internet of things

How blockchain technology could integrate financial & physical supply chains and revolutionize small business finance

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Small business finance is a window of opportunity big enough to drive a truck through. Yet despite years of effort by many smart ventures, there has not yet been a breakthrough to mass scale. Many digital loan processing ventures, such as Ondeck and Kabbage have reached significant scale. Yet we are also seeing high Customer Acquisition Costs for these companies and no fundamental barrier to entry against the banks (who can acquire/build/license digital loan processing technology quite easily) and there are issues with some borrowers using the systems to borrow from one lender to pay back another lender. In another area of the market, Merchant Cash Advance ventures figured out a scalable way to loan against future credit card receipts. This works in B2C (i.e for Mom & Pop retailers) but has such high interest rates that many retailers who get hooked on this will not survive. Over in B2B, the niche that we call Invoice Finance (but which is also known as Approved Payables Finance, Receivables Finance, Supply Chain Finance and occasionally Reverse Factoring) has proven the proposition to both Lender (short dated, self liquidating assets) and Borrower (low APR %) and yet despite about 15 years, none of these have reached mass scale yet. Today’s research note looks at the thesis that Blockchain technology could be the breakthrough that makes  Approved Payables Finance go mainstream.

Why Invoice Finance works for both Lenders and Borrowers

Marketplace Lending ventures have the tricky job of keeping two parties – Lenders and Borrowers – equally happy. The recent turmoil at Lending Club and Prosper shows how hard this is to do. Approved Payables Finance has the even trickier job of keeping three parties happy – buyer & seller & lender. That is why we call this niche Invoice Finance rather than Supply Chain Finance because the latter name looks at it too much from the perspective of the big company buyer (as opposed to the small company seller) but both buyers and sellers agree on the concept of an invoice.

Invoice Finance is a generic term that describes it from the point of view of the buyer, seller or lender. Generically it is cash flow secured lending as opposed to collateral secured lending and it works in B2B which uses invoices (vs B2C which uses cash or cards). Receivables Finance works on the credit assessment of the Seller (which is hard), whereas Approved Payables Finance works on the credit assessment of the Buyer (which is easy if the Buyer is big enough to have an existing credit rating).  So both buyer and seller are happy with the term Approved Payables Finance which works like this:

  • Seller sends invoice with agreed payment terms to Buyer and requests early payment.
  • Once the invoice has been approved for payment (typically because the goods have arrived), Seller requests payment quicker than the agreed terms.
  • Once the goods or service are delivered as per the agreed terms, Buyer approves the Invoice (which is now an Approved Payable).
  • A Lender agrees to finance the difference between the payment terms (say 60 days) and the requested terms (say 30 days). If the buyer is a big company with a credit rating, the credit risk calculation is simple.  For example, the risk of a AAA rated buyer reneging on a contractual commitment to pay on an already approved invoice is minimal.

The Seller/Borrower gets a low APR % because the Lender users the credit rating of the Buyer not the Seller (which is why this is sometimes called Reverse Factoring).

Lenders get what is highly prized in an age of ZIRP and NIRP, which is high credit quality, short dated, self liquidating assets. Lenders look at the arbitrage with Short Term Treasury Bonds and Corporate Bonds and back up the truck for as much as they can possibly get. That is the problem. Lender demand massively exceeds asset supply. Anybody operating in this market confirms that if they offer $10m of these assets, the Lender asks for $100m and if they offer $100m of these assets, the Lender asks for $1 billion.

What is holding Approved Payables Finance back from mass scale?

In other words, if Lenders are backing up the truck, why cannot Approved Payables Finance ventures deliver the scale they want? We see three structural impediments:

  • # 1 The long slow death of paper. The delays in paper invoice processing make Invoice Financing too difficult.E-invoicing is an obvious benefit for both buyer and seller, but paper invoices (and paper payments aka checks) refuse to die. When e-invoicing gets to something like 90%, the buyer simply tells the other sellers to switch to digital invoices. Then the Buyer gets massive savings in their Accounts Payable (AP) department. The trend lines on this are clear, but inertia is a powerful force. This is an “inevitable but not imminent” change.
  • # 2 Closed networks. The ventures that have been at this the longest, such as Prime Revenue, Orbian and Taulia operate closed networks of buyers and sellers. There is no single standard for e-invoicing, so it is based on the clout of the buyer (if a big buyer tells a Seller to use their standard in order to reduces their AP cost, the Seller may agree despite the fact that using multiple standards increases their Accounts Receivable (AR) costs. Some big buyers tie in their suppliers by offering low cost Invoice Finance (ie they become the Lender) and this gives them a more robust supply chain, but this is clearly a closed network.
  • # 3 No Secondary Market. Short dated assets such as Sovereign or Corporate Bonds that reached massive scale all have a secondary market.

# 3 will only happen when #1 and 2 happen. #1 is already happening and is inevitable. So the key is having an open network for Invoice Finance. This is where the integration of the physical and financial supply chain via a blockchain could be the game changer.

The vision of Digital Trade Finance

Banks make a lot of money on Trade Finance (as I recall from years of selling Trade Finance workflow software to big banks). They make money on three transactions – short term lending & payments & foreign exchange. Invoice Finance could be the unbundling of Trade Finance aka Digital Trade Finance.

In ye olden days of Analog Trade Finance, it felt like a throwback to Victorian days with terms like Bills Of Lading and Demurrage (for a full glossary go here). A lot of the workfkow and process complexity was because tracking the physical supply chain is so hard. This is where the arrival of Internet Of Things and Blockchain could be the game-changer.

Cracking the provenance issue and tracking shipments

Flexport is a Silicon Valley venture that raised $20m Series A in August 2015 that aims to bring freight forwarding into the Internet age (out of the Victorian age of analog Trade Finance).  TechCrunch memorably described them as the unsexiest trillion dollar startup.

We recently described how an immutable shared database (aka Blockchain) could create a better supply chain by cracking the provenance issue. This matters to consumers who want to know what they are buying. It is also matters in the B2B world where invoice approval gets held up by real world issues where the buyer wants confirmation of exactly where the goods came from and how they travelled to the buyer.

The physical supply chain now has a digital overlay. Everything can be tracked and verified from a computer. This is where the physical supply chain can now intersects with the financial supply chain.

How Fluent is tokenising the invoice

Fluent is a Lexington, KY based venture that recently closed a $1.65m Seed round. They are tokenizing invoices so that they can be tracked and approved on a blockchain. This is a critical innovation because it prevents the invoice from being refinanced (aka “double-spent” in Blockchain lingo).

It is a small step from there to a smart contract on a DAO that ensures that the right people automatically get paid the right amount. Sellers can get paid. Lenders can get paid. Intermediaries (such as a DAO) can get paid.

The key is that both the physical and the financial supply chain can be tracked on the same networks. Buyers can approve invoices on the Fluent Network once they receive the physical goods.

This is a game-changer for global supply chains and small business financing.

A Blockchain on Top of Banking

The Fluent Network’s blockchain is largely based on Bitcoin’s architecture, but purpose-built for global supply chains with specific focus on invoicing and payments. It is perhaps best described as a blockchain layer on top of the existing banking infrastructure.

Despite using a blockchain, the Fluent Network typically uses U.S. dollars and funds remain in custody of banks at all times. So this is practical and aims to coopt banks rather than being a rant against banks.

Fluent is a permissioned network of financial institutions and global enterprises that have an extended supply chain. It uses a hybrid consensus model, with both a federated system as well as proof-of-work security. The proof-of-work security – SHA-256 – works similar to the way it does in Bitcoin, but with one great difference: mining is not an open process anyone can participate in, but a closed circuit where participants are permissioned by Fluent.

As one of the founders explains it “Think of giving permission to your neighbors to come to an open house but locking up the good china for extra security. Also, because we know who the miners are, we don’t need nearly as much hashing power as you would on a permissionless blockchain.”

This is an example of a permissioned network that makes sense. At some point, a permissionless network that includes consumers may evolve and interact with this network. However right now, this is a game-changer for global trade and small business financing.

Daily Fintech Advisers provide strategic consulting to organizations with business and investment interests in Fintech. Bernard Lunn is a Fintech thought-leader

After Volvo put their money where their mouth is, does this mean the end of motor insurance? I don’t think so!

By Rick Huckstep

Back in 2008, Volvo’s lead safety expert, Anders Eugensson made this statement;

“By 2020, nobody shall be seriously injured or killed in a new Volvo”.

Earlier this year, the car manufacturer that invented the three point seat belt and made safety its core brand value, restated its commitment to the vision. “We’re trending towards zero (deaths)” and “Our vision is to make it next to near impossible (to die in a new Volvo)”.

I remember thinking “Wow” the first time I heard the Volvo 2020 mission statement. It was bold, clear and powerful. All the best corporate mission statements are just that. Customers are in no doubt what is most important to Volvo. Nor are the 110,000 employees who work for them. Nor are the shareholders of this $21bn corporation.

Then I saw this and thought triple “Wow”…

“Volvo will accept full liability whenever one its cars are in autonomous mode”.

Switzerland Geneva Auto ShowThe boss of Volvo, CEO Haken Sammuelsson, made this statement in Washington on October 8th. Again, it is bold, clear and powerful.…and demonstrates Volvo are ready to put their money where their mouth is when it comes to liability.

Both Mercedes and Google have made similar statements, although, IMHO, they are not as clear and unequivocal as Volvo.

Now, it’s worth making sure that we’re clear about terminology here. Volvo are talking about autonomous cars, not driverless cars. There is a fundamental difference between the two.

Autonomous cars look like every day cars. They have a steering wheel, pedals and a rear view mirror to hang your furry dice from. Autonomous cars use technology to take over from the driver in certain circumstances. Autonomous technology is already employed today with self-parking, lane assistance, automatic breaking, collision avoidance, and adaptive cruise control.

Driverless or self-driving or robot (take your pick) cars are very different. They don’t look like conventional cars and have no steering wheel, pedals or rear view mirror to hang furry dice from. The front seats can face backwards towards the back seats facing forwards.

Here, the “car” does all the driving from A to B, albeit using the same technology as the autonomous car.

In the autonomous car, the driver has an autopilot to share the driving. In the driverless car everyone is a passenger.

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What does this all mean for insurance?

In this recent article on cbsnews.com for the 60 Minutes show (where the reporter is taken for a drive in an autonomous Mercedes S500), the piece opens with;

“Car accidents cost us much more than time and money. They also take a staggering number of lives. Every year on American roads, nearly 33,000 people die, almost all because of driver error. That’s the equivalent of a 747 full of passengers crashing once a week for a year. Self-driving cars could save more than two-thirds of those lives. That’s what the nation’s top auto regulator told us.”

Pause for a second.

The number of driver error related deaths on American roads is equivalent to a full 747 crashing every week of the year!

In Europe, whilst there has been a steady decline in the number of fatalities caused by road traffic accidents (and by as much as 50% since 2001 in a few countries), it is still a very sad fact that traffic fatalities still constitute the most common cause of death amongst youth and young adults (source: GenRe).

1) Lower claims and lower premiums

With cost of claims accounting for around 70% of premiums, it is easy to see how any measure that radically reduces motor accidents with have a major impact on combined ratios.

In the US, motor accounts for around $175bn of the P&C market where the frequency of both Liability and Physical Damage claims resulting from motor accidents have broadly stayed that same for the 10 year to 2014. Although bodily injury average cost per claim has risen by around 30% over that time (see detailed breakdown for US market here).

In the UK market, the combined ratios for both private and commercial motor insurance have been in the doldrums for two decades.

Deloitte reported back in May that gross written premiums were down at £13bn but combined ratios had improved to 101% (this means that the industry spent £101 for every £100 is received in premium, i.e. a loss). For an alternative view and detailed breakdown, go here to request an excellent review of the UK motor industry from Towers Watson.

Of course, the flip side of lower cost of claims is that premiums will also decline as the same rate. What this means for combined ratios in the future, no one really knows. When researching this subject, I see speculation and attention seeking headlines, often on the doom and gloom side, but I’m not convinced this is a bad thing.

It will mean a smaller motor class of insurance for sure, but it might also give the carriers the opportunity to correct the out of kilter market dynamics and return to profitability. That’s a good thing in my book!

2) Shift of liability from drivers to manufacturers

Coming back to Volvo (and the other manufacturers who will follow suit), insurance protection for the motor industry will see a big shift from individual liability to corporate.

For autonomous cars, individual drivers will still require insurance protection for when they are in control. But the policy construct will change to shift liability to the car manufacturer when it is switched into autopilot mode.

Now, how that is defined, tracked, reported and unequivocally proven in a court of law has yet to be made clear by Volvo and Mercedes.

And the legislators have a lot of work to do to figure out how to prepare for this new world. They are not prepared for the changes to the insurance industry that are being driven by the motor industry. Which is why I believe we are some way off from this new world and more than the 5 years until we hit Volvo’s 2020 timeline.

But the principle will be that when you are driving, you are liable and when the car takes control, the car manufacturer is liable (subject to the car being properly maintained, updated and so on).

In this model, we have to assume that Volvo will have software in the car that will “know” if a car has been maintained regularly and if the software controlling the car is current and up to date.

Which begs yet another question; what would Volvo do if the owner doesn’t take the car for its service at the regular intervals? Would they cancel the policy? Would they disable the car? Would they insist on a punitive additional charge for non-compliance?

And then, what if there is an accident. You can just imagine the headlines when the manufacturer refuses a claim because the driver is just over the service interval at time of accident, but over it nonetheless.

The beginning of the end?

I’ve seen a few reports calling this the beginning of the end for motor insurance. I don’t see it that way. To me, I see a substitution of cover from one form to another. There will still be motor insurance; it will just be in a very different form.

And it makes sense too. Insurance is about risk. And risk is best placed with those who can exert the most control over managing that risk. And right now, the biggest risk on the road is us, the drivers, not the cars themselves.

By shifting liability from the driver to the manufacturer, the risk of a driver causing an accident is replaced by consistently reliable and dependable technology.

What I do see though, is that the volume of carriers and intermediaries providing motor cover will reduce in numbers. The size of the motor insurance class will reduce significantly as risk is taken out of the getting from A to B. And the roads will continue to get safer to travel on!

Daily Fintech Advisers provide strategic consulting to organisations with business and investment interests in Fintech.

It’s all about the data! How wearables tech enables life and health insurers to better understand and engage with customers.

By Rick Huckstep

The tech industry loves its buzzwords. Yesterday it was all “big data” and “cloud” and today we’re talking “wearables” and “Internet of Things”…and tomorrow, the “Internet of Everywhere”?

For the world of insurance, these buzz words are more than superficial. They are more than fashionable consulting speak to hoodwink the industry and keep everyone guessing about what this really means.

For life and health insurers, they mean the ability to improve risk ratings, to personalize the price of the cover and to apply and adjust policy conditions on an ongoing basis. The traditional approach of a single, point in time questionnaire is being replaced by an ongoing adjustment, assessment and review approach enabled by these new technologies.

Through the use of wearables and smart phone apps, the accuracy of evidence-based underwriting is significantly improved (see latest publication from Raconteur).

These new technologies enable insurers to radically shift from being the provider of an enforced product to a provider of a value added service.

And this is not a fad or a short-term trend! A decade ago, there were (only) about 500 million devices connected to the Internet. Today, with a global population of over 7 billion, we have more Internet connected devices than people. Today’s estimates range from 10 to 20 billion connected devices and this is predicted in the next five years to rise to 40 to 50 billion Internet connected devices!

IDC predict that 72 million wearLeaders-in-wearables-market-760x428able devices will be shipped this year, up from 26 million last year and forecast to exceed 150 million devices by 2019. The vast majority of wearables will be wristwear such as the Apple Watch or Microsoft’s HoloLens.

With this massive growth in devices that collect data, it is no surprise that, according to the Norwegian research organization, SINTEF, 90% of the world’s data has been generated in the past two years. Every second, over 250,000 new gigabytes of data are created, which is the equivalent of 150 million new books…I repeat, every second!

It is, therefore, no surprise that I am seeing a new group of tech startups from the data aggregation space focusing on life and health in InsuranceTech.

This week I caught up with CEO and co-founder Jan-Phillip Kruip from Singapore based startup, FitSense. Their data aggregation technology was developed at and subsequently licensed from the National University of Singapore. JP explained to me how their aspiration is to take the approach of telematics for motor and apply it to health insurance.1433219251320

The idea behind FitSense is to develop a tech platform that will aggregate data from the wide variety of wearable inputs in the market. These inputs come from activity trackers such as a Fitbit or Jawbone or a smartphone. Today, a smartphone is equipped with a range of sensors that track all manner of things such as proximity, ambient light and sound, barometer, temperature, motion, acceleration, gyroscope, magnetometer. And all for less than $5 of the total price of the smartphone!

This mass of real time and individualized data in all of its glorious forms is consolidated on the FitSense aggregation platform and normalized. It is organized and processed to create a composite view of the individual, which is updated and adjusted in real time.

The benefit to the insurer falls into two camps. First is that the data aggregation platform takes care of the pain of integrating with lots of different wearable technologies. Second is that the FitSense platform gives out a risk rating, much like an Experian credit score.

As a trusted, evidence based source of risk rating, services such as Moody’s or S&P have become institutionalized in the bond markets. Using Moody’s to illustrate how FitSense works in the world of insurance, imagine a similar system for setting health premiums.

Instead of a single point in time questionnaire to determine your premium and any policy conditions, you had a health insurance rating of AAA based on actual and current data. Like a credit score, this would lead to highly competitively priced premiums and generous policy conditions. However, in the same way as back to back disappointing quarterly corporate results leads to a downgrade and worsening credit rating, this same model would be applied to the health insurance policy.

Insurers could, should they chose to do so, apply increases to monthly premiums to reflect the worsening score from the data aggregator.

At this point, I am going to defer the subject of how insurers would or could handle “bad behavior”. Today, those insurers in this space are only rewarding policyholders for better behavior and they are staying silent on worsening behavior. Where bad behavior is subsidized by the good in the traditional model, this now creates a moral and ethical debate to be had amongst insurers about how to benefit from this new technology. The issue is about segregating customers into good ones and bad ones (based on the evidence from wearables data) thereby potentially creating a class of “the uninsurable”.

1432618504418Coming back to the subject, research from Salesforce.com found that 79% of those companies adopting wearable technology agree that wearable tech is or will be strategic to their future business.

And 23% of companies said that data collection and aggregation was their biggest challenge!

Unlike banking, where the Fintech movement is about radical shifts and disruption, in
InsuranceTech the theme is more subtle and evolutionary. This is what we are seeing here and there is no question that wearables and the Internet of Things plays right into the executive agenda about how to apply new technology to traditional insurance.

DriveWay – A Safety first approach to personalized motor premiums and smartphone telematics

By Rick Huckstep

Personalized premiums are an industry prediction that has become a pretty safe bet! Big data, cloud, mobile, wearable’s, Internet of Things are all highly used buzzwords for the technologies that are changing the way insurance is calculated and distributed.

And one of the biggest areas of massive growth that is going to impact motor insurance is the adoption of telematics. Nora and Alain Minc first used the word in a 1978 report to the French Government but today, it is synonymous with the collection of data that defines and determines a driver’s risk profile behind the wheel for an insurer.

At the end of 2014, there were a relatively small number of telematics drivers in Europe at around 4.8m. In the US, the adoption rate was also small at around 2%. However, according to the EY report “The Quest for Telematics 4.0”, this is set to change with penetration of integrated telematics to touch 88% of all new cars by 2025. This massive growth will be driven by two significant factors, namely, (a) the growing importance of smartphones in everyday life and (b) regulations for improved driver safety.

Smartphones, by their very mobile nature address one of the barriers facing the early adoption of telematics, which was the reliance on a hardware solution fitted to the motor vehicle.

In the UK and the US, the cost for installing a “black box” was somewhere in the region of $200 to the insurer, which in many cases, negated any pricing benefit derived from it. Lower costs solutions, such as Metromile’s hybrid approach of a dongle together with a mobile app go some way towards addressing this cost issue.

Another barrier for the pure hardware solutions is that they plug into the car’s data or OBD (“On Board Diagnostics”) port. The problem with using this source of data is that car manufacturers did not create the data to be used in this way. So, the hardware solution relies on software to interpret the data and derive driving behavior information.

Which in turn, imposes more limitations on this approach. Such as, the hardware solution can determine speed but not whether the driver was breaking the speed limit. Or, it cannot determine if the driver is driving safely at a modest 50 miles an hour on a straight road or dangerously fast around a sharp corner.

And it is this focus on the safety element of telematics, rather than lower insurance premiums, that has been the focus for regulators. The European Commission’s ‘Digital Agenda for Europe” has set a goal of all new cars produced in Europe to be equipped with telematics by 2020. The first step in this eSafety initiative is the introduction of eCall. This was originally scheduled for the end of 2015, but, as is the way with new regulations, they require local legislative changes and are subject to delays. As a result, the Commission has extended the deadline to 2017/18.

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eCall is an initiative with the purpose to bring rapid assistance to motorists involved in a collision anywhere in the European Union. The system will either be activated by a button in the car or automatically in the event of a collision firing the airbag. The eCall service will trigger a call to 112 and send data about the whereabouts of the vehicle to emergency services.

The other area of much debate is data privacy and ownership of the driving data. In Italy, where penetration of in-car devices is around 1/3, insurers are allowed to access data to assign fault after an accident. In Germany, the debate amongst the industry is in full flow and is heading towards the view that data, first and foremost, belongs to the driver.

However, this is a massive subject for another day and I will return to it another article. Just as I will also return to the subject of cyber security and the ability to hack into and take control of the car through the in-car hardware solutions (see reports of a hack on a Jeep Cherokee).

This week the focus is on improving driver safety and its link to personalized insurance premiums. And to help me tell it, I Skyped with Igor Katsman, Founder and CTO of Silicon Valley based DriveWay and Roman Glukhovsky, VP of Business Development for the firm.

DriveWay hit the news 2 weeks ago when they announced they had raised $10m in their 251335second round of fund raising with Roman Abromovitch backed Ervington Investments. This follows a seed raise of $1.3m two years ago with three VC firms.

Igor explained how he started around 2006/7 with a desire to build a solution that would make the roads a much safer place to drive. Back then, he built his first prototype on the Symbian operating system for a Nokia phone that just contained an accelerator, GPS and a few sensors. These were the days when a phone was a phone and nobody had any idea that one day making a call would be one of the least important considerations for your phone!

Even though the technology was limited back then, the goal and vision was the same as it is today. By using technology to provide real-time, meaningful feedback, the driver can be educated and informed in a way that makes them a better, safer driver. And in the process, they reduce the cost and risk of driving for both the individual and the employers alike.

Today, DriveWay’s first application is in the insurance market, where they provide a white label platform for insurers to build their own apps around. Already, with 250,000 downloads under their belt, DriveWay are providing insurance carriers with a big data cloud solution, supported by over 700 sophisticated algorithms to provide an enterprise-class mobile platform.

Igor explained how sensors in a smartphone produce “noise”. By using complex algorithms and the data from multiple sensors, the DriveWay app can eliminate the noise. This enables them, for example, to determine the subtle differences between the rapid movement of lifting the phone up to take a call versus the equally rapid motion from speeding around a corner.

Essentially, DriveWay comprises two parts. First, there is the smartphone that collects and analyses driving data and provides real-time feedback to the user. DriveWay’s users already report a 30% improvement in their driving behavior.

Secondly, DriveWay is a big data cloud and analytics platform. This engine has already collected half a billion driving miles of data. This data has been used to build actuarial risk and pricing models for use by underwriters as they develop personalized pricing models.

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Beyond insurance, DriveWay’s platform will provide fleet managers of all shapes and sizes with valuable information about how their fleet of vehicles is being driven. Not only does this focus on safety reduce the accident rates, it also reduces fuel costs through better driver behavior. Roman explained, “we’ve started to see Fleet Managers use our platform to run a monthly competition amongst their drivers for who can return the best fuel economy. The winner gets rewarded and the Fleet Manager sees overall consumption decline.”

When we discussed the differences between hardware and a smartphone solution, Igor explained. “smartphones are much more flexible. For a start, they are an ‘opt-in solution’ (an important point in the data privacy debate). With DriveWay, we can also be selective about the data that is shared. For the father monitoring his son’s driving, he only needs to know whether he exceeded the speed limit, not that he drove to McDonalds. There’s a line between need to know and intrusion!”

There is no doubt that the smartphone will drive up user arevised-chart-for-landing-page2-1024x857doption and overcome the barrier of the installation and cost of the hardware approach. And given that it is likely to be best part of a decade before telematics capability is universally available in our cars, then smartphone based telematics is looking at an open road to bring this into the mainstream.

And with the move to personalized premiums well and truly underway. It is only a matter of time before insurance premiums are based on risk factors directly connected to, and dynamically adjusted for, our individual driving behaviour. Then, our individual driving score becomes the basis upon which we buy motor insurance, in the same was as our Experian credit score is the basis upon which we borrow money.

Daily Fintech Advisers (the commercial arm of this open source research site) can help implement strategies related to the topics written about here. Contact us to start a conversation.

Forget yoga, wearables insurance is the path to a better life!

By Rick Huckstep

And before my yoga-practicing daughter berates me, it’s a tongue-in–cheek headline! But it is also a headline born out of the emerging trend in life and health insurance to encourage and motivate policyholders to lead a more active life.

This stems from the fundamental problem insurers have in this market. To rate the risk you are seeking to cover, they require a lot of data. Policyholders fill out extensive questionnaires asking for personal data, family histories and the like (I’ll come back to personal data in a minute).

Prospective policyholders also often submit themselves to expert examination. All this information is fed into complex actuarial models that seek to normalize the specific variables of the assessed. Using comparable data collected over large samples of the population and with decades of history, the result is a statistical assessment of the risk of a life threatening illness or being knocked down by the proverbial bus.

But, here’s the problem.

This is a static, point in time data model. Like a balance sheet in the annual report, it’s a snapshot view of the state of the individual. Unlike the balance sheet analogy, the insurer doesn’t have the equivalent of a CFO updating the balance sheet on a regular basis.

The insurer is not able to reassess the changing risk profile over the term of the policy.

Once the risk has been assessed and the premium has been set, this is the base line for the term of the policy. Whilst the policyholder has an obligation to declare material changes in circumstances, the reality is that these only cover the exceptional items.

For example, a year ago I regularly went to the gym, and had done so for about five years. Then I stopped because I simply got out of the routine. These things happen as other things took my attention, like writing for Daily Fintech every week. Now I don’t go to the gym anymore.

I’m not obliged to disclose this “material” fact to my insurer even though it does change the data that was used to rate me. My BMI is now different, as is my weight, general levels of fitness and, crucially, my diet.

Of course, this is a lifestyle change that works in both directions. What if I used to spend all my time on the sofa, eating pizza and watching Jeremy Kyle re-runs? (no judgment or offence intended, just illustrating a point!) And then I changed my behavior and started to go to Body Combat and Spin classes 3 times a week? As a result, I lose 20lbs, eat better, sleep better and have changed the basis upon which my cover could be rated.

I’m not obliged to disclose this “material” fact to my insurer either!

And that’s the issue with pricing for Life and Health cover. It is all based on static data at a single point in time. Once the price point is set, this is the baseline for the full term or every renewal.

It’s a one–size fits all approach. Whilst it may be driven by complex actuarial models to achieve a high degree of granularity, the underlying principle of how the cover is priced remains the same. The premium I pay has more to do with the life expectancy and general health and wellbeing of every other male in their fifties than it does with my actual lifestyle, attitudes and changing behaviour.

But times are a-changing!

The adoption of wearables-tech by insurers is growing. A 2014 survey by Strategy Meets Action (SMA), a Boston-based research firm found that 22% of insurers are developing a strategy for wearables. Ironically, the same survey also reported that only 3% of these insurers actually wore a wearable device themselves!

BTW, when I talk about wearables in this article, I mean the collective name for miniature electronic devices that are worn on the body in some way to track health and lifestyle information. The well-known wearables include Fitbit, Jawbone and, of course, now the Apple Watch. Wearables also include such technology as Google Glass or Golden-I, but their application in the claims process is a subject for another day.

In the US, estimates vary around the 10% mark of all Americans who wear a fitness tracker, although this is going to rise dramatically in the coming years. The widespread adoption of sensors that track more than just fitness will also explode. Sensors that monitor breathing, heart rate, stress levels and the onset of chronic illness will all add to the current generation of fitness trackers that count steps and sleep patterns.

The big one is the pursuit of blood-glucose monitoring, as this is the link to an individual’s diet and eating behavior, which has a greater impact on health than simply measuring activity.

Already employers, and particularly the self-insured corporations, are buying wearables in large quantities to give to employees to both track and also encourage them to a healthier lifestyle (thereby reducing the potential cost claims burden from absenteeism and ill health).

The early pioneer in this space some 20 years ago was South African insurer, Vitality. They were the first insurer in the world to both reward and encourage healthy behavior and the first to use a USB connected pedometer (in the days before wearables were called ‘wearables’!)

We first saw Vitality in the UK around 2004 when they entered the market with PruHealth. In 2009, they teamed up with gyms in the US and are now integrated with 6,000 clubs across all 50 states. In 2010, they entered the China market with Ping An, followed in 2013 with the partnership with AIA to enter eight countries across Asia. Last year, they acquired the UK business and rebranded them to VitalityHealth and VitalityLife.

When you look at their work they have put a lot of resource into programs that educate on the benefits of healthy diets and a healthy lifestyle…for the good of the individual as well as for the insurer or employer. To me this defines corporate social responsibility far better than any go-green policy or carbon footprint reductions.

Vitality has gone further than just integrating wearables. Their relationships with the network of gyms enables them to track when policyholders go to one of them from the swipe of their membership card. Through their mobile app on the smart phone, they can then track how long you have stayed there.

And it’s not just going to the gym that earns reward points, playing a round of golf also counts towards the overall reward points tally.

The reason that this model works is because there are clear benefits to both parties. It’s a win-win with significant social consequences. The policyholder is healthier and spends less because of lower future premiums and rewards. The insurer spends less by reducing the overall cost of claims.

However, there is a price to be paid for this advance in mobile and wearable tech in the insurance industry. And this is in the area of data privacy.

To work, the policyholder must be willing to share data continuously with the insurer. This data will come from multiple sources, and not always at the explicit request of the insured. When Vitality first launched the pedometer, the insured would physically connect the pedometer to the computer via a USB cable. The policyholder knew what they were doing.

However, today, there are no cables required. Whether the insured is swiping their gym membership card, blue-toothing their Fitbit or simply carrying their mobile in their pocket, the insurer is continuously collecting data on them.

Ironically, given the amount of personal information that has been written on forms for decades when applying for insurance, we are now in an age when sensitivities about personal data run very high. In some quarters, the use of wearables and mobile tech to track and collect personal data is an intrusion that must be stopped, or at least curtailed.

I’m not in that camp. I’m down with the millenials on this one, who seem completely bemused by the debate on privacy.

Having said all of this, the fact is that the wearable insurance model is still at a rudimentary stage in its evolution. The data collected is assessed and aggregated, but only to create a points system. These points are simply exchanged for a future discount or rebate on the policy in the form of amazon gift vouchers. The underlying underwriting process hasn’t changed!

So, this might not yet be the giant leap for mankind, but it is certainly one small step towards the nirvana of personalized and dynamic premiums. Where premiums will adjust over the term of the policy to reflect a policyholder’s efforts to reduce the risk of ill-health or a chronic illness on an on-going basis.

To do that requires a seismic shift in the approach to underwriting risk and represents one of the biggest areas for disruption in the insurance industry.

When this happens, I will be able to take my personal data collected across multiple sources, aggregated it together on Nudge, and upload this data to an underwriting marketplace where insurers will bid for my cover based on my profile. And I will be healthier and wealthier as a result!

The crazy brilliant IBM Adept fork of Ethereum

Another update as of June 2016 in italics

Since writing this an aeon ago (in Sept 2014), much has happened and much has not happened. So this is an update as of end Jan 2015.

Happened:

– many more people are connecting the dots between re-decentralization and Internet Of Things.

– many more announcements from IBM and Samsung and Ethereum.

Not Happened:

– any shipping products.

The last point will bring out the skeptics, but I am sticking with two convictions:

1. Crazy brilliant move by IBM. The need for decentralization in IOT is immediate but more long term in finance. IBM gets to make money now in IOT and learn more to make money in finance later.

2. Ethereum is the platform to bet on. There is a lot of debate on this score, but the two big reasons why people are skeptical of Ethereum look less compelling with each passing day:

A. Ethereum is not shipping yet. Yes, but it is getting closer every day. Sure, they could still fail to ship working code, but that does look more unlikely with every passing day.It is shipping now. Obviously it is still a work in progress (but so is every tech product that does not die). Today the preponderance of evidence is that Ethereum will work.

B. Ethereum does not use Bitcoin. It uses Ether. Link A + B and you get cries of Scam! Now that Bitcoin price is falling below its mining costs, the idea of a Blockchain platform that divorces Blockchain from Bitcoin looks increasingly smart. (No, I have not bought Ether, so this is not a pump and dump post).Ethereum DAPPS (some examples here) do also use Bitcoin as the crypto currency. It is wrong to look at it as Ether vs Bitcoin – it is more like “horses for courses”.

Original Post in Sept 2014:

This will be a short post, as I am still getting my head around the implications of this announcement that IBM is creating a fork of Ethereum called Adept (news release as pf Jan 2015  here).

I have been fascinated by Ethereum for some time. (Index to all Ethereum related posts on Daily Fintech are here).

I had a thought about how Ethereum connects with Internet of Things in relation to the professionalization of sharing economy services such as AirBnB here. This is worth reading and the need I was expressing there has been realised in Slock.it (which represents the best use case of decentralised smart contracts in the wild).

All I know now about the IBM announcement is:

  • This is a massive validation for Ethereum. A company of the scale of IBM ($98 billion of revenue last year) does not get involved with bleeding edge technology like this on a whim.
  • This demonstrates what an amazing company IBM is. To be able to operate simultaneously at the level Fortune 500 Board/CXO and at the level of bleeding edge technology that is usually only understood by a few developers is very, very cool.

 

 

 

Ethereum – where Bitcoin meets Internet of Things

Judging by Google alerts, the two biggest tech trends are Bitcoin and Internet of Things.

Listening to the Ethereum guys talk about how Smart Contracts can automatically enable or disable locks on property such as a car or a house brings these trends together.

My first thought is yikes, scary. My second thought is “Hype Smorgasboard”. However in the context of sharing economy type services this not only makes sense but has to happen for the sharing economy services to grow into their potential.