Insurance Industry Overview

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Insurance Industry Overview
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
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
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
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
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
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
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
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
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.
• 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
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
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
Insurance Landscape
14
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
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
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
$496	B
Largest US Insurance Companies
Source:	Insurance	Information	Institute,	US	Treasury	Department,	AM	Best
Metlife	
Prudential	Financial
Berkshire	Hathaway
AIG
State	Farm
0
200
400
600
800
1,000
1,200
0 20 40 60 80 100 120
Assets	($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
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
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
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
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
P&C Insurance
23
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
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
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
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
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
P&C Insurance
Auto Insurance Landscape
29
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
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
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
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
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
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
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
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
P&C Insurance
Home Insurance Landscape
38
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
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
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
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
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
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
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
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
Life Insurance Overview
47
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
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
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
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
$1,495
20 35 50 65
Male	Non-Smoker Male	Smoker Female	Non-Smoker Female	Smoker
Source:	TrustedChoice.com
Life	insurance	premiums	increase	exponentially	with	age.	Tobacco	use,	medical	history,	and	other	health-related	factors	have	thepotential	to	raise	premiums	
by	3-4x.
51
Factors	Impacting	Life	Insurance	Premiums
• Tobacco	use
• Age
• Gender
• Medical	history
• Alcohol	use
• Current	health
• Weight
• Family	history
• Occupation
• Lifestyle	and	hobbies
• Driving	record
• Credit	history
Key Life Insurance Dynamics – Life Insurance Sales
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
<25 25-44 45-64 65+ Total
How	Consumers	Would	Like	to	Purchase	Life	Insurance	by	Age
Would	not	use	the		internet Research	online,	purchase	directly	from	company	(phone/mail)
Research	online,	complete	purchase	online Research	online,	buy	from	advisor	or	agent
While	the	majority	of	consumers	still	prefer	to	purchase	life	insurance	through	agents,	the	age-old	saying	that	life	insurance	is	“sold	not	bought”	may	be	
changing.	Younger	populations	are	performing	significant	research	online,	and	are	comfortable	executing	financial	transactions	without	interacting	with	an	
advisor/agent.	With	80%	of	first	year	premiums	going	towards	agent	commissions,	a	reduction	in	the	cost	of	sales	by	switching to digital	channels	has	the	
ability	to	drastically	change	the	cost	structure	of	life	insurance.
Source:	LIMRA 52
Key Life Insurance Dynamics – Capital Market Conditions
Compared	to	P&C	insurance,	life	insurance	is	more	asset-intensive	and	policies	typically	have	longer	durations.	Interest	rates	and	capital	market	returns	
therefore	have	a	more	significant	impact	on	the	profitability	of	life	insurance	carriers.
Source:	EY	&	US	Treasury	Department
(60)
(40)
(20)
-
20	
40	
60	
-20%
-15%
-10%
-5%
0%
5%
10%
15%
2008 2009 2010 2011 2012
Net	Income	($B)
Return
US	Life	Insurance	Profitability	&	Invested	Asset	Returns
Net	Income Return	on	Statutory	Surplus
53
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
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
Health Insurance Overview
56
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
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
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
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
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
$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
$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
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
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
1 of 65

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Insurance Industry Overview

  • 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 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 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 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 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 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 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. 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 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. • 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. 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. 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
  • 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 $1.2 T in 2014, accounting for approximately 7% of GDP and 40% of the financial sector. Insurance companies play a significant role in the global financial markets, accounting for roughly half the total assets held by insured depository institutions. 11.9 11.5 11.1 9 7.6 7.5 6.7 4 3.9 3 2.2 2 1.3 South Korea United Kingdom Japan France Italy United States Germany Brazil India China Mexico United Arab Emirates Russia Insurance Penetration Rate Ratio of Total Insurance Premiums to GDP Source: McKinsey, Insurance Information Institute 15
  • 18. Largest US Insurance Companies Source: Insurance Information Institute, US Treasury Department, AM Best Metlife Prudential Financial Berkshire Hathaway AIG State Farm 0 200 400 600 800 1,000 1,200 0 20 40 60 80 100 120 Assets ($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. 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. 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. 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. 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
  • 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. 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. 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. 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. 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
  • 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. 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. 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. 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. 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. 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. 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. 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
  • 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. 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. 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
  • 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. 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. 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. 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
  • 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. 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. 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. 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 $1,495 20 35 50 65 Male Non-Smoker Male Smoker Female Non-Smoker Female Smoker Source: TrustedChoice.com Life insurance premiums increase exponentially with age. Tobacco use, medical history, and other health-related factors have thepotential to raise premiums by 3-4x. 51 Factors Impacting Life Insurance Premiums • Tobacco use • Age • Gender • Medical history • Alcohol use • Current health • Weight • Family history • Occupation • Lifestyle and hobbies • Driving record • Credit history
  • 52. Key Life Insurance Dynamics – Life Insurance Sales 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% <25 25-44 45-64 65+ Total How Consumers Would Like to Purchase Life Insurance by Age Would not use the internet Research online, purchase directly from company (phone/mail) Research online, complete purchase online Research online, buy from advisor or agent While the majority of consumers still prefer to purchase life insurance through agents, the age-old saying that life insurance is “sold not bought” may be changing. Younger populations are performing significant research online, and are comfortable executing financial transactions without interacting with an advisor/agent. With 80% of first year premiums going towards agent commissions, a reduction in the cost of sales by switching to digital channels has the ability to drastically change the cost structure of life insurance. Source: LIMRA 52
  • 53. Key Life Insurance Dynamics – Capital Market Conditions Compared to P&C insurance, life insurance is more asset-intensive and policies typically have longer durations. Interest rates and capital market returns therefore have a more significant impact on the profitability of life insurance carriers. Source: EY & US Treasury Department (60) (40) (20) - 20 40 60 -20% -15% -10% -5% 0% 5% 10% 15% 2008 2009 2010 2011 2012 Net Income ($B) Return US Life Insurance Profitability & Invested Asset Returns Net Income Return on Statutory Surplus 53
  • 54. 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. 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
  • 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. 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. 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. 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. 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. $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. $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. 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. 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