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Insurance Industry Overview

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While insuretech has become a major area of interest among VCs, we recognize that few investors in the space have comprehensive knowledge of the industry. To better understand the complexities and opportunities in the space, we have compiled the research report posted below. The report provides an overview of the auto, homeowners, life, and health insurance sectors. We hope you find the presentation insightful and welcome comments and questions.

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Insurance Industry Overview

  1. 1. Insurance Industry Overview
  2. 2. 2 What is Insurance? Insurance is a mechanism individuals use to limit their exposure to risk. A risk refers to the potential for a loss – meaning it is unclear as to if and how an individual will be affected by an event. Individuals band together to form groups that pay for losses. By forming groups, the risk is spread and no individual is fully exposed. Exposure Loss Someone or something that can experience damage, destruction, disappearance, death, disability or illness because of the action of another person or accidental happening. The unintentional or unexpected reduction in value of an object or potential stream of income due to the action of another or accidental happening. Claim A demand for another party to recover the value lost from a suffered loss.
  3. 3. 3 Insurable Risks Four criteria are typically used to determine whether a risk is insurable: (1) there must be a large homogenous group exposed to the same risk in the same relative manner, (2) any loss must be quantifiable in dollars, (3) the risks must be independent and not subject to catastrophic losses, and (4) the loss must be accidental in nature. Major categories of insurance Property & Casualty Life Health Property insurance covers damages to physical objects that are lost or damaged, while casualty insurance covers liabilities that result from negligent acts. Life insurance protects against the financial risks associated with dying, disablement, illness, and retirement. Health insurance provides coverage for health expenses incurred in the event of illness or injury.
  4. 4. 4 Managing Risks Insurance companies manage their risks through risk pooling, the rule of large numbers, diversification, and reinsurance. Diversification • Diversification ensures the insurance company is not overexposed to particular losses by spreading the risk over products, areas, or markets Risk Pooling & the Rule of Large Numbers • Grouping similar risks reduces the variability and uncertainty associated with insuring a pool of individuals. Given a sufficiently large number of policies, the actual value of claims should approach the expected value Reinsurance • A type of insurance purchased by insurance companies to mitigate the risk of sustaining large losses. Insurance companies sell off portions of their portfolio to a reinsurer which aggregates the risk at a higher level
  5. 5. 5 Hazards Hazards are conditions which cause or lead to losses. Insurance covers 4 types of hazards: physical, moral, morale, and legal. • Losses resulting from dishonest intent or exposure to dishonest persons. Examples include embezzlement and arson • Hazards associated with indifference, laziness, or negligence, which includes actions such as smoking in prohibited zones, leaving doors unlocked, and not wearing safety equipment • Loss exposure due to new legal decisions and regulation. For example, if a government agency determines a chemical is carcinogenic, manufacturers of the product may face lawsuits arising from the ruling Physical Hazards Moral Hazards Morale Hazards Legal Hazards • Risks that result from environmental factors, such as broken stair steps, dry bush near buildings, worn tires on vehicles, and inadequate fire protection equipment
  6. 6. 6 Economics of Insurance Supply • The premium for an insurance policy covers two major costs – the expected loss and loading. The expected loss is the amount of claims an insurer will incur in a given year. The loading is comprised of selling and administrative costs, broker and agent compensation, and claim adjustment expenses • The lower the premium loading factor, the more efficient the operations of the insurance carrier. Actuarially fair insurance will have a load factor of zero Expected Utility = Demand • Most individuals are risk averse and are willing to purchase insurance even if the expected utility is negative. The willingness to purchase will depend on an individual’s perception of the likelihood of a loss • The value of insurance for low probability events is often underestimated and the value for high probability events is often overestimated Expected Utility Outcome Probability of Loss * Claim Reimbursement – Premium & Deductible Risk averse customer behavior Premium Quantity Supply Demand Premium = Expected Loss / (1 – Premium Loading Factor)
  7. 7. 7 Insurance Anomalies 1. Inadequate demand at reasonable premiums 2. Large demand at excessive premiums 3. Purchasing the wrong amount of coverage 1. Coverage is not offered when it should be 2. Coverage is priced below break-even premiums Supply Demand Terrorism Insurance Terrorism insurance for buildings has historically been priced extremely high given an assumed 30-40% premium loading factor. A sample $9M policy is priced at $900K, implying a 1 in 10 annual probability of a loss. HMOs In the 1990s, HMO health insurance was priced significantly below the actuarially fair price. HMOs assumed they would be able to better control costs, and experienced major losses before adjusting premiums. Electronics Warranties Electronics insurance is vastly overpriced and purchased given the expected cost to repair or replace a device. Around 20-40% of all customers purchase a warrantee on a new electronic device. Low Deductible Auto Insurance Most consumers show a strong preference for high premium low deductible auto insurance policies, despite the fact that low premium high deductible policies are more economical for the average driver.
  8. 8. 8 Insurance Models Private Stock • Most insurance companies are stock based. To start the business, individuals purchase shares, and the capital is used to fund the operations of the company until breakeven • The board of directors is elected by the stockholders and a portion of earnings may be paid to stockholders as dividends Mutual • Mutual insurance companies are owned by the policyholders. Before a mutual insurance company can operate, the company must sell a minimum number of policies and amount of premiums to be issued upon authorization • Mutual insurance companies have no stock outstanding and the board is elected by the policyholders. Surplus funds are distributed to policyholders as dividends Reciprocal • Reciprocal insurance exchanges are owned by their members. The subscribers (policyholders) establish an exchange to insure one another. An attorney-in-fact is appointed to operate the exchange • Premiums are paid in deposit and surplus funds are returned in the form of dividends Public Voluntary • Optional insurance programs underwritten by the federal or state government • Voluntary federal programs include military, crop, security dealer transactions, crime, and mortgage insurance • State programs include life, title, auto, medical malpractice, and workers compensation insurance Compulsory • Required insurance programs provided by the government • Programs include Social Security plans for retirement, survivors, disability, and health coverage
  9. 9. Role of Agents, Brokers, MGAs, and Insurance Carriers Risk-bearing individual/business Insurance Broker Insurance Agent Chooses to work with an agent or broker to obtain insurance Represents the insurance company and collects data used in the underwriting process. A “captive agent” only represents one insurance company Represents the client seeking insurance. Brokers generally do not work for an insurance company, but instead sell policies from multiple carriers Provide data Provide information on policies Provide potential customers and data Provide compensation Provide benefits Managing General Agent Insurance Carrier Pay premiums Defines policies, invests premiums, pays out benefits and commissions In certain circumstances, insurance carriers grant authority to MGAs to perform a wide array of functions associated with selling and issuing policies 9
  10. 10. 10 Insurance Premium Allocation Benefits Surrenders Reserves Transfers Commisions Administrative Insurance, Taxes, Licenses, and Fees Other 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% U.S Accident and Health Expenses The bulk of P&C, Life, and Health insurance premiums are allocated to claim payments to compensate policyholders for insured losses. As expected in a commoditized market, profit margins are low and the majority of expenses are tied to policy liabilities.
  11. 11. • An insurer can cede certain loss exposures under one contract, or purchase several contracts covering different aspects or portions of policies Reinsurance Reinsurance is, in essence, insurance for insurance carriers. The insurer secures coverage from a reinsurer for potential losses it is exposed to from policies it has issued. Reinsurance enhances the spreading of risk and serves to increase the capacity of an insurer to write insurance and stabilize the financial results of insurance carriers. Risk-bearing individual/business Insurance Carrier / Ceding Company Reinsurer Retrocessionaire (insurer for reinsurers) Insurance Reinsurance Retrocession • Layering multiple reinsurance agreements is commonly employed to obtain sufficient monetary limits of reinsurance protection • A reinsurance agreement does not establish a partnership between the insurer and the reinsurer as co-insurance does, although some pro rata contracts may provide that the parties share proportionally in the gains and losses of the underlying policies Basic Reinsurance Structure 11
  12. 12. Insurance Regulatory Bodies In the US, state insurance regulatory systems determine and set most regulations. If an insurance company operates in multiple states, the states must coordinate to track producers and prevent violations. State Legislators • State legislators set the regulatorypolicies for insurance • The state legislators oversee state insurance departments, review and revise insurance laws, and approve budgets State Regulators • Grantedauthority by the states to oversee the insurance industry and implement insurance regulation • Responsible for ensuring insurers are financially solvent, and that claims are paid out fairly and as outlined in policy contracts Federal Insurance Office and the Financial Stability Oversight Council (FSOC) • The FIO serves as an advisory member of the FSOC. The FIO is responsible for monitoring all aspects of the insurance sector and representing the US on prudent international insurance matters • The FSOC monitors all aspects of the insurance industry, including: o Identifying issues or gaps in the regulation of insurers that could lead to a systemic crisis o Monitoring the extent to which underserved consumers have access to insurance products o Recommending an insurer be designated as an entity subject to regulation as a nonbank financial company supervised by the Federal Reserve o Coordinating federal efforts and developing federal policies on prudential aspects of international insurance matters o Consulting with states regarding insurance matters of national and international importance National Association of Insurance Commissioners (NAIC) • US standard-setting and regulatory support organization created and governed by the chief insurance regulators from the 50 states • The NAIC serves as a vehicle for individual state regulators to coordinate their activities and share resources • The NAIC functions as an advisory body and service provider for state insurance departments 12
  13. 13. Functions of Insurance Regulation Insurance regulation is structured around several key functions, including: insurer licensing, producer licensing, product regulation, market conduct, financial regulation, and consumer services. Licensing • An insurance company must be licensed before it can do business • Insurance companies that are licensed and authorized to do business in a particular state are known as “admitted” insurers and are said to be “domiciled” in the state that issued the primary license Capital Requirements • All insurance companies are subject to capital and surplus requirements, which vary widely by state • The NAIC develops model rules and regulations for the industry, many of which must be approved by state legislatures before theycan be implemented Solvency and Guaranty Funds • State regulators monitor the financial health of companies through the analysis of financial statements and periodic onsite examinations • All states have organizations known as guaranty funds through which the property & casualty insurance industry covers claims against insolvent insurers Rates • Three principles guide state rate regulation: rates are adequate to maintain insurance company solvency, rates are not excessive, and rates are not discriminatory (pricing only reflects expected claim and expense differences) • States have adopted various methods of regulating insurance rates, which fall into two categories, "prior approval" and "competitive” 13
  14. 14. Insurance Landscape 14
  15. 15. US Insurance Landscape Life Insurance, $616,000,000 Accident and Health, $178,000,000 P/C Commercial, $252,000,000 P/C Personal, $255,000,000 Revenue Associated with 2013 US Insurance Policies ($000) The US insurance industry is the largest in the world in terms of revenue. Insurance premiums totaled more than $1.2 T in 2014, accounting for approximately 7% of GDP and 40% of the financial sector. Insurance companies play a significant role in the global financial markets, accounting for roughly half the total assets held by insured depository institutions. 11.9 11.5 11.1 9 7.6 7.5 6.7 4 3.9 3 2.2 2 1.3 South Korea United Kingdom Japan France Italy United States Germany Brazil India China Mexico United Arab Emirates Russia Insurance Penetration Rate Ratio of Total Insurance Premiums to GDP Source: McKinsey, Insurance Information Institute 15
  16. 16. State Farm Liberty Mutual Allstate Berkshire Hathaway Travelers Other UnitedHealth Group WellPoint Kaiser Foundation Group Humana Group Aetna Group Other MetLife Prudential New York Life Insurance Jackson National Life Group AEGON Other Insurance Landscape – Market Share by Sector P&C Life Health Source: Insurance Information Institute 16
  17. 17. MetLife Prudential New York Life Insurance Jackson National Life Group AEGON Other State Farm Liberty Mutual Allstate Berkshire Hathaway Travelers Other UnitedHealth Group WellPoint Kaiser Foundation Group Humana Group Aetna Group Other Insurance Landscape – Market Share by Sector Revenue P&C Life Health Source: Insurance Information Institute 17 $783 B $533 B $496 B
  18. 18. Largest US Insurance Companies Source: Insurance Information Institute, US Treasury Department, AM Best Metlife Prudential Financial Berkshire Hathaway AIG State Farm 0 200 400 600 800 1,000 1,200 0 20 40 60 80 100 120 Assets ($B) Net Premiums Written ($B) There were 6,118 insurance companies in the US in 2014, including 2,583 P&C insurers, 895 life insurers, and 857 health insurers. Top 25 P&C and Life Insurance Companies by Assets and Net Premiums 18 LifeP&C Diversified
  19. 19. Key Performance Variables Appropriate pricing and diversification of insurance portfolio risk • Accurate development of customer risk profiles • Appropriate diversification of customers • Disciplined and effective underwriting practices • Ability to manage risk Cost effective sales and distribution • Abilityto build brand recognition • Ability to reach and sell to customers in a cost effective manner • Ability to service claims and policies Investment in diversified and well-performing assets • Development of a strong balance sheet with the appropriate level of invested capital • Allocation of assets among asset classes • Ability to effectively measure and manage risk Ability to obtainand analyze accurate data • Abilityto collect accurate data on customers and events • Ability to use data to drive decisions and interactions (e.g. product development, customer engagement, fraud detection) Awareness Engagement Application & Closing Servicing Renewal Auto Insurance Lifecycle 19
  20. 20. Major Trends - Consolidation The need for growth in an environment of excess capital, intense competition, commoditization of insurance products, and shifting consumer buying preferenceshas lead to a series of mergers and acquisitions in the insurance sector. In addition, growth in government-subsidized programs, such as Medicaid and Medicare, coupled with a retreat of traditional employer-based plans in favor of high-deductible plans and exchanges, has generated pressure among carriers to acquire Medicaid and Medicare providers. 0 50 100 150 200 250 300 2010 2011 2012 2013 2014 2015 2016 Number of Transactions US Insurance Mergers and Acquisitions There were 24 transactions valued at $1 B or more in 2015, compared to 9 in 2014. P&C M&A deals increased to $39.6 B in 2015 from $6.7 B in 2014, driven by several large transactions (such as the Ace/Chubb merger). The number of health insurance M&A transactions also increased to 22 in 2015 from 13 in 2014. Source: Pitchbook 20
  21. 21. Major Trends – International Regulation Prior to the downturn, regulation of US insurance companies was almost entirely through the NAIC system. Regulations used US-centric metrics, with international organizations such as the International Association of Insurance Supervisors (IAIS) or International Monetary Fund (IMF) having little influence. Post the downturn, existing entities (such as the IAIS) and new ones (such as the G20) have moved to globalize and centralize insurance regulation, increasing international influence over US regulation in the process. Regulatory Structure Prior to the Downturn Regulatory Structure Post the Downturn International Association of Insurance Supervisors International Monetary Fund National Association of Insurance Commissioners International Association of Insurance Supervisors International Monetary Fund National Association of Insurance Commissioners The Department of the Treasury US Federal Reserve System G20 21
  22. 22. Major Trends – Increased Technology Spend Modernizing core insurance technology is a primary challenge facing insurance companies. From a resource perspective, the highest priority is hiring and retaining technology staff. 28% 27% 15% Modernization of core technology Innovative new products and services Increased competition Top Challenges Identified by Insurance Executives 68% 31% Insurance IT Budgets 1% 68% of insurance carriers anticipate IT budgets to increase this year. According to IDC, global insurers spent almost $101 B on IT in 2015, a 4.4% year over year increase. IT Resource Consumption Front, Middle, and Back Office Integration Data Security Data Latency Issues Scalability The majority of IT resources within the insurance sector are dedicated to system integrations and data security. Source: SS&C Technologies Survey 22
  23. 23. P&C Insurance 23
  24. 24. P&C Insurance Overview Property & Casualty insurance accounts for 56% of the net premiums written in the US insurance industry. The largest segments within P&C are auto, home, and commercial insurance. In 2014, a total of $502.6 B of net premiums were written in the sector. P&C Insurance is a Consolidated Market There are 2,583 P&C insurance companies in the US. The top 10 carriers account for 45.4% of P&C direct premiums written. US P&C Carriers Direct Premiums Employment in P&C by Direct Insurers has Declined 0 1,000 2,000 3,000 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Employment (000s) Insurance Industry Total Employment P&C Direct Insurers Life and Health Direct Insurers Direct P&C insurers have reduced staff over the past decade, likely due to the rise of online auto insurance. Source: Insurance Information Institute 24
  25. 25. Major P&C Insurance Dynamics - Competition & Balance Sheet Strength Cyclical Pattern of Competition Insurance carriers must balance growth with profitability – leading to a cyclical pattern between hard and soft markets. The duration of insurance cycles varies, however historically cycles have lasted 6-10 years. Hard Market Premiums and profits rise as insurance companies focus on building reserves. Insurance carriers are less focused on customer acquisition and competing on price. Soft Market Premiums and profits fall as insurance carriers attempt to gain market share. Insurance carriers with strong balance sheets focus on lowering premiums and aggressively pricing risk. Hard Market Soft Market Higher Premium Rates Increased Profitability Strict Underwriting Falling Premium Rates Decreased Profitability Higher Competition 25
  26. 26. P&C Insurance Industry Profitability Over Time -5% 0% 5% 10% 15% 20% 25% ROE Profitability peaks approximately every 10 years. The next profitability peak is predicted to occur in 2016-2017 – meaning that premiums and the strictness of underwriting standards have been heightened over the past few years. Source: MarketRealist 26
  27. 27. 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Bonds Cash Property Equities Major P&C Insurance Dynamics – Investment Performance & Profitability Investment Performance Determines Profitability In practice, very few firms make a profit off of policies sold to consumers. Instead, P&C insurance companies generate profit off of their investments. Insurance carriers are therefore highly impacted by the financial health of the economy. Since 2000, companies have “de-risked” – moving away from equities and towards bonds. P&C Invested Assets Debt Securities Equity Cash / Other Real Estate & Loans P&C Invested Assets Over Time Source: NAIC, American Insurance Association 27
  28. 28. VC P&C Insurance Investing 0 10 20 30 40 50 60 2011 2012 2013 2014 2015 2016 Capital Invested ($M) Deals Innovation from startups in the P&C sector has primarily occurred in auto insurance. The number of deals in the sector remains low despite growing interest in the space. Source: Pitchbook 28
  29. 29. P&C Insurance Auto Insurance Landscape 29
  30. 30. Auto Insurance Overview Revenue $220.4 B Profit $22.0 B Annual Growth 1.9% 19% 11% 10% 9% 5% 5% 5% 4% 33% Market Share by Direct Premiums Underwritten (2014) State Farm Mutual Automobile Insurance Berkshire Hathaway Inc. Allstate Corp. Progressive Corp. USAA Insurance Group Farmers Insurance Liberty Mutual Nationwide Mutual Group Other Categories of Insurance • Liability insurance • Comprehensive physical damage policies Main Distribution Channels • Brokers & agents • Online Auto insurance represents the largest line of business in the property & casualty sector – accounting for approximately 45% of premiums written. Source: Insurance Information Institute 30
  31. 31. Auto Insurance Coverage Requirements by State Description Required by most states Liability Bodily Injury Coverage • Pays for injuries suffered by others in an accident you caused, including: medical expenses, funeral costs, long- term nursing care, lost income, and pain and suffering Yes Property Damage Coverage • Pays for repair/replacement to another person’s property that resulted from an accident Yes Umbrella Insurance • Works in conjunction with a homeowners and/or auto insurance policy; appliedafter liability coverage has been exhausted to cover injuries and property damage No Medical Coverages Personal Injury Protection • Covers the costs associated with injuries sustainedduring an accident. PIP can often work in conjunction with your health insurance. PIP is only available inno-fault states and a select few no-fault optional states Required in No-Fault States Medical Payments Coverage • Medical payments coverage generally pays for medical costs after an accident, regardless of who is found at fault for the accident Optional Full coverage typically provides state required liability and no-fault insurance coverage, collision coverage, and comprehensive coverage. State insurance requirements differ widely, with some states requiring no insurance coverage. 31
  32. 32. Auto Insurance Coverage Requirements by State Description Required by Most States Vehicle Coverage Comprehensive Insurance Coverage • Pays for repairs to your car after it has been damaged by an event other than a traffic accident, such as fire, theft, vandalism, failing objects, and natural disasters No Collision Insurance Coverage • Helps pay for repairs to your car after it has been damaged in a traffic accident No Gap Insurance Coverage • Covers the difference between a vehicles current fair market value and the amount still owed on the vehicle No Other • Emergency road service coverage, mechanical breakdown insurance, custom parts and equipment coverage No Other Uninsured motorist protection • Covers costs if you are hit by a driver with no insurance No Underinsured motorist protection • Covers costs if the other driver has insufficient insurance coverage and/or coverage limits No Rental reimbursement • Covers rental costs while your car is being repaired No 32
  33. 33. Factors Affecting Auto Insurance Premiums Average Annual Auto Insurance Premium by State Factors Impacting Individual Auto Insurance Premiums • Age • Gender • Education and employment • Make, model, year of the car • Where the car is typically parked • Driving record and claims history • Credit history • Some states do not allowinsurance companies to factor credit history into premiums • The chosen deductible Factors Impacting State Auto Insurance Premiums • Regulation (no fault insurance structure) • Accident severity (fatalities) • Population density • Frequency of driver initiated litigation • Crime • Weather Source: Kiplinger 33
  34. 34. Key Auto Insurance Dynamics - Sales Advertising Drives Sales Auto insurance is for the most part a homogenous product. Carriers invest heavily in advertising to differentiate their products. As a result, auto insurance has one of the highest advertising/sales ratios among insurance products. Brand recognition is a key success factor in the auto insurance industry. 0 200 400 600 800 1,000 1,200 Geico State Farm Allstate Farmers Progressive Liberty Mutual Nationwide American Family Travelers AIG USAA Annual P&C Marketing Spend ($M) 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Marketing Spend ($B) Total P&C Marketing Spend ($B) Source: Cornell, McKinsey 34
  35. 35. Key Auto Insurance Dynamics - Distribution 3.1 million auto insurance policies were sold online in 2012, up about 6% from 2010. 67% of customers report obtaining an online auto insurance quote. 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 209 2010 2011 2012 Distribution by Channel based on Direct Premiums Underwritten Independent Captive Direct Response Source: Insurance Information Institute 35
  36. 36. Auto Insurance Change & Innovation The auto insurance industry is anticipated to change drastically over the next 10 years. While car ownership is predicted to rise in the coming decade, technology will enable more efficient risk pricing and management, which will squeeze insurance margins. The sharing economy and autonomous vehicles will also have a large and unknown impact on the car insurance industry. Telematics • The use of GPS technology to track location, mileage, speed, acceleration, and time of use to better evaluate a driver’s vehicle utilization and risk profile • Telematics has penetrated personal insurance to a greater extent than commercial, with most national carriers offering a usage-based insurance product • Telematics enables carriers to offer products that are closely priced to actuarially fair premiums, potentially increasing competition as carriers reduce the cushion on policies, and eventually leading to consolidation Sharing Economy • The sharing economy poses new risks to the insurance business. The divide between personal and commercial auto has been obscured, and new products are needed to fill legal gaps • The sharing economy will increasingly impact car purchases. In major urban cities, vehicle ownership has dropped as services like Uber and Lyft have become more popular. In the long run, if less policies are purchased, the risk and cost to service an area will increase and premiums will rise Autonomous Vehicles • Autonomous vehicles will reduce accident frequency and severity. The legal responsibilities of insurance carriers however, have not been determined. State by state regulation will likely differ, leading to varying product offerings by region. Carriers with a strong regional focus may be better positioned to adopt changes relative to national carriers with a broad customer base • Autonomous vehicles will drastically alter pricing models. With lower overall risk, premiums will drop. With less capital to invest, carriers will likely be less profitable in the long term 36
  37. 37. Auto Insurance Startups Logo Company Stage Total Funding Location Description Goji Series C $70M Boston Auto insurance quote-comparison portal CoverHound Series C $57M San Francisco Auto insurance quote-comparison and buying portal Zendrive Series A $15M San Francisco Mobile telematics software for commercial fleets and individuals Metromile Series B $14M San Francisco Pay-per-mile insurance provider and smart driving app and hardware Driveway Software Series A $12M San Mateo App giving drivers and auto-insurance providers data about driving habits Snapsheet Series B $11M Chicago Virtual insurance claims operations Estify Series A $2M Los Angeles Digitizing paper insurance claims for auto repair Accuscore Series A $1M San Diego Data analytics on driver behavior for insurance underwriters 37
  38. 38. P&C Insurance Home Insurance Landscape 38
  39. 39. Home Insurance Overview Revenue $80.8 B Profit $4.8 B Annual Growth 4.7% 21% 9% 6% 6% 5% 5% 4% 2% 42% Market Share by Direct Premiums Underwritten (2014) State Farm Group Allstate Corp. Farmers Insurance Liberty Mutual USAA Insurance Group Travelers Group Nationwide Mutual Group Chubb Other Categories of Insurance • Property coverage • Liability coverage Main Distribution Channels • Exclusive agents • Independent agents The second largest line of personal P&C insurance is homeowners, which represents approximately 15% of net insurance premiums in the US. Source: Insurance Information Institute 39
  40. 40. Home Insurance Policies Homeowners 1 – Limited coverage policy • This “bare bones” policy covers against fire or lightning, smoke, windstorm or hail, explosion, riot or civil commotion, aircraft, vehicles, glass breakage, vandalism & malicious mischief, theft, and volcanic eruption. Due to demand for higher coverage, HO-1 is no longer available in most states Homeowners 2 – Basic policy • Broad policy covering against 16 disasters, including those covered by HO-1, loss by falling objects, weight of ice, snow or sleet, accidental flooding from plumbing, sudden rupture of heating or cooling systems, freezing of plumbing or related systems, and sudden and accidental damage from artificially generated electrical currents Homeowners 3 – Special policy • Offers the same protection as the HO-2; however also covers all perils except those explicitly excluded Homeowners 4 - Renter • Covers personal property against the same perils as HO-2. HO-4 also provides coverage for additional living expenses in the event of a loss Homeowners 6 – Condo/Co-op • Policy created to cover the special needs of condominium owners. It covers loss of personal property and building additions and alterations inside the owner’s individual unit Homeowners 1 – Limited coverage policy • Policy designed for older homes in which replacement costs exceed the property’s market value. This form allows the policyholder to carry lower limits of insurance rather than try to maintain coverage for 80% of replacement cost 40
  41. 41. Factors Affecting Home Insurance Premiums Average Annual Home Insurance Premium by State Micro Factors Impacting Home Insurance Premiums • Amount of coverage • Neighborhood crime • Fire safeguards and home security • Condition, materials, and age of the home • Certain breeds of dogs • Swimming pools, trampolines, etc. • Homeowner’s credit score $980 $691 $674 $567 $648 $538 $580 $871 $821 $1038 $844 $1661 $1501 $1213 $1038 $789 $1038 $1140 $779 $631 $802 $804 $1158 $721 $840$881 $1091 $2084 $975 $1134 $1248$1314 $1742 $1096 $771 $961 $1008 $927 $843 $837 $678 $981 $1160 $1233 $1150 $741$792 $848 $957 $942 • Population density • Real estate prices and construction costs • Exposure to catastrophes • Building regulation codes • Inflationary impact on insured contents Macro Factors Impacting Home Insurance Premiums According to a recent survey, 95% of homeowners have insurance but only 40% of renters have renter’s insurance. Source: NAIC 41
  42. 42. Home Insurance Claims In 2014 5.3% of insured homes had a claim. Property damage accounted for 97.3% of claims. The percentage of homeowners filing claims is highly dependent on weather-related activity. $0 $5,000 $10,000 $15,000 $20,000 $25,000 $30,000 $35,000 $40,000 2014 Homeowners Losses Ranked by Claims Severity 0 0.5 1 1.5 2 2.5 3 3.5 2014 Homeowners Losses Ranked by Claim Frequency 42
  43. 43. 0% 20% 40% 60% 80% 100% 120% 140% 160% 180% 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Homeowner Insurance Combined Ratio Actuarially fair pricing Homeowners Insurance Dynamics – Catastrophic Losses The frequency and severity of natural catastrophes has increased within the past few decades. Both premiums and losses have increased as insurers attempt to maintain profitability. Hurricane Andrew Hurricane Ike Record Tornado Activity Hurricane Sandy The combined ratio is a measure of profitability. It is the sum of incurred losses divided by earned premiums Source: Insurance Information Institute 43
  44. 44. Key Home Insurance Dynamics – Construction Costs 0 20 40 60 80 100 120 1980 1985 1990 1995 2000 2005 2010 2015 Price Index Price Index of US Single Family Homes Construction costs have a large impact on home insurance premiums. The cost of building a home rose 45% from the start of 2001 to the end of 2011 – far outpacing the rate of inflation. Source: US Census 44
  45. 45. Home Insurance Change & Innovation Innovation in the home insurance sector lags the auto insurance sector. While connected devices are available, few companies have designed new insurance products which integrate these technologies. Connected Devices Drones • According to Accenture, 45% of all home insurers believe connected devices drive revenue growth over the next three years. By partnering with connected device manufacturers, insurers can enable homeowners to prevent losses and limit the severity of events • Through providing preventative services, insurers will increase their touch points and have a more positive presence with customers • Despite various connected devices entering the market, implementation has been limited by a lack in mass market interest. Consumers view connected devices as “in development” and are holding off for more refined products • Drones have the potential to greatly reduce overhead costs of insurers. Physical inspections can be replaced through imaging performed by drones – revolutionizing the underwriting and claims process of home insurance • A major reduction in the effort to assess damages to a property will result from the pairing on drones with analytics, to completely automate the insurance analysis • Currently drones are restricted in use due to regulation. Drones are regulated by the FAA and states, and require pilot licenses to operate. Pending refined regulation to account for specific drone uses, insurance companies are expected integrate drones into their operations to a greater degree 45
  46. 46. Home Insurance Startups Logo Company Stage Total Funding Location Description Augury Series A $9 M New York, NY Sensors for heating, ventilation and air conditioning systems Wallflower Seed 500 K Cambridge, MA Connects mobile devices to gas or electric cooktops and monitors whether its on or off Roost Pre-Seed N/A Sunnyvale, CA A smart battery for smoke detectors Bungalow Pre-Seed N/A Philadelphia, PA A platform targetedat millennials for purchasing renters insurance ZeneHome Pre-Seed N/A Santa Monica, CA Digitizes homeowner paperwork and inspects the homeowner's mortgage, insurance policies, property taxes, bills, and services for inefficiencies, cost-savings, or better alternatives 46
  47. 47. Life Insurance Overview 47
  48. 48. Life Insurance Overview Revenue $533 B Profit $31 B* Annual Growth 6.2% 16% 8% 5% 5% 4% 4% 4% 3% 52% Market Share by Direct Premiums Underwritten (2014) MetLife Prudential Financial New York Life Insurance Jackson National Life Group AEGON Lincoln National American International Manulife Financial Other Categories of Insurance • Permanent Life • Term Life Main Distribution Channels • Independent agents • Affiliated agents * Thomvest EstimateSource: Insurance Information Institute Relative to other forms of insurance in the US, life insurance has a relatively low penetration rate. Traditional life insurance is no longer the primary business for many companies in the life/health insurance industry, as they have shifted focus to underwriting annuity products. 48
  49. 49. Life Insurance Products Permanent Life Provides death benefits and cash value in return for periodic payments. Permanent life products include whole life, universal life, and variable universal life. • Whole Life: Pays a death benefit and also accumulates a cash value. These policies have a high expense strain due to first-year commissions to agents. Over time, whole life provides an income stream to the company and the agent • Universal Life: Flexible premium policies that incorporate a savings component. The cash values that are accumulated are put into investments to earn interest. The accumulations are used to reduce future premiums or build the benefit amount. Tight pricing and high reserve requirements limit the profitability of these products • Variable Universal Life: Flexible premium policies allow investments in mutual-fund-like accounts. The variable performance of the investments is a risk held by the policyholder. Insurers are susceptible to profit fluctuations as mutual fund fees adjust to changing environments in the equity market Term Life • Provides protection for a specified period of time. It pays a benefit only if the insured person dies within the covered period. Term periods typically range from 1-30 years. Term life insurance is a highly competitive market with many financial institutions marketing and offering products Group Life • Group life insurance is marketed to employers or association groups. Typically in the form of term life insurance, costs may be shared between the participant (employee) and the master policyholder (employer). Participants can typically elect to pay for additional coverage not purchased by the master policyholder 49
  50. 50. 0% 10% 20% 30% 40% 50% 60% 70% Reasons for Not Purchasing Life Insurance Life Insurance Penetration 62% 38% US Households with Life Insurance Coverage 0.3 3.6 2.2 0.7 7.1 7 Gen Y Gen X Baby Boomers Life Insurance Sales Potential ($T) Covered Untapped Market Source: Deloitte The value of life insurance relative to its price and other financial priorities is the main reason for remaining uncovered. Relative to other types of insurance, life insurance has relatively low penetration. Without a government mandate, many consumers choose to forgo life insurance due to its price and other financial priorities. 50
  51. 51. Factors Impacting Life Insurance Premiums Monthly Premiums for a 20-Year Term $500,000 Policy $33 $36 $111 $611 $107 $217 $490 $2,016 $26 $36 $87 $419 $73 $144 $334 $1,495 20 35 50 65 Male Non-Smoker Male Smoker Female Non-Smoker Female Smoker Source: TrustedChoice.com Life insurance premiums increase exponentially with age. Tobacco use, medical history, and other health-related factors have thepotential to raise premiums by 3-4x. 51 Factors Impacting Life Insurance Premiums • Tobacco use • Age • Gender • Medical history • Alcohol use • Current health • Weight • Family history • Occupation • Lifestyle and hobbies • Driving record • Credit history
  52. 52. Key Life Insurance Dynamics – Life Insurance Sales 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% <25 25-44 45-64 65+ Total How Consumers Would Like to Purchase Life Insurance by Age Would not use the internet Research online, purchase directly from company (phone/mail) Research online, complete purchase online Research online, buy from advisor or agent While the majority of consumers still prefer to purchase life insurance through agents, the age-old saying that life insurance is “sold not bought” may be changing. Younger populations are performing significant research online, and are comfortable executing financial transactions without interacting with an advisor/agent. With 80% of first year premiums going towards agent commissions, a reduction in the cost of sales by switching to digital channels has the ability to drastically change the cost structure of life insurance. Source: LIMRA 52
  53. 53. Key Life Insurance Dynamics – Capital Market Conditions Compared to P&C insurance, life insurance is more asset-intensive and policies typically have longer durations. Interest rates and capital market returns therefore have a more significant impact on the profitability of life insurance carriers. Source: EY & US Treasury Department (60) (40) (20) - 20 40 60 -20% -15% -10% -5% 0% 5% 10% 15% 2008 2009 2010 2011 2012 Net Income ($B) Return US Life Insurance Profitability & Invested Asset Returns Net Income Return on Statutory Surplus 53
  54. 54. Key Life Insurance Dynamics – Aging Populations 70 71 74 75 77 79 9% 10% 11% 13% 12% 13% 0% 2% 4% 6% 8% 10% 12% 14% 64 66 68 70 72 74 76 78 80 1960 1970 1980 1990 2000 2010 Percent of Population Over 65 Life Expectancy (Years) Life Expectancy % Population over 65 In 1900, 75% of the US population died before the age of 65. Today, 70% of the population lives past 65. With longevity increasing, individuals must better prepare and save for retirement, and insurance carriers must appropriately adjust mortality assumptions to remain profitable. Source: Center for Disease Control 54
  55. 55. Life Insurance Startups Logo Company Stage Total Funding Location Description Lion Street Seed $3.1 M Austin, TX Resources for independent life insurers to meet the financial planning needs of high-net-worth and corporate clients Ladder Pre-Seed N/A Menlo Park, CA Technology-enabledfull stack insurance company Sureify Pre-Seed N/A San Jose, CA Third party source for life insurance education, comparison, and carrier data targetedat millennials 55
  56. 56. Health Insurance Overview 56
  57. 57. Health Insurance Overview Revenue $783 B Profit $33 B Annual Growth 6.5% 14% 8% 8% 5% 4% 3% 2% 2% 54% Market Share by Direct Premiums Underwritten (2014) UnitedHealth Group WellPoint Kaiser Foundation Group Humana Group Aetna Group Health Care Service Corporation Highmark Group CIGNA Other Types of Insurance Structures • HMO • PPO • EPO Main Distribution Channels • Employer plans • Direct • Government Source: Insurance Information Institute Health is the largest sector within insurance. The sector includes private health insurance companies as well as government programs. Select P&C and life insurance companies provide health insurance products. 57
  58. 58. Health Insurance Overview Health insurance costs are closely tied to health care expenditures – which have skyrocketed over the past few decades as life expectancy has increased and new health care technologies have been developed. The health insurance market has grown significantly since the implementation of the Affordable Care Act, with revenues increasing from $641 B in 2013 to $743 B in 2014. Much of this growth however, has been unprofitable. Health insurers lost a total of $2.5 B, or on average $163 per consumer enrolled, in the individual market in 2014. Compared to P&C and life insurance, health insurance has a shorter investment time horizon and higher loading factor. The average medical loss ratio (medical costs/premium revenues) has increased slightly to in recent years to 83.2%, due to requirements set by the Patient Protection and Affordable Care Act. Health Insurance Coverage in the US Employer Non-Group Medicaid Medicare Other Uninsured Private Health Insurance Spend Inpatient Outpatient Professional services Pharmacy Other 0% 5% 10% 15% 20% 25% 30% Percent of Insurers Operating Margin of Private Health Insurers Source: Wall Street Journal, McKinsey, Deloitte 58
  59. 59. Flow of Health Insurance Funds Purchasers Health Plans Providers $2.7 T in Expenditures Individuals Employers $305 B $305 B $580 B Government Private Plans $952 B $286 B Health plans consume a 15.2% of the $1172 B insurance companies receive. Health plans represent a significant cost to the US healthcare system and are therefore under intense scrutiny. • Hospitals • Physician Groups • Integrated Delivery Systems • Accountable Care Organizations • Coordinated Care Organizations Source: Deloitte $1172 B 59
  60. 60. Health Insurance Plans Plan Description Market Share of Policies Health Maintenance Organization (HMO) • HMOs use primary care physicians (PCPs) as gatekeepers to prevent the overuse of healthcare. Customers who enroll in HMOs are required to choose health care providers within the network of contracted physicians and hospitals 16% Preferred Provider Organization (PPO) • PPO plans aim to restrain the overuse of medical services while allowing patients more flexibility in their choice of physicians and specialists. There is no PCP gatekeeper for these plans, but customers are encouraged to choose providers within the network 56% Point of Service (POS) • A point-of-service plan(POS) is a type of managed care plan that is a hybrid of a HMO and PPO plan. Like an HMO, participants designate an in-network physician to be their primary care provider. But like a PPO, patients may go outside of the provider network for health care services 9% High-Deductible Health Plan (HDHP) • Health insurance plan with lower premiums and higher deductibles than traditional health plans. 19% Source: Kaiser Foundation 60
  61. 61. Major Government Programs and Regulation Children's Health Insurance Program (CHIP) • A program which was established by the Balanced Budget Act designed to provide health assistance to uninsured low-income children Consolidated Omnibus Budget Reconciliation Act (COBRA) • A federal act which requires each group health plan to allow employees and certain dependents to continue their group coverage for a stated period of time following a qualifying event that causes the loss of group health coverage • Qualifying events include reduced work hours, death or divorce of a covered employee, and termination of employment Health Insurance Portability and Accountability Act (HIPAA) • A federal act that protects people who change jobs, are self-employed, or who have pre-existing medical conditions. HIPAA standardizes the approach to the continuation of healthcare benefits for individuals and members of small group health plans and establishes similarities between the benefits extended to these individuals and those benefits offered to employees in large group plans • The act also contains provisions designed to ensure that prospective or current enrollees in a group health plan are not discriminated against based on health status Medicaid • Government funded health care typically provided to low-income individuals and families • Medicaid is jointly funded by the federal and state governments • Although the federal government establishes national guidelines, each state has the authority to establish its own eligibility standards, determine the type, duration, and scope of services, set payment rates, and administer the program Medicare • In 1965, the Social Security Act established both Medicare and Medicaid. Medicare is a federal health insurance program designedto provide coverage for individuals 65+ and individuals with applicable disabilities Source: UNT Health 61
  62. 62. $429 $476 2013 2014 Medicare Spending ($B) $586 $619 2013 2014 Medicare Spending ($B) Healthcare Spending Breakdown – Medicare & Medicaid 5.5% growth The increase in Medicare spending was primarily attributable to faster growth in spending for prescription drugs, physician and clinical services, and government administration. Medicare accounts for approximately 20% of total health care spending. The increased spending in Medicaid was largely driven by the newly eligible enrollees under the ACA, which were fully financed by the federal government. Medicaid accounts for approximately 16% of total health care spending. State and local Medicaid expenditures only grew 0.9 percent, while federal Medicaid expenditures increased 18.4 percent in 2014. 11% growth Source: Center for Medicare and Medicaid Services 62
  63. 63. $326 $330 2013 2014 Out-of-Pocket Expenditures ($B) Healthcare Spending Breakdown – Private & Out-of-Pocket Source: Center for Medicare and Medicaid Services $949 $991 2013 2014 Private Health Insurance ($B) Private health insurance accounts for 33% of total health care spending. Private health insurance spending has increased due to the Affordable Care Act, which has implemented marketplace plans, health insurance premium tax credits, health insurance industry fees, and benefit design changes. Out-of-pocket expenditures grew slower than the overall annual growth in healthcare spending. The slowdown is primarily due to a reduction in the number of individuals without health insurance. Out-of-pocket expenditures account for around 10% of total health care spending. 63 4.4% growth 1.3% growth
  64. 64. Innovation in Health Insurance Medical Grade Wearables Telemedicine • Soreon Research estimates that the smart wearable healthcare market will grow from $2 B in 2014 to more than $41 B in 2020, with diabetes, sleep disorders, obesity and cardiovascular disease representing the largest growth segments • Insurance carriers have recently invested and partnered with a variety of wearable device companies. Insurance companies are currently using wearable devices as a preventative measure, offering discounts to customers who meet certain fitness and wellness goals • As wearable data becomes more available, reliable, and detailed health insurance companies are expected to increase customer outreach through apps, wearables, and other mobile devices • Although telemedicine has been around for decades, its prevalence and popularity has suddenly exploded, fueled by a powerful combination of market forces and technological advances • More than half of US hospitals now use some form of telemedicine. Telemedicine allows doctors to provide care at lower costs and reduces hospital contaminations. In addition, patients have experienced a 75% reduction in travel and a corresponding 75% increase in certain types of care, such as psychological evaluations • While the promises of telemedicine are prevalent, doctor are prevented from touching a patient and observing certain cues – making it an inappropriate response to certain medical conditions Source: Reuters, Insurance Net News 64
  65. 65. Health Insurance Startups Logo Company Stage Total Funding Location Description Oscar Private Equity $738 M New York, NY Provides and sells health insurance, utilizing technology, design and data to optimize the healthcare experience Bright Health Series A $80 M Minnesota City, MN An insurance service platform that partners with health systems and care partners to provide health plans Maestro Healthcare Technology Venture $53 M Chicago, IL An online service platform that offers private exchange marketplace, healthcare enrollment, health insurance, healthcare savings accounts, care management and billing services Clover Health Series B $135 M San Francisco, CA Clinical data platform that designs various medical insurance plans and models for senior citizens and other middle-income group patients Stride Health Series A $15 M San Francisco, CA Health insurance recommendation engine for finding health insurance plans 65

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