When insurance is simply a guessing game!

By Rick Huckstep

Throughout the last century, the significant majority (90%+) of general insurance products were distributed through intermediaries who represented the insurance company in front of the client. These were local agents or brokers and they influenced the pricing based on their assessment of the risk directly with the customer.

For the insurance carriers who sat behind the intermediary, their focus was two-fold: fine tuning their underlying actuarial risk models; and managing the claims process cost effectively. The two areas of focus were interlinked with the claims history fed back into the actuarial models to refine the risk assessment for the different classes of business being covered.

The world was simple, and then came the Internet!

And now the world is very different. Except that insurance carriers still operate the same business model.

As margins have been squeezed, there’s a strong focus on managing down the cost of claims. And as more and more data is available in the world, the carriers look at ways to improve the actuarial risk and pricing models at the heart of all insurance products.

But essentially, the insurance carriers still operate the same focus on underwriting and claims handling.

For the broker, their customers have steadily moved away to buy insurance from somewhere else. Whether it is direct from the insurer with a phone call, or online, or from an aggregator, general insurance has been commoditized. There is less demand for a personalized service from the local broker.

The puck is headed towards on demand, personalized insurance protection. You buy insurance as you need it and only for what you need.

We see this with travel insurance and the option to provide cover for a trip by checking the box when you buy online. Today, there are far fewer travel agents on the High St, but the agency businesses that have remained tend to be larger and more successful than their predecessors according to a study by McKinsey & Co called “Agents of the Future”.

The report was published in 2013 and looks at the evolution of P&C distribution and the impact of ecommerce on the way consumers will buy insurance cover in the future. The report concludes, “How can insurers foster and support distribution innovation? They should not be bystanders in the evolution of the agent channel. They should encourage innovation and be as flexible as possible in giving fledgling ideas room and time to develop.”

But, we’ve already seen how difficult it is for insurers to be truly innovative. This is the domain of the Fintech startup. And in the world of general protection insurance, the puck is heading towards the demand for short-term, individualized protection cover.

Also referred to as collaborative consumption, the sharing economy is driving this demand. This is a rapidly growing phenomenon built on the premise of an economic arrangement where participants “share” rather than “own” the assets, products and services they need.

Off the back of crowd sourced and sharing businesses like Uber, AirBnB, RelayRides, Hassle, DogVacay, TaskRabbit, the demand for short term insurance protection, available at the point of demand and personalized specifically for the event is growing.

In these emerging business models, the traditional self-insurance approach will not work. Equally, the traditional approach to risk rating and pricing an insurance premium using the carrier’s actuarial models also doesn’t work.

To illustrate my point, this year I have twice needed to add a person to a motor policy. The first was my 27 years old daughter added to her mum’s policy to drive her SUV for a weekend. The second was to add a 51-year-old friend of mine to drive my Jag back from France. On both occasions the one-off cost was c10% of the annual premium.

That might just be coincidence, but this illustrates the type of demand for short term, individualized insurance policies driven by the sharing economy. And in doing so, it challenges at the very heart of the way insurers rate the risk of cover.

no-guessing-game-smartbrief-open-forum-432And, what it says to me is that this was a guessing game and there is no underlying risk model to rate this type of cover.

Which leads me neatly onto a conversation I had this week with Nikolaus Sühr, CEO and founder of insurance startup Kasko. I wanted to find out more about how the agent channel could be developed to serve the growing demand for personalized, on demand cover.

Nick started by setting context with the size of the market in Europe and North America. In the $830bn personal non-life sector, less than 10% of all cover is offered at the point of demand.

And for insurance carriers, they are faced with three hurdles to the creation and distribution of new on demand products to the online economy;

First – new actuarial risk models are needed as an alternative to the current models. The traditional models are built from extensive data sources and claims history collected over many years. But these models are geared for the old way of providing insurance protection. These old models don’t cater for my friend to drive my Jag for one day. However, this is the direction the puck is travelling and the carriers that learn to underwrite these demands the quickest will establish market-share.

Second – back end integration of the carrier’s legacy IT with the platforms used by on demand market. This is where Kasko comes in, because they are a white-label distribution infrastructure to integrate the on-demand insurance products from the carrier within affiliate websites and apps. Kasko becomes a buy button on the platform and enables the consumer to purchase personalized insurance at the point of demand.

Third – volume! For this to work, the carrier needs volume. These will be lots of small insurance policies and the carrier will need to ensure they get a lot of traffic to drive better actuarial risk models. And although these policies will be smaller in terms of premiums, they will be much richer in terms of margins. Consumers are willing to pay a premium for convenience.

The Kasko model is B2B2C and provides a tech platform as an intermediary between the supplier or provider to the consumer at the front end and the insurance carrier at the back end. Their plan is to focus on four areas of the market;

– travel insurance, where they will provide contextualised insurance products. For example, if you book a hotel in Germany as a German citizen registered at a German address, then the chances are high that you will be using your own car. In this case, you don’t want to be offered car rental but you might want to buy an add-on for an additional driver plus a break-down cover.

– peer-2-peer car sharing – for when someone else need to drive your car and they need cover.

– property rental – to provide short term and personalized cover for anything from accidents to deposit insurance.

– peer-2-peer house services – to provide classic accident and liability insurance in this emerging sector of the sharing economy.

Over time, as Kasko enable volume to be built through its distribution platform, this will lead to better underwriting models and better pricing by the carriers (rather than than guessing at 10% of the annual premium!). And in doing so, Kasko break the current chicken and egg dilemma in the traditional carrier/broker model. The carriers can’t, today, create the models they need for tomorrow, because the traditional broker doesn’t offer a service at point of demand.

Whether you consider this to be innovation or disruption is irrelevant right now. The fact is that the industry is ripe for change and for insurance to change it has to find different ways to approach the underlying risk and pricing model. The industry has to start somewhere and for Kasko, that somewhere is with the distribution model.

And the time has never been better to address these changes head on. As Nick describes it, “this is the perfect storm for the insurers, VC money is coming into insurance; insurers are nervous because they see VC funded startups nibbling at the edges, and they see what’s happening in banking and are nervous it will happen to them”

For Nick and his cofounder Matt Wardle, speed to market is important and they plan to be live in their home German market this September. Carriers are lined up and their platform has 25 use cases as they define the on demand insurance sectors they will target. Then they will come to the UK market and expand out from there.


  1. Just some comments.

    Insurance brokers / agents do not have influence on price – usually if an insurer reduces his price he also amends the coverage accordingly. Because insurance products are complex and many customers do not understand the coverage, they just notice the price drop but not the change in cover, until they make a claim!

    This is why most insurance agents had to have errors & omission (professional indemnity) cover as most were misleading their customers.

    The internet only favored insurers as now they could sell directly to people without the costly insurance agents, prices reduced accordingly to reflect the absence of broker / agent commissions.

    However with the internet, and many insurers, came the problem of how to choose the right product.

    So enter the aggregators (or price comparison sites).

    Although heralded as an innovation in the insurance industry, the idea had been borrowed from price comparison sites for consumer electronics.

    Now, a price comparison works when you compare the same products with the same specifications for example a Samsung Galaxy S6, so its easier to make a comparison on a apples for apples basis since the specs are the same and it only comes down to price (including shipping).

    However with insurance, aggregators assumed (dangerously) that insurance products are the same.

    I guess because motor insurance is mandatory in most major markets it makes people perceive the product to be a commodity.

    But all insurance products differ in their terms and conditions.

    Its like saying, lets compare legal contracts by price! Any lawyer worth his money will tell you you cannot compare legal contracts, even worse legal contracts from different lawyers!

    Insurance policies are legal contracts and their price is determined by the clauses in the contract.

    So in fact its a bit of a lie to say you are comparing insurance products.

    All what aggregators are doing is comparing the price and not really telling people the differences in the terms and conditions!

    When it comes to on-demand insurance products you have to understand that insurance is based on the law of large numbers.

    This means insurers will take on business if there is a large (diverse) pool of people demanding that product.

    Insurance companies assess premiums (money in) and exposure (how much they will pay out if a claim arises).

    Law of large numbers is a safe bet because it means you get to take money from many to pay claims of the few.

    In insurance short and long term have different meanings.

    Just because you add your brother / sister to your insurance cover today and you remove her from the policy on Sunday doesnt make the policy short term.

    If an accident was to happen and she becomes hospitalized or suffer long term injuries that could last for years then an insurer would look real stupid for taking a few buck$ for a few days for a claim that runs into the $millions!

    Its a fine balance taking on risk on a short term basis.

    I could go on but its very clear not many understand this industry and what seem like a good solution might actually be dangerous for the industry.

    However the industry does welcome innovation especially if that innovation encourages many people to purchase insurance.

    I see kasko as a way to distribute products at the point of sale which is something that has worked wonders in the travel industry – for example you can book your flight and book your hotel as well, as well as hire a car etc….

    • The response above nailed it and explains why this statement in the article, reflecting the McKinsey report, is patently false: “Whether it is direct from the insurer with a phone call, or online, or from an aggregator, general insurance has been commoditized.” Insurance has NOT been commoditized. There may be a perception that personal lines, especially auto insurance, is a commodity, but nothing could be further from the truth. The incessant price-focused advertising by a couple of major players in our own industry has duped consumers into this myth.

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