Why is Sequoia Investing in Peer-to-Peer?

The idea of peer-to-peer insurance is simple. It allows a group of similar people to pool their risk and thus receive lower premiums based on group risk against individual risk. If few or no claims are made during the period of risk coverage – there is then a “cash back” element to the policy which allows the members of the group to get paid for not filing claims.

Unsurprisingly, this is likely to appeal to consumers as a way to reduce their insurance premiums over the course of a year.

The concept of peer-to-peer insurance is not new. In fact, there are companies that have been involved with pooled risk for a long time. The trouble was that consumers, until recently, would have had problems finding others to pool their risks with.

Now, with the internet and the sharing economy running hand-in-hand, it may be time for the peer-to-peer model to take off in the mass market.

Of course, investors aren’t handing over wheelbarrows full of cash because they’re looking for a better deal for consumers; they’re hoping for huge profits by enabling higher levels of competition in one of the most valuable market places on earth.

The property and automotive markets, in which peer-to-peer insurance is easiest to develop, are worth billions of pounds and more than a trillion dollars in the United States in profits. That’s a substantial amount of money and it’s worth fighting over.

However, potential for disruption to the insurance market is one thing – actualizing it is quite another. The key challenge facing peer-to-peer insurers is educating the general public. That’s a public that already finds insurance confusing to begin with.

While the idea of cashbacks may lure in policyholders; failure for those cashbacks to materialize (because claims have gone over a certain threshold) may well drive consumers back into the arms of traditional insurers even if they make the switch in the first place.

It would be a good idea for insurers to keep an eye on Lemonade and the progress that it makes; peer-to-peer insurance may, with the right backing, be something that the mainstream insurer needs to consider carefully in the very near future.

However, how do we calculate the value of an asset (the property) under a policy and what should the policyholder expect to receive when they make a claim.

Replacement Cost Value

Some policies offer a “replacement cost” as a form of compensation for an asset. The replacement cost is relatively easy to calculate – it’s simply the cost to replace an asset with something of the same or equal value.

Replacement costs aren’t fixed. For example, if you have building’s insurance – the property market can go up and down and so can the value of a building. Similarly, if you were to insure a commodity item (like say, 10 tons of coffee) the value of that commodity can rise and fall on the market and so can the replacement cost.

In most instances assets, when they are covered by a replacement cost value, must be replaced before the policy will pay out – this prevents the policyholder from over-insuring the value of an asset (either by accident or for fraudulent purposes).

Actual Cash Value

Actual cash value is slightly different. When an asset is insured based on actual cash value it takes into account the depreciation of the asset when determining how much the policyholder will be paid. This isn’t the same as “book value” (which is an accounting determination as to how much the asset will be valued on the company’s books).

For actual cash value: Deprecation is, normally, calculated by the insurer allocating a “useful life” to an item (say a period of 10 years) and then the remaining useful determines the level of depreciation.

Depreciation = Remaining Life of Asset/Useful Life of Asset

So let’s say we insure a video camera that we’d purchased for £2,000. The insurer decides that the useful life for the camera is 5 years.

After 2 years of holding a policy – the camera is destroyed.

The Actual Cash Value is calculated as follows:

Actual Cash Value = Original Value x Depreciation

The useful life of the asset was 5 years, we had the camera for 2 years, so there were 3 years of remaining life on the asset.

Depreciation = 3/5 = 60%

Actual cash value = 2000 x 60% = £1,200

So our policy only pays out £1,200.

Fixed Value Replacement Cost

This is a slightly different method again. In this instance, the insurer allocates at the beginning of the policy a replacement value to the item. No matter how the item rises (or falls) in value in the interim – it is the fixed value replacement cost which is paid to the insured party in the event of a claim.

What Did They Find?

• More than 1/3 of drivers reported that they had altered their driving behaviour to a small extent after having the black box installed
• Nearly 20% of drivers reported that they’d made major changes to their driving behaviour after using a telematics device from their insurer

In total 54% of drivers said that they had changed the way that they drive because of telematics from the insurer.

The survey also discovered that more than 4 out of 5 drivers had been given information by the insurers to help improve their driving behaviour and that 81% of those drivers had read that information. Of those that read the information nearly 90% said that they found the information useful.

What Does This Mean?

We’re a little sceptical of survey data when it comes to reporting improvements in behaviour. We know, for example, that when people who are dieting are asked to record what they eat in a day – they significantly under-report their consumption. This may be because participants want to fool themselves or it may be that they don’t accurately record data because they forget about it. However, it is a good indication that self-reporting is not a very accurate way to assess the impact of a change in behaviour.

What it probably does mean is that telematics is getting some drivers to think about their driving habits more closely and that some drivers are making changes to their driving because of the technology. As the Insurance Research Council concludes; it is difficult to make any hard conclusions as to how effective these changes are and whether they are sustained or whether they only occur for a short period of time following contact from an insurer.

The data can certainly be seen as a positive indicator that telematics is getting people to consider how they drive but it will take hard and fast evidence from insurers (based on assessments of claims made by similar groups of risk profiles both with and without telematics) before we can be confident that telematics is having any meaningful benefits in terms of the way people drive today.

The Insurance Margin

The insurance margin is derived from the fact that insurers hold a “float”. The float is the combined funds derived from premium income. Until a policyholder makes a claim against their insurance policy – the insurer is able to invest their premium income to generate further returns. The insurer is allowed to keep the whole of the profits from these investments.

In fact, insurance company shareholders expect an insurer to invest their float. It can bring in a significant amount of profit and boost the dividends paid to shareholders each year.

How Do We Calculate Insurance Margin?

Firstly we need to understand the Net Earned Premium (NEP). This is based on Gross Written Premium (GWP), which is simply a tally of all the insurance premiums paid into the float. However, it’s more important from an accounting point of view to examine the Gross Earned Premium (GEP) which is the portion of the GWP that has been earned in any given financial year. (So a 1 year policy worth £1200 written on the 1^st of March would only accrue £100 of GEP before the 1^st of April – the end of the financial year).

We then take the GEP and subtract reinsurance costs (reinsurance being insurance taken by the insurer to limit their overall risk exposure) to derive NEP.

The insurance margin is the profit made on the float, which is called Insurance Profit, divided by the NEP.

So:

Insurance Margin =

Insurance Profit/Net Earned Premium(NEP)

Why Does This Matter?

It matters because the insurance margin can tell an investor an awful lot about the financial health of an insurer.

It’s possible that an insurer can make an underwriting loss in any given year and still be profitable thanks to the Insurance Profit on the float. Investment returns can offset underwriting losses. Insurers which can withstand underwriting losses thanks to investments are more financially secure than those which can’t.

Over in the US they’ve been developing online relationship management software that will let clients purchase insurance direct (using any device to do so), expand their policies and even make claims without having to interact with anyone. So where will this leave the insurance broker?

The Future Looks Bright

It may be that the most simple of insurance policies may fall below the radar of brokerages as time goes forward. Those brokers focused solely on car insurance, for example, might want to expand their product range. But in general we think the future looks bright for brokers.

The truth is that people’s insurance needs are going to become ever more complex. Businesses are going to find that doubly so. With increasing levels of technological sophistication combined with global warming and globalization trends – the complexity of risk and coverage is guaranteed to grow.

It’s all well and good asking for a simple quotation for car insurance without speaking to someone about the nitty-gritty of the policy but it’s not going to leave people reassured when they start discussing their data (either personal or business) or the risks of their jobs being outsourced or that a freak hurricane destroys their office or home.

In fact, we suspect that more and more people are going to be turning to brokers to put a human face on insurance. This will be done in order to ensure that they are getting the best advice from people that they can trust to support their needs.

Even simple technology advances in simple insurance fields may bring the broker closer to the customer. Insurers might be able to cut the car insurance broker out of the loop but at what cost? Brokers often provide administrative support, customer services, etc. for policies. It may well be that the broker finds themselves at the heart of these insurance technology changes where the technology enables instant access to a broker to provide impartial advice and ensure that customer satisfaction remains paramount in the sales process.

That led to us wondering, is it time for insurance companies to get into the gaming industry? After all, while the Konami scheme is run within the game – there have been other gaming moments where players, at least in hindsight, must have regretted not having insurance for their gaming investments.

EVE Online

EVE Online is a massive multi-player online (MMO) space simulator. In the game, you can be anyone you want to be in a futuristic universe. Players devote weeks, months and even years to collecting credits and growing their space armadas. These armadas cost real money and are valued in real money within the game itself.

Twice now, players have essentially ripped off large groups of other players in the game for in game currency worth thousands of pounds in the real world. The most recent heist happened earlier this year with $13,000 worth of currency stolen.

Legend of Mir

Over in China, they take their gaming really seriously. In fact when one player of Legend of Mir (a fantasy style) MMO borrowed another player’s “dragon sabre” in the game and then refused to give it back – we learned just how seriously they take their gaming.

Qiu Chengwei was so angry at the loss of this super weapon (worth just under $1,000 in real terms) that he visited the thief at home and stabbed him to death. Qiu is now serving a 15 year sentence at the Chinese government’s pleasure.

World of Warcraft

In a slightly less traditional crime, the World of Warcraft guild Serenity Now decided to help honour the death of a real world player. Actually, no they didn’t. In what must be one of the least pleasant efforts in the history of gaming – mourners arrived at a virtual funeral for the player only to be massacred by Serenity Now; who apparently couldn’t understand how this might upset the player’s friends and family. (You can see the whole sorry tale here but be warned some of it is NSFW).

Insurance and Gaming

There are many other tales of woe and peculiarity affecting the gaming world. Perhaps, it’s time for an insurer to come to the rescue? To work with players to protect them against losses, death and indignity through the act of gaming itself?

We appreciate that this kind of insurance is not going to attract vast premiums but in the days of micro-payments via PayPal or mobile phones – surely tens of millions of £5 payments a year might be of interest to an insurer? Let us know what you think in the comments below.

So what’s new?

We’ve got a fair number of new features so let’s take a look at each of them in turn:

Trending

Right up at the top of the screen you’ll find a news ticker for trending articles. These are the articles that are most popular at this moment in time and therefore, hopefully, the most relevant to those trying to get a quick information snack.

All you have to do is click on the article title and you’ll be taken straight there.

The Menu

Don’t forget to check out our helpful tools section (under products) – we’ll be growing this over the coming weeks.

Social Media

We’ve also made it easier than ever to connect with us on social media – our Facebook, Twitter and RSS feeds are a single click away now. Just use the icons at the top right of the page to go straight to the feed that you’re interested in.

Slideshow

You’ll find many of our best and most popular pieces are now included in the slideshow just underneath the menu bar. This is a great way to get a preview of some of the content of our trending articles too.

Latest Articles

Our latest articles aren’t going anywhere – you’ll find them on the left hand side of the main body of the screen. This is where you can make certain you’re staying up to date with all the recent news concerning insurance and technology and our latest insurance glossary pieces too.

Subscription Option

We also have a subscription option where you can receive our latest articles straight to your inbox – it’s the perfect tool for the busy insurance executive who doesn’t want to have to check in to a website but still wants to keep their finger on the pulse of what’s happening.

Social Media Coverage

If you’d like to know what’s being said on social media – we offer a sneak preview too. It’s on the right of the screen just below the subscription option.

Favourite Authors

And last but by no means least – we make it easy for you to catch up with your favourite Riskheads’ contributors now. Just click on a name and see their latest articles.

We hope you’ll enjoy this new more user-friendly version of Riskheads. Please let us know your thoughts in the comments box below.

If you do decide to develop an app for your insurance brokerage, we’ve got some tips to make the most of the investment:

Know Your User

You need to talk to existing and potential clients and find out what they’d want from a mobile app. A lot of money is wasted on app development which is only based on market research findings. You want to go deeper than that and make sure that you’re investing in an app that your users really want to use.

Consider the Cloud

The big advantages of using the cloud for hosting are the scalability and flexibility it offers. However, this can present challenges when trying to integrate the app with the functionality you already have in other systems. You need to ensure that your internal company systems architecture is compatible with the cloud solutions you want to use.

Think About Offline Experiences

Not every app has to be connected to the internet to provide valuable information. Of course, you want your users to be in contact at times but you might want to think about making it easy for your app to be used whether or not there’s an internet connection available at the time.

Communication is Key

Apps need to be designed so that their function is clear to the user. That means developing an app that is intuitive to use and where any written instructions are simple and to the point. Don’t try and drown your users in information or show off how technically clever you are. Keeping things simple means keep them accessible and that leads to better user experiences.

Different Platforms Must be Seamless With Each Other

If your users will use the app on multiple devices, the experience must be consistent across all devices. Ideally, any data that’s needed to run the app should transfer when a new instance is installed. Don’t make users keep re-entering information, let the app take care of the donkey work.

Make Convenience a Priority

The app you deliver to your clients needs to be more than just an advertising tool; it also has to make their lives easier and more convenient. The more useful the app is, the more it will be used, the more opportunities you will have to connect with your prospects and existing customers in a meaningful way.

Do One Thing Really Well

There’s no need to aim for a complex app that delivers tons of functionality. It’s actually better to deliver something that does one thing really well. It makes it easier for existing users to explain to potential users why they value your service. Always ensure that you make that one thing you do really well – the most obvious functionality within your app.

What is the Lapse Ratio?

The lapse ratio is a comparison of the number of policies active in any given period with the number that were not renewed (e.g. they have lapsed). A lapsed policy is distinctly different from a cancelled policy in that a cancelled policy requires an action to cancel; a lapsed policy is simply a failure to renew on behalf of the policyholder.

The formula for this is as follows:

(A-R)/A x 100

A = Number of active policies in the period

R= Number of renewed policies in the period

Why Does This Matter?

An insurer wants to renew as many policies as possible. The more renewals, the lower their operating costs and the higher their earnings will be. So let’s say that an insurer has 10,000 policy holders and that 3200 of these are renewed.

The lapse ratio here is 68%, (10000-3200)/(10000) x 100, which may or may not be acceptable.

It’s important to note that the acceptable lapse ratio for an insurer will be defined by the type of policy, the geographic range of policies, etc.

What Can a Lapse Ratio Be Used For?

In general, an insurer will use their lapse ratio to measure their current level of competitiveness in any given market. An unacceptably high lapse ratio indicates that the insurer is struggling to attract renewals compared to past performance.

As you might expect consumer focused policies have higher lapse ratios than commercial policies. This is because consumers are more prone to shop around for the lowest cost policy, something that is increasingly easy with internet comparison shopping sites.

Businesses, on the other hand, are less likely to price comparison shop due to the higher levels of complexity involved in their insurance policies.

How Can An Insurer Reduce Their Lapse Ratio?

Insurers can take a variety of steps to reduce their lapse ratio but common strategies include:

• Reducing the premiums of renewals to increase competitiveness
• Sending out renewal notices to customers reminding them to take action to renew
• Incentivizing renewals through gifts or other loyalty programs

Much of the action taken will depend on the budget that the insurer has available for marketing; bigger insurers can often develop more attractive offerings than smaller insurers on this basis.