to remember where you heard the idea first!