Smart devices can make the insurance biz proactive, not reactive

Insurance companies are looking for ways to reduce the amount of money they have to pay out on claims, and one promising way to reduce that risk is through connected security and home automation devices. In this week’s podcast I spoke with Dan Reed, managing director at American Family Ventures, the venture capital arm of American Family Insurance. AmFam as it is known, has 10 million policies and offers home, auto and life insurance.

Reed shared with me a bit about how he’s looking for investments in the space and also how the insurance industry is thinking about the smart home and about data privacy. “For the insurance industry in general [IoT] is essentially an extension of smoke detectors and seat belts. These are inexpensive products that can help keep people safe,” Reed said. “And from a strategic point of view, as a a strategic participant in the venture industry it offers the opportunity for a new type of engagement with our policyholders.”

He added that this changes the model of the insurance industry from a reactive to a proactive model and added that he believes that the industry not only has an economic incentive but also a moral incentive help prevent bad things from happening to its customers. Within that context he thinks the insurance industry will subsidize devices such as water leak sensors or connected smoke detectors much like they already offer discounts to homeowners that add alarm systems to their homes.

But once insurance companies start subsidizing connected devices, what claim will they have on the data those devices generate? Connected smoke detectors can offer not just low battery warnings or smoke alarm notifications, but can share details about people in the home or even temperature data. A connected security camera could share much more. On cars, data might include speed and location data that the insurer might want for setting pricing, but also might have to provide in case of an accident or legal demand.

When asked, Reed explained a program that AmFam implemented in 2007 that was aimed at teenage drivers and reducing their accident rates. The program put a DriveCam in cars that activated when a car accelerated or braked too quickly and then sent the footage to the cloud where independent analysts and the teen’s parents could see the images. The analysts rated the footage to make sure the program was helping reduce accidents and the parents saw the footage so they could talk to their kids about the choices they were making behind the wheel.

The program was opt-in, and it did help change driving habits and cut accidents. Reed said that program exemplifies how his company thinks about privacy and user data, and how he hopes the industry thinks about it as well.

“We are very conscious of this notion of Big Brother and of privacy within your own home or your own vehicle, and I think it is something that the insurance industry and the startups in this space have to be very cognizant of and very transparent about,” he said. “They have to tell users how they are going to use the information that is coming off of these devices and right from the start take a benevolent position about the partnerships you have with your policyholders. I think the worst thing that could happen is that a company would collect information that the policyholders don’t know about or approve of. I think that would be a major setback to the deployment of some of these safety technologies.”

For more from Reed or to hear Kevin Tofel and I respond to some of our reader questions, take a listen to this week’s podcast from earlier this week. It’s a long show, but chock full of good stuff.

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Uber and MetroMile offer drivers per-mile insurance between fares

Uber has partnered with on-demand insurance provider MetroMile to start to unravel the tangled web of insurance liability it and its drivers face every time they hit the road to pick up fares. Uber and MetroMile have developed a kind of insurance plan attuned to Uber’s dispatch network that can track precisely when and where an UberX driver picks up and drops off a rider.

That’s necessary because Uber’s coverage only kicks in when an Uber driver is actively working a fare. When drivers are waiting around to be hailed, they are expected to have coverage from their own policies. Confusion over where Uber’s liability starts and stops, though, has been a source of headaches for the company and its drivers for years.

MetroMile won’t just provide a general insurance policy. It uses a plug-in module called a Metronome that works in any car made after 1996 to track a vehicle, calculating down to the mile how it’s driven. MetroMile then charges rates based on that total mileage. With the Uber integration, MetroMile’s meter will turn off as soon as a driver accepts a fare and turn back on as soon as the rider leaves the car.

We’re starting to see more apps and technologies target the unique business case of managing a fleet of vehicles you don’t actually own. For instance, Zendrive recently launched an app that monitors and rates the on-road behavior of drivers for companies like Uber and Lyft.

Uber drivers interested in signing up with MetroMile can find more info here. The company will start shipping Metronomes (which are typically free) in February, but so far the program is limited to three states: California, Illinois and Washington. MetroMile said it hopes to add more states this year as it gets approvals from regulators.

The insurance industry challenged by technology change

 
Insurance is notorious for being among the sleepiest and most conservative of industries, but it is also one of the products most frequently sold online. Not only is technology poised to change many aspects of the business, but new research shows just how strong the correlation is between advanced tech use and top financial performance within the vertical. All together, insurance is a more interesting vertical case study than it outwardly appears.
Tech use among the industry leaders
IBM has found stark differences between industry leaders and nonleaders in their awareness of consumer changes in the sector. In a study based on interviews with executives at 80 insurers, IBM defined leaders as those firms that led in both profit and growth, with ROI in the top half of firms over a three-year period, and CAGR at least five points higher than market CAGR in that timeframe.  Although 88% of the leaders ranked changes in consumer behavior as important or very important, only 33% of the non-leaders gave the same response. IBM reports that “about 90% of insurance leaders are investing in customer support and 94% are funding new products and services, compared with 79% and 76% of non-leaders, respectively.”
Disruptive new entrants?
Along with online marketers of insurance products (e.g., einsurance.com and ehealthinsurance.com), large Internet companies have become potentially significant challengers in the sector. One pioneering new entrant into insurance markets has been Rakuten, known as the “Japanese Amazon”. The company is the third-largest e-commerce company worldwide, after Amazon and eBay, and it bought Buy.com in 2010. Rakuten has entered several insurance markets in recent years: offering medical insurance in 2011, and buying Airio Life Insurance Company Ltd., which it promptly rebranded and expanded from agent-based to online sales in 2013. Rakuten also has significant securities, e-money card and banking online businesses (ranking  #1 in Japan for the latter two). In its 2013 annual report, the company listed finance as one of its three strategic businesses, along with e-commerce and digital content.
In the U.S., Overstock.com followed suit this April, teaming with insuritas.com, an insurance private labeling agency, to launch an online residential, business, and auto insurance agency from Overstock’s main retail portal. The company has described it as a natural fit with its home furnishing sales. On the same day, Walmart announced a marketing partnership with the online vehicle insurance provider AutoInsurance.com.
In short, insurance agencies as a distribution channel appear to be going the way of travel agencies. A local, dedicated sales channel is simply being replaced by lower cost and more convenient online outlets. (Notably, Ratuken is also the number two travel agent in Japan.) Of course, established insurance companies also market their products online, with varying degrees of technical proficiency.
A new industry challenge
Forbes.com this week profiled a new online challenge to the insurance sector. The startup Injured Money surveys consumers on their insurance company payout experiences. The resulting data gives consumers new marketing power by rating insurance companies on their payout records—or the delivery on their promised services. This type of turnaround on industry knowledge may contribute to more costs and profits being squeezed out of the system.
An entry from Google?
Not surprisingly, there has also been considerable speculation that Google will enter the insurance industry, as typified by rumination in TechCrunch last month. In March, BCG and Google India released a study that shows insurance ranking among the top five products for Internet-influenced purchases in Europe, at 83%, with Internet influence somewhat less, at 66% of purchases, in the U.S. (For auto insurance, the figure has already reached 75% in the U.S.) From 2008 to 2013, auto, life, health and travel insurance saw 3.7x, 4.5x, 4.5x, and 6.0x increases in online searches, respectively.
The study also finds that U.S. insurers such as Geico and Progressive that have extensive online, but limited traditional, sales channels are significantly more profitable than more traditional firms.  Already Google acquired BeatThatQuote, an online price comparison service in the U.K., in 2011, although the site was disabled in 2013. With the sector’s exceptionally strong and growing online advertising and sales emphasis, will Google be able to resist some type of market entry?
Conclusions
In short, within the constraints of significant state-by-state regulation, the insurance industry is evolving its online presence for greater direct Internet sales. Those companies with a lesser traditional presence are generally doing better than the rest of the industry, and even among traditional providers, those with a greater focus on investing to meet changing customer demands are realizing greater financial success. New online entrants provide a significant marketing cost advantage, and large e-commerce players, with their massive scale and broad cross-selling capabilities, are entering the fray. That’s why as online search, research, and purchasing increases, the specter of Google’s Internet clout looms large in the fear of insurers–whether or not the company would ever consider more than a marketing partnership entry. Consumers may also gain from more symmetric, socially generated, market information.
Although there may be some advantages in hybrid traditional and online sales today, the intangible nature of insurance products make them naturally suited for pure online sales and delivery. Thus, traditional providers will likely find an ability to provide integrated, omnichannel sales and delivery is even less of a defense for them against new competitors than it is for providers of more physical products.