60 Finance & economics The EconomistJuly 20th 2019
2 people with niche possessions, for exam-
ple model railways or exotic pets.
Small and specialist incumbents are
seeking to insure businesses against new
risks, such as environmental liability or
terrorism. In April a group led by Beazley, a
33-year-old British firm, launched a policy
covering reputational damage. Using
share-price drops as the trigger, it provides
compensation and a crisis-management
package. It prices risk by scraping informa-
tion from social media and analysing the
impact of past meltdowns. On June 25th a
group of underwriters at Lloyd’s of London
launched a £53m ($66m) facility designed
to speed up product development.
But spotty innovation does not make up
for a stagnating core. In theory, startups
should provide valuable additions to in-
surers’ toolbox. Yet incumbents often dis-
miss insurtechs as “cute” little things that
fail to grasp complexities, says Heidi Law-
son of Cooley, a law firm. Administrative
costs absorb 20-50% of incumbents’ pre-
miums. A quote for home coverage is often
a multiple-choice hell, with cascading op-
tions depending on such matters as wheth-
er you own a shed or keep bees. Businesses
can wait months for a policy’s final word-
ing. “It’s just so depressing,” says an indus-
try veteran.
The growing abundance of data means
customers increasingly think they can do
without insurance altogether. The portion
of the economy that is covered is shrink-
ing. In developed countries total non-life
insurance premiums have grown by 1.2% a
year on average since 2008; life has seen an
average decline of 0.5%. Despite increased
take-up by rising middle classes in emerg-
ing markets, global premiums grew in real
terms by only 1.3% annually over the per-
iod, to $5.2trn. The world economy man-
aged twice that.
The result is a “protection gap”. On aver-
age, over the past ten years, only 30% of ca-
tastrophe losses were covered by insur-
ance, according to Swiss Re, a reinsurer.
The balance, worth some $1.3trn, was borne
by individuals, firms and governments. Ac-
cording to Capgemini, a consultancy, less
than a quarter of businesses feel their in-
surance coverage is adequate. That fell be-
low 15% for personal lines, and even fur-
ther for health, cyber- and political risks.
A central reason for insurers’ caution is
the fear that regulators will punish them
for unwittingly taking on bad risks—or be-
cause some new, ai-powered underwriting
method is found to be rejecting or over-
charging consumers from certain ethnic
groups or neighbourhoods. That creates a
culture of “trying not to change anything,
not to break things”, says Dan White of
Ninety. Moreover, waves of consolidation
mean insurers have disconnected datasets
and computer systems, making it hard to
innovate or to absorb successful startups.Other weaknesses are less excusable.
Mr White describes a typical sequence.
Starting from the premise that innovation
is good, insurers try to make it “part of the
dna”. Facing internal resistance, those
pressing for change shift to an “arm’s-
length model”. Many insurers have set up
innovation “labs”, “studios” or “garages”
where pricey data scientists are told to
come up with cool new pilots. Located sep-
arately, they operate under different rules:
they have beer fridges and pool tables, and
staff wear jeans and commute on scooters.
Then staff at the parent firm get dis-
gruntled with their rule-breaking peers—
who, for their part, have not been given the
budget to build anything sizeable. So the
parent firm’s return on investment is poor.
Eventually the labs are closed or moth-
balled. Firms then give their money to ven-
ture-capital funds, run internally or by
third parties. But these are designed to bet
on startups, not to perfect processes at
lumbering giants. Three of Europe’s top six
insurers have recently frozen or shrunk
their main technology-investment arms.
Insurers’ apathy is energising reinsur-
ers to innovate in their stead. As the prim-
ary insurers that do their distribution lose
touch with the market, the reinsurers feel
cut off. Reinsurers are also less strangled in
red tape. Munich Re, the world’s largest, is
in front. It has hired 200 data scientists and
trained over 100 experts internally, and
crowdsources ideas from staff. Good ideas
are fast-tracked; duds are killed quickly,
says Tom Van den Brulle, its innovationchief. Last year it paid $250m for relayr, a
startup in Berlin that uses sensors to ex-
tract data from industrial machinery.
Reinsurers’ greatest breakthrough so
far is probably “parametric insurance”.
Rather than compensating for losses re-
ported ex-post, such policies pay out a pre-
agreed sum when a clearly defined param-
eter, such as rainfall or seismic magnitude,
reaches a pre-agreed threshold. Since de-
buting in the 1990s, parametric insurance
has mostly been confined to the reinsur-
ance of catastrophic events. But the spread
of internet-connected objects creates the
potential for it to be applied to previously
uninsurable risks. Gerry Lemcke of Swiss
Re, which offers parametric insurance
against pandemics, flight delays and hurri-
cane damage to coral reefs, sees it as work-
ing rather like derivatives in finance, which
have a strike price. Customers receive their
payouts straight away; insurers save the
time and cost of adjusting claims.The best policy
Reinsurers could soon shake up the market
further. In recent years third-party capital
providers such as pension and sovereign-
wealth funds have sought to deploy vast
sums in reinsurance markets. That has
prompted reinsurers to set up money-
management platforms, akin to betting
interfaces, where investors can punt on va-
rious classes of risk. As a result reinsurers
are keen to take on a broadening range of
risks directly, by seeking to work with
insurtechs and cutting primary insurers
out altogether. “They’re calling us,” says Ms
Lawson. “They’re looking for deals.”
Asian giants are also pulling ahead of
Western peers. Pia Tischhauser of bcg
reckons they are “15 years ahead” on inno-
vative ways to price risk. In China Ping An,
which in the 30 years since its founding has
become the world’s most valuable insurer,
employs 23,000 researchers, spends 1% of
revenue on innovation and has over 12,000
patent applications. Its average underwrit-
ing time has fallen from five days to 15 min-
utes; it uses ai to recruit and train its 1.5m-
strong army of agents, who are 50% more
efficient than the competition. Yet in No-
vember its chief executive ruled out major
international acquisitions, preferring to
focus on domestic expansion.
For Western incumbents, the greater
risk may lie closer to home. Rumours are
growing that Big Tech is gearing up to enter
insurance. Amazon, Apple and Google have
troves of data and idle capital; they lack
underwriting skills but can easily lure tal-
ent. And they can hope for handsome pro-
fits: bcg calculates that the top quarter of
insurance firms returned a median 24% to
shareholders in 2018. Scaremongering,
sceptics say. But an adviser to tech titans is
adamant. “We’re seeing what’s happening
behind the scenes. They’re on the path.” 7Insurancepremiums
Real%changeona yearearlierIndecent exposureSource:SwissReInstitute *At 2018 pricesWorld,natural catastrophe losses, $bn*01002003004001970 80 90 2000 10 18Insured
Uninsured-10-5051015201980 85 90 95 2000 05 10 15 18WorldEmerging marketsDeveloped markets