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Insurtech: Insuring New Risks or Insuring Old Risks in New Ways?

Maor Fridman

November 18, 2020

The insurance industry is known for its dated methods and incumbent carriers, but recently we have seen a dramatic rise of ‘Insurtech’ startups, a term coined to describe the use of technological innovations that increase the efficiency of current insurance models. These startups are disrupting the industry and ushering in a new era of tech-infused insurance products.

That is why, unlike many other industries that are on their knees due to COVID-19’s economic fallout, Insurtech investments have remained robust with a total of $2.19 billion in investments in the first half of 2020. This puts the sector well on track to finish with the second highest amount of investments over the last five years.

Take Lemonade — Lemonade launched in 2016 and offers insurance to renters and homeowners with the use of AI and chatbots, allowing the company to greatly speed up their process. The US-Israeli company raised $319 million earlier this year in an initial public offering.

Lemonade Website Screengrab

Innovation in the insurance world is pumping, that much is clear. What is less clear is the source of innovation and how to classify and categorize the different Insurtech startups and technologies to better understand this booming industry.

In this article we propose the following classification: Insurtechs insuring “new risks” and Insurtechs insuring “old risks” in “new ways”.

Insuring “Old Risks” in “New Ways”

There is a great proliferation of Insurtech companies over the last five years, therefore, we will focus on the leading Israeli startups in the market as examples for our framework.

In the case of Hippo and Lemonade the “old risk” they deal with is homeowners & renters’ insurance. This type of insurance covers the property (building and contents) of the insured against risks such as theft, fires, floods, earthquakes, storms, and losses that can occur due to water and plumbing incidents. It can also cover various types of liabilities such as damage to a third party (for example flooding of a neighbor’s apartment due to plumbing problems in your flat) and bodily injuries of visitors and employees such as housekeepers.

These insurtech companies are selling the same coverage as the incumbent insurers but in a new way, specifically with regards to the three foundations of insurance — customer acquisition and distribution, underwriting, and claims management.

Customer Acquisition and Distribution

While most insurers distribute their product through agents, startup insurers are mainly direct-to-consumer, acquiring customers via online distribution channels. By using partnerships and APIs, distribution channels can be expanded beyond insurance agents and call centers, thus gaining advantages over incumbents with closed garden legacy systems.

While this method might initially increase customer acquisition costs, this type of distribution has enormous benefits in the form of the oil of the 21st century: data.

Lemonade, for example, claims to collect 100 times more data than an incumbent insurer. They do this by recording the entire digital footprint of their customers when selling products online. This data can be used to optimize future acquisition costs and feed more sophisticated underwriting and pricing models.


Underwriting (i.e. determining the risk, cost, and terms and conditions of the policy) is usually performed according to standard actuarial models.

By acquiring masses of data (more than any incumbents had access to previously) these Insurtech companies can create personalized pricing models for different segments, better partition the risk and therefore cherry-pick the market.

Root Website Screengrab

An example of a company with a more accurate tech driven underwriting process is Root. By collecting users’ behavioral data via their mobile app, they can more accurately price users’ policies, saving good drivers up to 52% compared with traditional car insurers.

Claims Management

The role of the claim adjuster is to process the claim by investigating and determining how much (or if) the insurer should pay for the damage or loss. This can be a long and cumbersome process. It is this process that is responsible for detecting and fighting insurance fraud or determining the right amount needed to indemnify the policyholder.

Insurtech products can use AI models to fight fraud and settle “simple” claims within seconds. The oil mine of data collected over time allows for predictive models to be built and eventually automated. This minimizes human costs, settles claims faster and keeps policyholders content.

An example of an Insurtech startup tackling claims management is Five Sigma, an F2 Venture Capital portfolio company. Through leveraging its cloud platform capabilities and adapting proven AI technologies, Five Sigma enables insurance carriers to understand and handle claims on a whole new level.

Five Sigma Website Screengrab

For adjusters, Five Sigma’s system automates traditional tasks and assists with smart suggestions to aid in decision making. This includes automatically documenting decisions, creating a workflow after the action, updating internal claim models, and a team of in-house claim and tech experts managing the entire process, allowing adjusters to give their full attention to the decisions concerning that matter. While for policyholders, Five Sigma offers unparalleled visibility into the status of their claims and delivers an easy, self-service experience by personalizing communications.

Insuring “New risks”

Today, we are faced with completely new business models that have led to new risks and produced new datasets. These, paired with AI models and ever-increasing computing power, have enabled the creation of new insurance products and different ways of transferring risks. These totally blue ocean markets could not be covered without innovative and disruptive approaches.

For investors and companies that operate in such innovative insurtech domains, it’s an exciting time. Rare is the case in which companies create a totally new market with huge potential, and especially in a heavily regulated industry like insurance where the innovation cycle is much longer.

This does not mean that there are no challenges. As an innovator/disrupter, you have to convince reinsurers or incumbent insurance companies to take giant leaps of faith and back you.

New pricing and underwriting models need to be built and should be based on real data that has been collected over time and experience, which a young company may not yet have had time to accumulate.

Another issue is dealing with risk accumulation or catastrophes. The biggest fear of an insurance company is that one day, all the policies in force will incur losses. Such an event in the insurance language is called a risk accumulation, when it’s raining, and everyone gets wet. Statistically this could happen, especially in such new or uncharted territory. In a new market models that can predict these catastrophes and rainy days are not yet fully developed. Therefore, the validation phase by risk takers is usually longer and more complicated compared to a known market.

Examples of Insurtech companies covering new risks are Parametrix and VOOM, both F2 portfolio companies. These startups innovate in two new domains: cloud downtime insurance and mobility insurance, respectively.

Cloud Downtime Insurance

Today, 83% of enterprise workloads are based on cloud technology. This has been accelerated by the COVID-19 pandemic which spurred companies’ digital transformations and led to the acknowledgment of the dependence that every industry has on third party systems in the cloud. But what happens when cloud technology fails us, when AWS, Gmail, Shopify, and Zoom go down and take everyone down with them?

Parametrix Website Screengrab

Unlike traditional insurance, parametric insurance does not indemnify pure loss, but rather issues a specific payment on the occurrence of an objective triggering event. In the past, parametric insurance was utilized primarily for weather related or other natural catastrophes, but Parametrix understood that this model of insurance is equally fitting for objective events like cloud downtime, an occurrence that is impossible to influence and that can cause major financial damage to a business.

Parametrix’s monitoring systems constantly monitor the performance of all the customers’ services and can detect failures and downtime to the millisecond thanks to leveraging actuarial and data science expertise.

If a specific downtime event occurs, the payment is determined by the coverage that the customer chose ahead of time and the duration of the event. In contrast to traditional insurance, here the pay-out is immediate and has zero dependence on the insurer’s assessment of loss providing for business continuity and eliminating the costly claim process.

Mobility Insurance

Another emerging market is in the mobility ecosystem, an ecosystem that is changing far too quickly for the insurance industry to keep up.

This includes new platforms such as e-scooters and drones, new usage models such as car share, and most importantly increased connectivity. These changes lead to meaningful risk analysis and distribution opportunities to which traditional insurance companies are struggling to adapt.

In many cases, insurance incumbents prefer to partner with Insurtech companies to co-create end-to-end insurance solutions to capitalize on these opportunities. A new player in this market is VOOM Insurance which provides innovative insurance solutions for the mobility space.

Voom Website Screengrab

VOOM’s first insurance offering is a usage-based drone insurance product covering third-party liability, the drones themselves, and other expensive equipment. They offer on-demand, monthly or annual policies that can be purchased instantly online or via affiliated brokers. VOOM’s unique usage-based insurance platform is supported by a combination of a powerful AI-based risk analysis engine, a proprietary born-in-the-cloud policy admin system, and an effective API based distribution.

Another innovative product being built by VOOM is on-demand insurance for e-scooters. Like drones, this is a usage-based policy that covers the rider with personal accidents and third-party liability.

New Directions

In this rapidly expanding industry of Insurtech, there are many questions: Will these new emerging risks become the major components of the insurance market? Will autonomous car insurance replace motor bodily injury? Will cyber Insurance become the most important coverage for businesses? As digital and cloud adoption grow, and software continues to eat the world, it is a matter of time before the answers to these questions play out before our eyes.

But to be a part of the Insurtech revolution, one must be able to classify, clarify, and understand it from top to bottom, and we hope this article is the first step.

Spectrum of Risks

Co-written by Maor Fridman, Associate @ F2 Venture Capital and Jonathan Schwartz, Chief Actuary @ Shlomo Insurance

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