When you think of insurance, chances are what first comes to mind is life insurance, which protects against premature death and therefore the loss of a lifetime of income. You might also think of car insurance, which helps pay the costs of an accident, and disability insurance, long-term care insurance and homeowners’ insurance. The underlying mathematics of these contracts, used by actuaries, involves risk pooling, where many people contribute to a large pool of assets, and then the pool of assets will pay out to a relative few people who experience a car accident, or suffer a temporary or permanent disability, or die young. People pay a relatively small amount to be protected from relatively large catastrophes.
The outlier in the insurance world is health insurance, which was theoretically designed to pool peoples’ assets so that individuals who suffered a catastrophic illness would be able to pay their hospital bills out of the common pool. But health insurance today is basically a flat monthly fee for all of a person’s medical care, with most people receiving “benefits” every time they visit the doctor or hospital.
Recently, a number of startup insurance firms, backed by more than $700 million of venture capital, are looking for ways to apply risk pooling to other aspects of your life. Several of them are creating on-demand insurance. A company called Trov, recently launched in the U.S. after operating in Australia and the U.K., now features an app for quickly insuring personal and work items like laptops, smartphones and high-end cameras.
A similar system, called Cover, lets you take a snapshot of an item you want to insure, and Cover will write a policy on the spot. New York-based Sure, another entrant, is building out a mobile app offering quick insurance quotes for things like weddings, lost baggage, flight cancellations and pet health.
Even traditional insurance markets are being disrupted. A startup insurance company called Metromile will give you an auto insurance policy that is priced based on how many miles you drive. If you rack up more miles than the base rate, the rate will automatically go up. In the homeowners’ insurance space, a two-year-old company called Lemonade provides homeowners and renters insurance priced using artificial intelligence algorithms. Hippo, based in Silicon Valley, is an online seller of homeowners’ policies with stronger protections for common valuables like home electronics.
In the life insurance field, where most policies are still sold face-to-face, a company called Ladder has raised $16 million to build a platform that will offer direct-to-consumer term insurance online.
This is almost certainly on the beginning of a revolution in one of the stodgiest areas of the global economy. There is no questioning the benefits of risk pooling: it smooths out the potentially catastrophic bumps in the road of life. What the startups are realizing is that there are many more kinds of bumps than the traditional insurance world is currently covering, and there are ways to gain more efficiency than the by-hand sales of traditional insurance. It will be interesting to see where this goes.
About the Author: Bob Veres has been a commentator, author and consultant in the financial services industry for more than 20 years. Over his 20-year career in the financial services world, Mr. Veres has worked as editor of Financial Planning magazine; as a contributing editor to the Journal of Financial Planning; as a columnist and editor-at-large of Dow Jones Investment Advisor magazine; and as editor of Morningstar’s advisor web site: MorningstarAdvisor.com.
Mr. Veres has been named one of the most influential people in the financial planning profession by Investment Advisor magazine and Financial Planning magazine, was granted the NAPFA Special Achievement Award by the National Association of Personal Financial Advisors, and most recently the Heart of Financial Planning Distinguished Service Award from the Denver-based Financial Planning Association.
In an insurer’s ideal world, there’d be a profitable policy for every conceivable risk. Click once, and you’re covered. In the real world, however, insurance coverage hasn’t kept up with the social and economic changes of recent years. Sharing economies have gained scale. Jobs have gone from full-time to gig-based.