Speaker 1:
It's time for InsurTalk with insurance industry tech geek and Guidewire chief evangelist, Laura Drabik. In this podcast series, we don't just talk about innovative ideas and P&C insurance. We talk with industry trailblazers about the big ideas they made happen and how they did it. If you're looking for insights on the trends and technologies reshaping the industry, an all-new InsurTalk starts now.
Laura Drabik:
Welcome to InsurTalk. My name is Laura Drabik and I'm the Chief Evangelist at Guidewire. In this episode, I have the privilege of interviewing Vivek Krishnamurthy, Principle at Commerce Ventures. Vivek's investment focus is on early stage insurtechs that support the insurance value chain. As of late, he's honed in deeper on claims technology and that will be the focus of today's conversation, all things insurtech. Hello, Vivek. Thank you for joining my podcast.
Vivek Krishnamurthy:
Thank you so much for having me, Laura. I've been a longtime listener, so excited to be a part of the community.
Laura Drabik:
Wonderful. So tell our listeners about Commerce Ventures and your role there.
Vivek Krishnamurthy:
Happy to do that. So Commerce Ventures is a 10 year old venture capital fund based out of San Francisco. We manage about 300 million across four funds and we are writing checks into the earliest of stages of companies. So think, brilliant founder and idea all the way through mid-stage companies and our passion is people who are building businesses that leverage data and technology to re-innovate financial services broadly.
So for us, that's banking, payments, lending, and insurance. We spend a lot of time thinking about the next generation of infrastructure and technology inside of insurance, everything from data for underwriting all the way through claims tech and claims disbursement. The last thing I'd add is we're big fans of working with large incumbents in our categories as partners to our portfolio and Guidewire's been an incredible asset to our business and the companies we support. So thank you to the Guidewire family and, again, thank you, Laura, for having me on.
Laura Drabik:
We're very welcome and I'm glad to hear that you share a passion with me which is for insurance. So Vivek, can you share with our listeners some of those companies in your portfolio?
Vivek Krishnamurthy:
So we invest, I would say largely, in three buckets of companies. The first is core infrastructure. So here in the FinTech world, it's companies that recently went public like Bill.com and Marqeta. Inside of insurance, it's businesses like Snapsheet. We also have folks who are building full stack financial services companies so MGAs are carriers at scale so we're proud investors in Kin Insurance. In the coastal home insurance space, we're investors in Mulberry which is in the warranty space. We're investors in Butter, formerly known as Sidewalk, in the commercial insurance space. And then back on the infrastructure side, we're investors in Flueid which is a title, insurance infrastructure, and data provider. So we've got, probably about a quarter of our portfolio in some way, shape, or form, touches insurance either on the direct to consumer side or direct to business side or on the selling through carrier side.
Laura Drabik:
Wonderful. So we launched our insurtech incubator program last year and Vivek, it's called the Insurtech Vanguards and our goal is to incubate early stage insurtechs into full partners with Guidewire and also, educate our community on new insurtech value props. So you're focused on early stage startups too. You know our reason for focusing on early stage startups, what's yours?
Vivek Krishnamurthy:
That's a great question. I was introduced to the category about seven or eight years ago. My first ever client in investment banking was a business called Enservio, one of the first claims fraud and claims data companies. They would scrape the web to figure out the exact value of any household good item and they'd built very specific depreciation curves on predicting exactly how much that asset would be worth two months in or three months into use. That is an interesting company to get fully immersed in at the age of 21 but ended up spending almost a year with that business eventually helping sell it to Solera.
One of the things that struck me was just the volume of IT spend in this category from carriers, from brokers, from re-insurers relative to the lack of venture capital money that had gone into building next generation players. In fact, when we look at our markets across payments, banking, lending, and insurance, the greatest delta between enterprise spend on IT and venture capital money going to build next gen technology programs is in insurance. So as far as we can tell, it's probably the most still underinvested category of financial services with the most upside. It also happens to just be fun and interesting and the people who serve this industry tend to be thoughtful data driven folks which has always appealed to me as well.
Laura Drabik:
So I really like what you just said regarding underinvested category, most upside. Also, I can firmly agree it is fun and it is interesting. So what are the risks involved when focusing on early stage startups?
Vivek Krishnamurthy:
Oh. So, so many. Some specific to early stage startups and insurance and some not. I firmly believe that inside of financial services, building an insurtech SaaS startup is one of the hardest things to do. It turns out, company building is incredibly hard. Who to hire? How to scale? How to raise capital? Sell people on your dream, those all are incredibly difficult things.
Going years without founders taking salaries or years without knowing whether or not you have product market fit, those are all horizontally relevant problems for early stage companies. Certainly as an investor, you're really underwriting a person and a thesis more than you are a business. In insurance specifically, however, if you're selling to carriers, you have a unique journey.
These sales cycles can take, as everyone knows, two years, they can take 18 months. Even then, you may have only landed one carrier and that may be the only carrier you ever land because you spend so much time in proof of concept or testing or pilot that you never have the resources to go and sell carrier Number 2, Number 3, and Number 4.
In our experience, an early stage insurtech company generally reaches scalable product market fit right around carrier Number 3. That is incredibly high bar to set because normally, that can take you six years to go and get. So early stage investing inside of insurance SaaS before they have those contracts, the stakes are very high because even if they do everything right and they can't survive that procurement process, that company might not go anywhere.
Laura Drabik:
That's a really great insight, especially about the stakes being high and not potentially surviving the procurement process. Thanks for sharing. So Vivek, insurtechs have been hammered lately. During the first half of 2022, venture capital investment in insurtech plummeted 50%. The sector has also suffered from the broader sell off of tech stocks and surging M&A activity suggest a period of consolidation is afoot. So what are your predictions for the next six months?
Vivek Krishnamurthy:
You know, if I was really good at this, I'd be a much wealthier man but I can certainly try. I think, actually, insurance is a tale of two camps and it's been that way for a long time. Now, it's been a while since I ran this math but if you look at all of the venture dollars that have come into insurtech specifically in the past, call it five to seven years, the number will get you somewhere in the double digit billions of dollars which sounds like a tremendous amount of money and it is. However, two things are true with that sum of venture capital money, probably about 60% or 70% of it went to MGAs and brokers.
Secondly, there's a small number of MGAs and brokers that actually attracted a lot of the capital. So think, Oscar Health in the health insurance space that raised a billion dollars or Hippo or Lemonade. And so, what does that really mean? I actually think that the category is still underinvested as much as the dollars sound really large, really, most of that capital went to a small number of players. To their credit, they were industry leaders and when they went public, the public markets really didn't know what to do with them.
It turns out, at the end of the day, if you're an insurance company, you're going to be judged like an insurance company and you better be really good at maintaining your loss ratios. As it turns out, this first crop of folks that made it public focused a lot more on growth than they did on underwriting and now, they're largely being penalized for doing so. That being said, insurtech SaaS companies, the next generation of Guidewires or Vertafore or Applied Management Systems, those businesses never really got that much love in the last generation.
They probably raised a minority of the capital, their fundamental economics are much more like SaaS companies than they are insurance companies, and I think that when this crop of folks go public, they'll actually be treated like tech companies. And so, I totally hear your point. I think that MGAs and carriers have a longer road ahead. I think the public markets have made a referendum about how they'll be valued. And so, there's folks along the journey now that are still private that will have a rough go raising more capital and getting the public markets to embrace them at the prices that they're valued at right now.
However, for all the folks that are listening who are building SaaS companies or data companies or broadly, technology first companies, I'm actually more excited than I've ever been before because I think the venture capital split is going to shift from carriers and MGAs back towards SaaS tech companies. I think that will give that part of our industry love for the first time in a long time and I think those businesses are fundamentally easier to scale and easier to take public.
Laura Drabik:
Yeah. No, that makes sense. Despite the turbulence in the near term, insurtech is well poised to deliver solid growth and profitability in the decade ahead, at least according to Gallagher Re. The firm estimates the insurtech market, Vivek, it's going to grow from $16.6 billion today to $165 billion in 2032, a key growth of 26%. So what is the reason for this growth?
Vivek Krishnamurthy:
First of all, I love to hear that. It sounds like I'll have a job for a very long time which I appreciate. I would say that there are probably two reasons that I think that is true. I think the first is that there are new relevant lines of insurance that while nascent today are being built for parts of our lives that are growing with prominence.
So if we think about cyber, we think about ride share, we think about changing asset ownership, cryptocurrencies, all of these new, emerging categories of our world didn't exist 15 years ago. As a result, the ability to underwrite them and do so in an appropriate scalable way was just the dream. And so, now that these categories are gaining prominence and there's real customer demand, it doesn't surprise me at all that they'll drive tremendous amounts of premium.
The second category is actually, I think, as digital distribution becomes more targeted and more relevant, I actually think it's easier for carriers today to penetrate deeper into historically under penetrated pockets of consumers. My favorite example is SMB. Something like 40% of small businesses are underinsured if not uninsured. The ability to target and embed insurance into places that can access even the three person mom-and-pop startup or the 10 person mom-and-pop startup, that is much easier today than it was 15 or 20 years ago.
So the summary answer is I think there's going to be new lines that are explosive and large. Second, I think even existing lines with new digital distribution tools, we're going to be able to serve digestible organic insurance to categories of consumers that just have been hard to market to before.
Laura Drabik:
Awesome. Great information. When we come back after this short break, we'll continue our conversation with Vivek Krishnamurthy.
Speaker 1:
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Laura Drabik:
Welcome back to InsurTalk. This is Laura Drabik and I'm talking to Vivek Krishnamurthy from Commerce Ventures. So Vivek, I grew up in insurance and have boots on the ground claims experience. I use that experience as a litmus test to determine which insurtech value props have potential. Some of my favorite value propositions, I believe have potential include deep fake detection, visual inspections, and voice analysis to detect the potential of fraud. Vivek, what are some of your favorite value props and why?
Vivek Krishnamurthy:
That is music to my ears. There's a lot of what you've mentioned already that speak to me. I'll choose a couple places that you didn't call out. One of my favorite value props is around claims disbursement, specifically around replacing the paper check. There are all sorts of new payment tools that exist today around push to debit.
So imagine instead of getting a physical check in the mail, you open your inbox, there's a beautiful branded digital check, and you have two or three options. You can print it out, take that check to the bank and get it cashed that way. You can remote deposit, capture it after you printed it out from your phone if you have a mobile banking app or you can enter your 16 digit Visa number for your debit card and those funds would get pushed to your account in 20 seconds. The best part of that, and my favorite stat, is today, it takes a normal carrier about $7 to cut, print, and mail a check. That experience that I just called out could be done for 10 cents. So there are these massive cost saving opportunities that also happen to be delightful for consumers.
If you take that particular use case and you take it a step further, you think about instances where you have total cap losses after hurricanes or earthquakes. Imagine the power of being able to instantly disperse. After you've looked at satellite imagery, you know there's been a total loss, you can instantly disperse those funds into someone's account when they need it most. There's a lot of power in that type of value. So that's the one that always stands up as something that I'm curious about.
The second is related, it's around claims collaboration. So I'd thought of having a captive contractor network on the same digital platform as claimants and the same digital platform of a carrier and imagine the ease of coordination across scheduling and payment between the three parties without having to get a multi-party check signed off by your bank and then by you and then going to the contractor. Those are the two categories that I'm probably most excited about right now.
Laura Drabik:
Yeah. Those are areas that I'm certainly interested in as well but how do you determine which value props have solid growth potential?
Vivek Krishnamurthy:
That is something that is so hard to determine and it goes back to your question about early stages versus later. Earlier, before carriers have said, "Hey, this is something that we're going to spend money on," you basically have to be confident that the company does one of two things: either meaningfully saves carriers' money or meaningfully makes carriers money.
On the latter, it's around finding the next well priced risk policy holder. On the former, it's around being able to point to loss ratios ideally within the course of the same year and say, "Hey, look, I've been able to save you money on a combined ratio because your adjusters work so much more efficiently or you spent so many fewer dollars dispersing capital."
Those are the metrics that we normally use. Can you add a new policy within 30 or 60 days because your technology's so good at identifying new folks or can you save money within a quarter or two quarters because you're increasing efficiency by so much? The litmus test that I would share to founders who are out there is if you are finding that your contracts sit under $100,000 dollars, very likely, they're coming from marketing or innovation budgets inside of carrier. That doesn't mean that you don't have product market fit, it just doesn't mean that the carrier has spent enough resources justifying the use of your product at scale.
The break point that I've noticed is right around the $250,000 or $500,000 range. Now, once you're in that range or above, when a carrier's willing to pay you that much, it means you're really, really driving down cost or driving up revenues. That's a great example of a proof point you can show yourself, your board, your investors, other partners that a carrier is finding legitimate value in your proposition.
Laura Drabik:
So let's go back to claims disbursements if you don't mind. 50% of policy holders are still getting physical checks in the mail but only 20% of policy holders actually want to receive it this way. Vivek, what does the future of claims disbursements look like?
Vivek Krishnamurthy:
So I think there's the version of the world that I would like and the version of the world that we're probably moving towards. I think I gave you a little bit of an overview of the dream scenario I have. The second I have a loss, I'm able to enter it through an FNOL app on my phone that is instantly adjusted using OCR. There's not even an adjuster on the back half of it or there certainly is an adjuster but they're getting a lot of help. They don't need to go out to the site to look at in-home inspection. They're being told very likely what type of category of claim this is. They have the tools and autonomy in a no code ecosystem to basically determine what's likely to happen and what the payout should be and then that payout is instantly dispersed using a virtual card. That is the dream scenario.
The reality is that claims are really complicated and claims need to be triaged. Particularly for inside the home claims, as an example, sending adjusters out always will make sense. The other complicating factor is, as I've learned very much the hard way, fixing something as specific as claims payouts in a vacuum is really difficult. Because within carriers, large treasury groups within the carrier have proprietary relationships with banks. Those banks, in addition to providing treasury relationships to the carriers, also provide claims disbursement.
And so, while you might be able to beat out their claims disbursement value proposition dollar for dollar, it's unlikely that a net new startup is able to get the carrier to change their entire treasury relationship from a JP Morgan or a Wells. And so, that's just a long and complicated way of saying, "I think there's a clear, defined end state of what could happen," which is the digital version that I mentioned. I think in the near term, I suspect it'll be slightly more incremental, very likely, we'll see innovation coming out of the large banks and payments companies in their partnerships with carriers and we've seen this already.
We have, in our own portfolio, KeyBank and Snapsheet are working together to work on next generation disbursements. So I think we'll see a lot more large company startup partnerships that work together to solve this problem for carriers versus one startup coming out of nowhere and just totally changing claims disbursement and making it all digital.
Laura Drabik:
That makes perfect sense. My family owns a 100 year old wheat farm. We've had parametric insurance since the '90s. I don't know, Vivek, if you were around then but parachute pants and NSYNC were all the rage back then. The reason why they have parametric is because it pays out based on a triggering event as you know, like rainfall, which means it's faster for my family to be compensated for their loss. Small family farms live off of lines of credit. Time to compensation is incredibly important. So what are your thoughts on the future of parametric insurance and new, modern applications for it?
Vivek Krishnamurthy:
That is awesome. I have many questions about wheat farming but I'll bother you about that later.
Laura Drabik:
And NSYNC. I'm sure you have lots of-
Vivek Krishnamurthy:
And NSYNC. I was around for it and had a wonderful time, bring them back. But parametric, to your point, has been around for a while. It's been great to see. I feel like I've been hearing the murmurs in the industry generally about the increased acceptance of parametric. I believe it works really well in two scenarios and you talked about one.
So one is where time to claim reimbursement matters a lot more than magnitude of claims reimbursement and the second is in low trust economies. I can talk a little bit about both. In the former, the two examples I like to give are eCommerce and agriculture. So in agriculture, hey, if it rains this many inches, very likely, that means your crops got flooded. That means that you're not going to be able to take in a harvest as a result, let's get you some money so you can dry out your field and start planning again. Actually, the magnitude of claim matters a lot less than just being able to help your business which is a cash flow business.
Another example is eCommerce, right? So there's a lot of businesses that are built on top of Shopify or third party eCommerce websites or maybe you're working on AWS and what happens one day when one of them goes down? All of a sudden, you lose the entire day sale and you may have a lot of fixed costs that are going on every day and you can't afford those fixed costs if you're not making money off your online website. So imagine an insurance product that says, "The second we can determine that AWS or Shopify is down, you instantly get a $10,000 payment. That way, you can make payroll and still stay in business for tomorrow," and that matters more than recouping all the revenue you could have lost. So those are pretty straightforward, what I'd call western hemisphere use cases of parametric.
The other category of parametric that I find really fascinating has been in emerging markets where historically, incumbent carriers maybe haven't been as forthcoming on their willingness to pay or there's just intentionality behind dragging out a claims process. And so, we've seen it in parts of Mexico, we've seen it in India, we've seen it in parts of Asia where folks say, "Hey, you know what? I don't want to wait for a large, maybe even state owned insurance company to come out and check my home. I would rather, just the second there's an earthquake of magnitude 5.0 or greater, I will just take a $5,000 check." And so, there's a business called Super Homes in Mexico doing that and there's a few others. So those are the two categories broadly, so time to reimbursement and low trust economies that I think we'll find parametric insurances quite well in.
Laura Drabik:
Great. Thanks, Vivek. On the other side of this break, we'll continue the conversation so don't go anywhere.
Speaker 1:
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Laura Drabik:
Welcome back. This is InsurTalk with Laura Drabik where we're talking with Vivek Krishnamurthy. So I recently bought an outfit for my daughter on Amazon and they offered me a buy now, pay later option. So buy now, pay later or BNPL is starting to enter insurance. What role does it play across various insurance lines?
Vivek Krishnamurthy:
At the end of the day, the famous saying, "What is old is new again." Premium finance has existed, I'm guessing, for north of 50 years and in some ways, BNPL has always been here. Premium finance has historically been a very upmarket product and I think the next generation of BNPLers like the Ascends of the world are bringing it down market which is great.
I think that there are certainly some challenges with BNPL that you can have at scale and we can talk more about that. But fundamentally, I think anywhere where an upfront premium payment is expensive or prevents a consumer from choosing to engage with insurance, if we as an industry can use the timing of cash flow, so BNPL, make four installment payments versus all at once, that's a great thing and we should be pushing folks to use those alternatives where they can do so responsibly.
I think particularly in commercial, it makes a ton of sense. If we're trying to get more small businesses to be appropriately insured, the best way to do that is not put a onerous upfront premium on a small business that may just be starting up and needs to spend that money just to even open doors. Same thing with contractors and third party service providers that need to be able to show insurance before they can earn a dollar.
I think in those instances, being able to split up that premium over time makes a lot of sense. And so, I suspect in life, in maybe cyber, in commercial, again, these are high premium categories, maybe even in crypto, I think in these places we'll see BNPL stay forever. Very likely, upmarket where it's always been in premium finance, there might be some new digital first approach or UI to place around it but I suspect that will live on as well.
Laura Drabik:
I can imagine a risk of BNPL from the insurer's side could include a lack of understanding of the consumer's credit worthiness. From the side of the consumer, the risk could include potential creation of too much debt. What are the risks for BNPL in insurance?
Vivek Krishnamurthy:
I think you nailed it. Insurance is such a unique category because so much of it has to do with consumer and buyer mentality. Part of the reason people claim less or claim the way they do is because they have premium, because it is in some way, shape, or form their own money. If you obscure away too much of that with a lending product that maybe doesn't require you to pay any principal balance for six or eight months, I think there's a legitimate actuarial question that you have to ask about how will those cohorts perform? Will they be taking more risks than they're used to?
I also think that there is a challenge with the actual credit math with BNPL when the dollars get too small. The reality is the last 10 years have seen some of the lowest interest rates ever. And so, the ability to borrow cheap and lend cheap has been quite easy. In an interest rate environment where rates are 5%, 6%, 7%, I would worry that it's difficult to borrow at that rate and then not charge an onerous rate to consumers.
Particularly with these products, sometimes consumer literacy can be a little lower and so, you wouldn't want to see folks paying 7%, 8%, 10%, 12% on top of their premiums just to split out cash flow over time because that can over lever them with too much debt. It can just be a burden on families so we certainly don't want to see that but those are the two things that pop to mind with BNPL.
That being said, on balance, I think it is an incredible tool to use when used appropriately and when you can do so in relation with the market and interest rates. So I'm pretty optimistic that folks will figure out a way to do it well in insurance, we're just in the early innings.
Laura Drabik:
So last question for you, Vivek. If you were fortunate enough to work in insurance, which role would you apply for and why?
Vivek Krishnamurthy:
This is oddly an easy question for me. I think working in an underwriting group or as an actuary would be incredible. I think as a venture capitalist, all I do, almost every day, is predict and think logically about how people and businesses live and buy in their financial lives. When I think about the allegory inside of insurance, I think underwriters, there's a lot of deep understanding of adverse selection and moral hazard and really interesting almost game theory of how people and businesses work and I suspect that would be really, really fun to go do. Particularly, again, in lines where you don't have 30 years of data and be on the forefront of thinking about how we can insure these new risks and do them in a way that's aligned with how modern humans and businesses think and act. I think that'd be really fun.
Laura Drabik:
Vivek, thank you very much for your time today and for your incredible insight you've showed us. It's not just about ideas, it's about making ideas happen.
Vivek Krishnamurthy:
Wonderful. Thank you for having me on.
Speaker 1:
Tune in next time for an all new episode of InsurTalk with Laura Drabik. Brought to you by Guidewire, the platform P&C insurers trust to engage, innovate, and grow efficiently. For more information, visit guidewire.com.