Insurance and the Low-Carbon Economy – A Meeting of Minds and Markets

Holly Stower

The insurance industry should reflect the society it underwrites risk for. The transition to a low-carbon economy means that incumbents are now looking for new and better ways to meet their clients’ changing needs. Many insurance incumbents are looking at the opportunities connected to cleantech, while also recognizing their responsibilities and interest in mitigating the physical, transitional and liability risks associated with climate change.  

European and U.S. insurance markets have been typically slow to innovate; for example, the London Market only started to digitize in 2016. Whereas emerging markets in China and India have leapfrogged, integrating innovation into the heart of the industry. As such, China’s insurance market is set to quadruple over the next 14 years to $2.4 trillion, overtaking the U.S. who are the current global leaders.  

Why are Cleantech and Insurtech Intersecting now? 

  • Cleantech start-ups are disintermediating, improving efficiency and reducing overheads for insurers. 
  • Innovation is reducing the risk of claims occurring or mitigating damage when they do. 
  • Innovation is enabling risk to be calculated more accurately, so insurers can better understand their exposure and better detect fraud.  
  • Technology is opening new markets for insurers and start-ups to sell products.   

There have already been big winners who have capitalized on the intersection between insurtech and cleantech. Turo, the car sharing app with integrated insurance, just received $200 billion of funding from Softbank, while Grab, another car sharing app, just raised a $3 million investment from Invesco and have partnered with insurer Chubb. U.S. based smart home insurance company Hippo just raised $100million in their latest funding round.   

Insurtech penetrates all five of the cleantech sectors we focus on and across most lines of general insurance from property and motor to agriculture and cargo.  

Business Models  

Partnerships  

Many start-ups selling cleantech insurance products are acting as Managing General Agents (MGAs), underwriting new policies within predefined parameters on behalf of the insurer, yet take on none of the risk. These partnerships are creating new, specialist lines of insurance. Venture backed MGAs used to be rare, but incubators and accelerators like Lloyd’s Labs have enabled them to proliferate.  

Although an MGA is an attractive business model, there is risk for both parties. The MGA may seek an alternative insurer to underwrite their risk and for the insurer may drop the MGA to emulate their business model in-house. Therefore, there has been a rise in incumbents taking equity shares at earlier stages or acquiring majority shares, like Aviva acquiring a majority share in smart home sensor startup Neos in 2017.   

We spoke with Jeff McAuley, Co-Founder of Energetic Insurance, who provided credit cover insurance for underfunded solar projects. Energetic Insurance operates as an MGA with re-insurer SCOR taking on the risk.  Jeff explained that businesses currently have limited options for financing due to a lack of public credit rating, which usually gives a debtor confidence in the investment. Energetic Insurance provides an insurance policy, which covers a portion of the project’s revenue to the project owner and allows the lender and tax equity provider to benefit from SCOR’s credit ratings in place of the business’. This innovative business model is enabling underrated commercial and industrial solar projects to be built.  

Following investment of $2.5 million earlier this year from the early-stage venture fund focused on sustainable technologies, Congruent Ventures, Energetic Insurance hope to continue product development and expand into community and residential solar. 

Route to market  

Similarly, Telematics startups are partnering with insurers, offering cheaper premiums for safer, more efficient drivers. Telematic insurance uses embedded telematics devices, tethered devices or integrated smartphones alongside GSP and satellite data to monitor driving behavior, which can formulate an accurate risk profile of individuals. The value pool of monetizing car data is estimated to be as large as $750 billion by 2030, with North America leading in telematic insurance and the number of policies is expected to grow from 10.6 million to 49.8 million by 2023.  

The incumbent players in the space are well established including, TomTom, Agero and Masternaught. However, start-ups Cambridge Mobile Telematics, TrueMotion and MyDrive have all penetrated the mainstream market, but have all undergone an M&A or partnership with insurers or reinsurers. We spoke to Roger Fletcher, Director of MyDrive who said these partnerships were necessary for start-ups to access an established customer base, compete in a highly competitive motor insurance market, adhere to strict regulatory compliance, offer integrated telematic/ car insurance policies and gain consumer trust, as consumers still held significant apprehension with sharing their data.  MyDrive sold majority shares to Generali Group in 2015.  

Risk mitigation

Enabling technologies like big data, Internet of Things (IoT), mobile technology, AI, sensors and blockchain are being capitalized by insurtech/cleantech firms enabling more accurate calculations of risk exposure and thereby allowing more accurate and granular individual risk profiles. This is also creating greater opportunities to mitigate risk and protect firms against fraud. As these technologies benefit from economies of scale, start-ups are partnering with insurance firms and can offer fit-and-forget, SaaS and policy packages which can be cheaper than traditional policies. This business model is being used by property insurance start-ups to prevent water damage, for example:  

FloodFlash – uses sensors to monitor flooding. If the sensor registers a flood at a pre-agreed height, the policy instantly pays out. This parametric insurance model provides more certainty to both the insurer and the insured. The insurer can accurately measure when a loss has occurred, saving on claims adjustors and administration costs, while the insured is able to benefit from instant pay-outs meaning they can begin repair work quickly. The insured can determine cover based on flood depth and get discounted premiums when resilience measures are installed. FloodFlash operates as an MGA, underwritten in Lloyd’s by Everest Re, a U.S. Reinsurer. We spoke to Adam Rimmer, Co-Founder of FloodFlash, there are many companies, particularly in the US, looking to emulate this sensor/parametric insurance model to include other natural catastrophes like fire and earthquakes. Therefore, there could soon be a complete natural catastrophes insurance and resilience package.  

Hero Labs  Krystian Zajac, the Cofounder of Neos, the smart device SaaS home insurance provider, sold his company share of Neos to insurer Aviva. Krystian then set up Hero Labs, using similar sensor technology, Krystian is piloting his AI-based leak detection device and correspondent water use app. Following a $3.1 million investment from Earthworm, Hero Labs are trialing the device in the hospitality sector. Krystian said the smart home industry is growing faster than other industries but is still an early majority in its path to mainstream adoption

Competition

Cleantech products

in 2018 several US insurers experienced severe losses insuring renewable energy. This has been attributed to attritional losses, the increasing cost of repair and vulnerability to natural catastrophes. As a result, excesses are expected to rise and there will be a greater focus on risk management measures when insuring renewables. However, some insurers are taking a more proactive rather than protective approach to insuring cleantech.

Cleantech insurance specialists, Chubb, offers insurance products and services for cleantech companies from start-ups to established corporates. We spoke to Maria Guercio, AVP of Commercial Insurance at Chubb who said Chubb recognizes the opportunities to underwrite companies that contribute to the low-carbon economy and overall sustainability. As the population increases and overall demand increases, there is no doubt that the cleantech market will only increase; this is proven by the increase in government led initiatives driving innovation. Chubb works closely with emerging cleantech companies to best understand what products and services they need. Chubb enhanced property policies to provide protection for business income and R&D operations as well as coverage for  sensitive data, designs and/or prototypes. This presents an example of an insurer embracing the transition to the low-carbon economy, catering for it and benefiting from it.  

Fostering Innovation 

Anna Bordon, Innovation Associate at Lloyd’s of London, said that Lloyd’s Lab opened its doors in September 2018 to harness the opportunities that technology can offer to the 330-year old market and hope to see cleantech/insurtech firms applying to be part of the Lab in the future. FloodFlash has since been accepted into their third cohort.  

Lloyd’s is also improving confidence in new sectors; the Lloyd’s Innovation team is currently working with Imperial College London Consultants on an emerging risks and research report that will identify insurance opportunities in the renewable energy technologies field.

Ryan Jones, Head of Innovation at the insurance broker BMS, is heading their new in-house incubator following the launch of the BMS Innovation Labs last year. Ryan said there is increasing pressure for incumbent brokers and insurers to have in-house innovation teams or incubate start-ups. Ryan also noted a shift away from M&As into acquiring later stage equity stakes in start-ups. Similarly, Lloyd’s labs have selected later stage companies in their next cohort. 

Although the London Market insures cleantech technologies, there is apprehension to insuring the newest technologies such as plastic to waste. The current focus is on companies with established technologies and track records or start-ups improving current business practices in the short-term.

Barriers to entry

European markets are well established and heavily relationship based, often with barriers to entry due to the Prudential Regulation Authority’s approach to insurance supervision. Truly disruptive companies like start-up insurance company Lemonade, who’s last two funding rounds raised $420m from Softbank, need significant funding to break these barriers. As such, many start-ups are seeking partnerships through either M&As, MGAs or through selling majority shares.

The ‘mass disintermediation’

However, many insurers and brokers are expecting mass disintermediation once enabling technologies like AI can write risk significantly faster and cheaper than the broker/underwriter relationship. When this occurs many of those traditional barriers will be broken or look very different, opening the flood gates for disruptors.