The RBNZ has revealed plans to talk with insurers about climate risks. That is a good idea. Commencing a conversation about climate risks may enable pricing signals to more smoothly contribute to changes in policy necessary to avert climate change, and manage its effects. Dealing with this in a planned way helps avoid consumers and companies getting shocked: like suddenly having flood coverage removed for properties in low-lying areas.
In Australia ASIC has called for general insurance commissions to be banned. I think this is likely to have unintended consequences. It might well kill off sales of general insurance at car-yards and over the phone, where most of the problems have been discovered. But it may also damage the business model of third-party general insurance advisers that have been the only real advocates for consumers, and quality, in a market dominated by just a couple of large companies.
Meanwhile, back in New Zealand, the New Zealand Herald wondered whether the backlash against banks might damage the offer of services to New Zealanders. In a piece which brought the first hint of balance from mainstream media to the debate about about conduct regulation. Link.
My worry is that a financial services sector where the only advice you could get is fee-only, would leave the mass market without access to the ability to compare and consider higher quality alternatives without having to find a couple of thousand dollars.
Grant Robertson appears to be worried that insurers are sending price signals about earthquake zones and flood risks, but I think he has that all wrong: properly pricing these risks encourages development in other places, reduces the cost to taxpayers in emergencies, and also helps people make better choices to mitigate climate change. Prices in general, and insurance in particular have a role to play in changing behaviour. In truth, I think this government knows that - otherwise they wouldn't tax cigarettes and petrol so much.
Here is the short version of my analysis of the way Lemonade has focused their offer on the things that will motivate customers to buy:
- "Forget everything you know about insurance"
That's a promise to be different, cleverly playing on the low trust environment for insurance. It is a gamble, and must be backed up by what follows. Lemonade can only get away with it, because they do back it up.
- "Instant Everything"
Their tech means that you can get cover in 90 seconds and get claims paid in three minutes. If you want a benchmark for product development, you have it right there. Beat those two numbers and you have a winner. Why? Because life is short and apart from a few sad individuals (like me) no-one is so interested in insurance that they want to fill in a 2, 12, or 22-page form. No one really wants to read a 2, 12, or 150-page policy document. Consumers are just not that into us. Making everything "instant" is also a testable proposition. It's almost a dare: we bet we can move your insurance fast. The consumer can see if its true - but only by starting. When was the last time you heard an insurer bragging about how quick they do things?
- "Killer prices".
This is a testable proposition as well. Most consumers can spot the lower number out of two. Price can be a curse, of course, but right now Lemonade is bound to lose money, so you might as well lose it with more clients than with less. The consumer is up for this too, surprisingly. The unfair advantage of the upstart? Sure, but Lemonade is also betting that by automating everything the marginal costs of acquiring a customer can be kept very low, well beyond the start-up phase. In fact they reckon they are one tenth of the industry average.
- "Big heart".
In a cause-motivated era the model of Lemonade, which states that after their share (20% of the premium) the surplus will go to charity. Warm-fuzzy emotional buyers can love the connection with their self-image. Cold-hard rational buyers can feel comfortable that the company does not have a limitless incentive to deny claims. It works both ways. Hidden in here is a promise about product, but it isn't presented in a technical way.
How successful are they? Very, but it is early. Like a lot of start-ups Lemonade is keen on rapid customer acquisition, and doesn't need to worry so much about profits right now. Its current customer base is obviously too small to support its infrastructure, so detailed financial analysis cannot reveal much at this early stage. Of course, some day, it will need to achieve profit, some day it will be judged on the same metrics as other insurers. But insurers choosing to comfort themselves with that line, and putting their own digital transformation on the same timescale - 'we'll do that some-day' should reflect that Amazon is over 20 years old, has intentionally tiny profits, distributes no dividend, and remains a decidedly different company to all the others. Amazon thinks of itself as a 'day-one' company, and intentionally works on a strategy of avoiding 'some-day'. Amazon are also interested in the insurance market. For New Zealand insurers today, with companies like Lemonade choosing to start in New York, rather than Auckland, you have a precious window in which to change. Lemonade has a few markets to go before it comes here. So does Amazon. But you may need every day's grace they give you.
In this Newstalk ZB report Winston Peters, Deputy Prime Minister, has called for a new government-owned, New Zealand Insurer. Peters is talking about a general insurance company, but before you consider the wider question - life insurance - Gerry Brownlee has points out that, in effect, NZ already has one: AMI, as a result of the bailout required after the Christchurch earthquakes.
If you apply the same logic to life insurance, the state already owns at least one of those: Kiwi Insurance Limited, part of the Kiwibank group of companies, is already state owned. Plus, the New Zealand Superannuation Fund owns a substantial stake in Fidelity Life Assurance Company.
There could be many directions of argument on the idea of a new general insurer, owned by the state. Although there strong strand of economic nationalism behind what Peters has said he might find that there are others that worry about the high levels of concentration of insurance brands under two large Australian-owned insurers. Those voices might welcome a new insurer joining the field. Still others might reflect that like-it-or-not government is always, kind of, the insurer of last resort, (for example - supporting AMI, running ACC and EQC) so acquiring still more risk might not be such a bright idea. The first step is to be clear about whether there really is a problem with general insurancee in New Zealand - what evidence of actual market failure is there?
Meanwhile, since we're on the subject of general insurance, the New Zealand Initiative has an excellent report on the insurance system following the Christchurch and Kaikoura earthquakes. You can find the report at this link, but here are three summary recommendations as they apply to private insurers:
- Government should follow through with proposed changes to insurance that make private insurers the first port of call for claimants in major events, but strengthen audit procedures appropriately;
- Government should quickly seek declaratory judgments in key test cases arising after a major disaster; and
- Government should consider mechanisms like the Reserve Bank’s OBR for failed insurers.
KPMG has highlighted the major forces they see shaping the insurance industry in their general insurance update.
“Disruption is the new normal,” says KPMG’s Steven Graham in KPMG’s General Insurance Update 2017, released today following his presentation at last week’s Insurance Council of New Zealand’s annual industry conference.
The potential for a non-traditional provider, such as one of the technology giants, Amazon or Apple, to step into the market adds to a clear imperative for the industry to continually challenge itself and evolve.
Why wouldn't Amazon choose general insurance - nearly everyone has some - so its a great place to start. But they aren't starting here, because the market is tiny. They are starting in the UK.
The paper also looks at life events, bancassurance, cover that flexes better with changes in circumstances, plus virtual reality, digital labour, cybersecurity, and digital disruption.
Life as an insurtech start-up is hard. We know, Quality Product Research Limited, which runs www.quotemonster.co.nz, is a rare New Zealand example of success in the category - and it wasn't easy. As a general insurance start-up life is probably harder. This excellent article explains why. In some respects many of the largest problems cluster around the role of incumbents, who can be expected to use all their market power (within the limit of the law, of course) to make life for an upstart hard. The next is regulation. But there is a trade-off. If an incumbent carrier makes life too hard for a new distributor to get an agency, sometimes they just raise enough capital to become a carrier. That's Lemonade, and by all accounts they're going great.
Here is an interesting article by Ross Campbell on Gen Re's website. It discusses the increasing incidence rates against survival rates and outlines some of the biggest risk factors and how this may effect critical illness insurance in the future.
Tower is set to be sold for $197 million to a Canadian insurance company. Find out more here.
Risk management means taking a broader view of business risks and the approaches to resolving them than a basic mix of 'she'll be right' and a bit of insurance. Making a business more resilient does cost money, but can have other benefits too: and help manage threats from competitors as well as earthquakes, fires, and floods. This is worth a read - link.