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Ask the Expert: Leveraging Insuretech in the Mortgage Industry

 

November 19, 2020

Max Simkoff Welcome, everyone, to our Ask the Expert series, where we get a chance to ask industry leaders about their unique perspective on how to navigate the most difficult challenges faced by the broader real estate and financial services ecosystem and also give you a chance to ask the experts some of the most pressing questions on your mind. 

My name is Max Simkoff, I’m the CEO at States Title, and today I am super excited to welcome Adrian Jones, Deputy CEO of P&C Partners at SCOR. He’ll be talking with us about the topic “Leveraging Insuretech in the Mortgage Industry”.

Some quick background on Adrian. As I mentioned, he’s Deputy CEO of P&C Partners at SCOR, which is a French reinsurance company. SCOR, operates in 160 countries, has a balance sheet of approximately $50 billion. Prior to joining SCOR, he was head of strategy at RenRe in Bermuda. One of the interesting things I think about SCOR, which was relayed to me, meaning I was in with Adrian and the SCOR CEO, is that their presence is so thorough across all categories of reinsurance that at any given point in any given year, you can pretty well bet that there is some major catastrophic event that SCOR is in the midst of helping to try and manage and help their customers make sure that people are well taken care of, which is quite a stressful business to be in.

Adrian started his career at Bain & Company, the consultancy where he worked in financial services, real estate, private equity, consumer goods, and some other industries in the U.S. and Europe. And just as an aside, Adrian is somebody who I’ve had the pleasure of knowing now for probably just about four years, was one of the earliest backers of States Title from an investor perspective, and also has been a fantastic commercial partner to us.

So with that, welcome, Adrian. Thank you for joining us today. 

Adrian Jones Thanks, Max. 

Max Simkoff I figured, given we’re going to talk about insuretech, I would do away with the collared shirt and the sport coat, and I see that you are also appropriately, you know, what passes as business casual in this remote environment. 

Adrian Jones Don’t worry Max, I’ve got on a business suit and some very nice loafers underneath, they’re well polished.

Max Simkoff Well, OK, let’s just start by talking about what insuretech is. So this category could not be any hotter right now. First, we had the Lemonade IPO, then Root. We’ve had multiple big financings happening for the likes of Hippo, Kin, Next, Pie, States Title. So just for everyone’s benefit, I think it helps to start by defining insuretech. So what in your mind makes a company a true insuretech versus just, you know, an incremental twist on an old line insurance business?

Adrian Jones Yeah, there is some of that, but basically what we’re talking about here is companies who recognize that insurance should cost less, be faster, be easier to buy, be more sophisticated in its pricing, and overall deliver a better consumer experience. Globally, there are at least a thousand companies you could call an insuretech, depending on where you draw that line between incremental versus more revolutionary. And they have successfully obtained more than $25 billion in funding since 2015, so enormous amounts of money have come into this industry.

Globally, there are at least a thousand companies you could call an insuretech, depending on where you draw that line between incremental versus more revolutionary. And they have successfully obtained more than $25 billion in funding since 2015, so enormous amounts of money have come into this industry.

As an example, you can go to a website like myhippo.com or ourbranch.com and you can get home or auto or sometimes both in a matter of two minutes. So it’s no longer “15 minutes can save you 15 percent.” It’s two minutes. And I think that that is having implications all across every different type of insurance. There’s no area that’s untouched. And certainly title is one of them.

Max Simkoff And I’m curious. So, any time you see a new category like this emerge as quickly as it has, in a market as big as insurance, right? I mean, we’re talking about a huge industry where there was already plenty of capital. In fact, in some cases, a lot of these insurers almost had too much capital and they were trying to figure out things to do with it. What was it that allowed this to happen? Why did these incumbents not see this coming? These are big categories that are being changed overnight. Home, auto, renter’s insurance, life insurance. What happened? Were these guys just asleep at the wheel at these large incumbents? Or why did this sneak up on them? 

Adrian Jones Well, I think it depends a lot on what type of incumbent you’re talking about and who specifically it is. You know, the thing about insurance is that there is an enormous gap between the best performers and the worst performers. The best performers – you know, there are more than 500 insurance companies in the U.S. – so you only need 10 or 20 percent to be quite good. And they will really define the industry, and I think that’s, in fact, what you’ve seen.

So there are incumbents who are very much embracing what’s going on in insurance technology, and there are certainly others who, for various reasons, have lagged – and it’s not always the ones that you expect. But we do find that there is certainly a large group of insurers who are very pleased with the business that they have built, and they see that business going on for quite some time. And frankly, they’re just not worried about anyone disrupting it because nobody has been able to do so, so far.

But this is learning that happened before venture capital discovered insurance and before public markets showed that, actually, they really highly value these insuretech challengers. And I think that, collectively, there is much more brain power and much more capital focused on the insurance business than there has been in at least 20 to 30 years. I don’t go back any further than that. But I think that is collectively making a change, and some incumbents are leading that change and some are not. 

Max Simkoff So, look, obviously it’s probably never polite in a public forum like this to name the people who are falling behind. But before I move on to a few other questions I had, I am curious: Who of the incumbents that you mentioned are actually doing a good job of either keeping up or even leading on their own? Who do you think is notable there and deserves to be commended for staying up to speed with that stuff? 

Adrian Jones Yeah, I mean, companies that Americans are familiar with, you just take Progressive, for example. It has continued to gain market share year after year – a very technology first-driven company. They actually introduced telematics devices, in the United States at least. So, you know, it’s a device either in your car or on your phone that measures the quality of your driving and uses that to determine a price for insurance. Progressive started doing that actually almost 10 years ago now. You look around the world and you see challengers in every market who are actually doing a really good job advancing technology, but they’re not uniformly distributed and you don’t see them in every line of insurance. 

Max Simkoff You have been very candid in public in a number of LinkedIn posts, which I always enjoy, about metrics that you’ve seen that demonstrate successful insuretech models and then maybe numbers you’ve seen that may be cause for concern with respect to the companies who are even sometimes touting them as evidence of their success. Why don’t you take a moment to tell us which metrics do you think are the best to look at to gauge the true health and success of an insuretech business that is rapidly scaling? And how do you tell the difference between the stuff that tells you the company’s working and stuff the companies want to point to that might actually mean the opposite? 

Adrian Jones Yeah, so I think a lot of it starts with segmentation and understanding what customer segment you’re actually going for, because that’s what drives the appropriate measures. So in personal lines, for example, there is a segment of consumers who just shops for price all the time. And half of those customers who switch, switch for savings of less than 10 percent. Now, there’s one well-known insuretech who, in my estimate, needs to raise their price probably by 50 to 60 percent in order to break even. 

Max Simkoff Yeah, but we’re not going to mention their name here. 

Adrian Jones I won’t name any names, but you know, this is my personal opinion having studied their numbers. The point is, if you sell insurance for half off, then, yeah, absolutely, you’re going to get customers very quickly. But if you want to build a sustainable business, you have to deliver a great product with a great customer experience while charging a price that earns you a profit. 

Max Simkoff Sorry, what was that last word you used with a ‘P’? 

Adrian Jones Profit? 

Max Simkoff I’m not familiar with it. Could you explain what that is for our audience? 

[Both Laugh]

Adrian Jones In a few years, we’ll get there, right? But look at the business that you’ve built, Max. You’re using a standard ALTA product that everybody expects. Customers are closing their loans days and even weeks faster. They’re raising their pull-through rates, they’re simplifying their operations. And this is not because States Title is underpricing its product. It’s because it’s delivering a better customer experience. And that, I think, is the true measure of a long-term, sustainable insuretech. 

Max Simkoff Great. So, look, you mentioned us, and I guess I could use a story to lead into this one, that gets to a broader topic of how reinsurers, you know, fit in this landscape. We obviously got to know each other probably about four years ago now. We were pitching you on why we felt like there was a better way to produce title insurance for U.S. consumers. Reduce the friction, the frustration, the expense, reduce the time, make it simpler, better, faster.

But, you know that did entail us launching our business, for our market, for the title insurance market, an entirely different business model, namely one where we were actually insuring real risk, unlike most title companies do. And we needed to convince a number of folks – mortgage originators, the GSEs, for example – that that was an acceptable risk trade to take for having a better way to originate mortgages.

Ultimately, you obviously helped us stand up that program from scratch and fulfill some of the very significant requirements that were being placed on us. And so I’d love for you to talk maybe more broadly, less so about us specifically, but what is the role of reinsurers in driving innovation in insurance and mortgage markets specifically? Because a lot of our audience here is interested in how insurance and insuretech’s going to affect mortgage. So what is the role of reinsurers in promoting innovation, insurance, and mortgage markets, and how is SCOR specifically working to help get new solutions to market faster through that framework? 

Adrian Jones Yes, so let’s come back to mortgage markets, because I think the role of reinsurers in mortgage markets is much greater than probably most mortgage professionals understand. But let me step back, and just what is reinsurance? It’s an industry most people have never heard of, but it’s exactly what you would think: It’s insurance for insurance companies, and nearly all insurance in the world is reinsured, at least to some degree. So, as a reinsurer, we deal with almost every notable insurer around the world and we see essentially every form of risk. And we’re constantly assessing that risk with our clients, trying to understand it both quantitatively and qualitatively. And ultimately, we assume a lot of that risk.

Globally, this is a $500 billion industry in terms of capital and there are about 60 major reinsurers. So the largest are MunichRe, SwissRe, HanoverRe, SCOR, Berkshire Hathaway, and Lloyd’s of London. It’s a long, stable industry. We are actually the youngest and we are 50 years old this year. So reinsurers, I think, have been very much at the forefront of a lot of the innovation that’s been seen in the insurance world lately. This year alone, more than a billion dollars will be seeded into the reinsurance markets by insuretech companies. And so, as a reinsurer, we stand behind those companies to say, “This is not just a young startup. This is a young startup that has an A-plus rating standing behind it from a 50-year-old company with a $50 billion balance sheet.”

…as a reinsurer, we stand behind those companies to say, “This is not just a young startup. This is a young startup that has an A-plus rating standing behind it from a 50-year-old company with a $50 billion balance sheet.”

So that’s our role in a very basic way. But more broadly, it’s that we have to come in and assess the risk, understand the risk, understand where it can go wrong, and partner with companies like States Title so that they take that risk in an appropriate, intelligent way, such that ultimately the product that they produce is better for everyone involved. So that’s the basic role of reinsurers. You want to talk about the mortgage market specifically? 

Max Simkoff Yeah 

Adrian Jones Yeah, so as I said, I think the role of reinsurers in mortgage is not fully appreciated by many people, but actually, the global reinsurance market has an important role. Reinsurers were critical in getting the PMI market, private mortgage insurance, back up and running in 2009. So reinsurers backed the startup Essent, which I think is the number three PMI now. And actually the number one PMI is Arch, which is a Bermuda company, a Bermuda reinsurer, as a matter of fact. And today there’s over $1.2 trillion of private mortgage in force – it’s about as much as the FHA covers – so reinsurers are critical in the PMI market. They’re also critical in the credit market, believe it or not. So in the early 2010s, Fannie and Freddie started seeding large amounts of business into the global reinsurance markets. 

So, Fannie, it was the Credit Insurance Risk Transfer (CRIT) program, which has reinsured about a half trillion dollars of unpaid principal balance. And Freddie, similarly, several hundred million through ACIS and STACR. So the data are not entirely easy to come by, but overall, we probably are touching essentially every mortgage in the country in some way, unless the government is taking the risk and retaining it. And this is just credit risk.

But then also remember, of course, you’ve got homeowner’s insurance, so the protection of the collateral, we could talk about that in a minute. And there’s all the insurances that mortgage professionals are buying, like errors and omissions, fidelity, crime, etc. So it touches the mortgage market in a lot of ways. 

Max Simkoff Awesome. And given that you’ve had a unique vantage point to see a lot of different places where new companies are trying to innovate in the realm of where insurance touches the residential mortgage process, aside from title obviously, what do you think are the most interesting points where you’re seeing insuretech go into and touch the residential mortgage process? And where do you think we’re going to see some of the most interesting developments in the next few years? 

Adrian Jones Yeah, so I think – and I’m going to draw upon my experience, having bought a house within the last month – I think title insurance is a very obvious place where innovation has been needed because of the oligopoly that exists in that market and the lack of focus on the customer there and making the customer’s life as easy as possible. 

I think title insurance is a very obvious place where innovation has been needed because of the oligopoly that exists in that market and the lack of focus on the customer there and making the customer’s life as easy as possible.

The issue in my home buying process, though, is actually the appraisal. The appraisal was delayed by two weeks. In fact, the appraisal delayed the closing by two weeks. Why? Because of a wildfire an hour away from the house. And so ultimately, I ended up with two appraisals and I got back these nice, thick documents here, which at the end of the day told me a number, which is exactly the same, or within a few thousand dollars of what Zillow had already told me. And I paid a thousand dollars for each of these appraisals. 

And by the way, then, what was even more amazing is, after I was forwarded the appraisals, I started reading through it and there was a team at the bank who had gone through all of the fine print of the appraisal and said, well, how come you didn’t adjust for the lot size, because his lot is this size and the comparable lot size is that size? And the appraiser wrote back: “Why?” And I just thought, oh my gosh, like, we’re putting so much effort into something that really ought to be automated and maybe there’s an insurance solution that exists for this for those who are concerned about using an automated appraisal. And of course, there are a lot of automated appraisals already being used. But it just seemed like a tremendous amount of work to tell me what Zillow could already tell me. 

So it just felt like this is an area where the priorities are out of order because at the same time I was getting my homeowner’s insurance and it seemed there that it was OK, whatever number we came up with for the value of the structure is what was insured for, and that was acceptable. And I think that there is a lot of risk there that mortgage companies are running that they’re not paying attention to. 

Max Simkoff Interesting. By the way, the appraisal piece, what fascinates me there is it’s effectively another form of collateral risk, right, like title is. And yet there is no insurance market for it today – at least that far up the origination channel. And it certainly seems ripe for someone to do something there.

So you mentioned appraisal, you mentioned title, you mentioned PMI, you mentioned homeowner’s insurance. Those are four or five different insurance policies around a home purchase or a refi. The homeowner’s paying for all of them. The beneficiaries, oddly enough, are different in some of them, right? One, title policy, for example, even though the homeowner pays for 100 percent of it, the beneficiary is 100 percent not them, it’s the lender. And you can argue that the beneficiary of the appraisal, most of the beneficiary of the appraisal that the homeowner is paying for is not them either. It’s really the lender who’s lending who wants to insure collateral. 

So you’ve got all these different policies, all these different consumer experiences. The homeowner pays for all of them, but with different beneficiaries. Could we not consolidate all of these, have a single product to streamline this all for the consumer? 

Adrian Jones  I’d love to, and in theory, the answer is yes. You could indemnify the mortgage holder against any risk to the collateral, no matter how that risk came about so that you have collateral risk and you have credit risk. But in practice, we crack open the California insurance code, we read the first line under title insurance and it defines what title insurance is. The second line then says the business of title insurance shall be conducted only by title insurers. And so this is where folks like Radian Lien Protection got shut down 20 years ago because the government said, well, you’re doing title insurance, but you’re not a title insurer.

I think it would be great to work hand-in-hand with regulators and state legislators to think about ways you can reduce the barriers to homeownership, make homeownership simpler, faster, more affordable, while also providing better protection against the collateral for mortgage holders. But you have to actually rebuild the entire regulatory framework to do that.

So to actually merge all of this sort of risk is just something which goes against the very foundational principles of the way that insurance has been designed. I think it would be great to work hand-in-hand with regulators and state legislators to think about ways you can reduce the barriers to homeownership, make homeownership simpler, faster, more affordable, while also providing better protection against the collateral for mortgage holders. But you have to actually rebuild the entire regulatory framework to do that.

Max Simkoff So let’s talk about this just for one more minute, because this is something that I’m sure a lot of folks in our audience are not familiar with and I think is kind of fascinating. I believe that same restriction in California insurance code is written into the insurance code of most states, which is to say that title companies are required to be what are called “monoline carriers.” And similarly, that same restriction is, in most states, I think, written for PMI as well. PMI or private mortgage insurance is required to be a monoline product. And yet homeowners, I believe, can be part of a multiline. You can be a company that does homeowners, renters, and other P&C products. Why is that? Why was that delineation made? 

Because I think your point here is that – and this is what’s so frustrating, I’ve often found about, honestly, the world of mortgage tech in general and certainly insuretech – oftentimes it’s not that the technology doesn’t exist for the best consumer experience, it’s that there’s some arcane piece of regulation that stands in the way. It’s like, what is it? Do you remember what it was that created that requirement for title and PMI to be monoline, but allowing for things like homeowners to be multiline? 

Adrian Jones My understanding is that it actually dates back to the Great Depression when you had a number of insurance companies who failed for various reasons. And so the idea was to separate out financial guarantee business from everything else. Does that make sense? Not necessarily, because the whole point of insurance is that you pool all sorts of different types of risk – that’s what we do as a reinsurance company. So, you know, it’s a little bit like the other favorite Depression-era change, which is the three-tiered liquor distribution system is why you can’t buy direct from a lot of wineries if you’re here in New York. So maybe we can eliminate both of those systems, ultimately it would be better for consumers.

Max Simkoff Great. All right, I’m going to open it up for audience Q&A, and I’ve had a few come through. The first one that came in here is: How has insuretech been affected by COVID? What has been the change in demand for faster innovation? So I think the question is framed around: Has COVID created faster demand for innovation, and has there been a change in how that affects companies developing new products?

Adrian Jones Yeah, and I think what’s relevant for mortgage professionals, in particular, is well several things. Obviously, there has been a huge demand for new homes, for homes that are more spacious, that are further away. And that’s driving a lot of what you’re seeing in the mortgage world. At the same time, that is also driving a lot of innovation in the insurance world. So, for example, oftentimes insurers would send someone out to actually visit and inspect the home and make sure that it was not about to fall apart and there wasn’t some big unknown hazard. A lot of that’s been eliminated, and so now a number of companies will actually pay you if you do your own inspection by holding up the phone and taking it around, and they have AI driven ways of recognizing what’s actually in the home and recognizing whether perhaps they need to send a human inspector.

On the claim side, I recently saw a claim of a townhouse that had burned and the claim was entirely managed through a Matterport tour, just like a lot of real estate agents are doing it. And I think Matterport is just a fabulous technology, but just as you’re using it in real estate, we’re using it in insurance to better settle and manage claims. But I think in general, any point at which there is an interaction physically between anyone from the insurer and any customer is a big focus area right now to get that automated.

Max Simkoff Yeah. I had another question come in here that is: What do you expect to happen in relation to PMI policies and foreclosures when the rolling forbearances end in Q1 of 2021? 

Adrian Jones I wonder if that’s actually a better question for you, Max.

Max Simkoff Oh, man. I mean, I don’t know if I can speak to the risk piece. I’d ask you to comment on that. But I do think that, suffice to say, we’re in for a very different landscape when the rolling forbearances come to an end and one that, quite frankly, I don’t know that we have a historical precedent to point to to tell us what it’s exactly going to look like. So, you know, I’d love your perspective on that. 

Adrian Jones It’s going to depend on the policy solution, and how it’s practically implemented, and how it gets implemented at mortgage servicers. What I would say is, from a reinsurance perspective, the reinsurance industry is very well equipped to handle this. Even if you look at Arch, they’ve got, I think, a 12 percent market share of the PMI world. Arch has not been downgraded at all. The rating agencies have really understood what’s going on and they’ve actually said they don’t believe that the losses are going to be material to them. So right now, I think people see it as being very manageable. What I would point out is, you know, these are very big reinsurance companies who have all taken a sliver of the risk, and that is precisely what should have happened because it spreads out amongst everybody.

Max Simkoff I’ve got one bonus question that I’d love to ask you, Adrian, I don’t know if I’ve ever asked you, but I’m sure you’ve got to have a good answer for, which is: You’ve been in this business for some time. You’ve seen every nature of nuanced risk everywhere across the globe. What is the strangest risk that you have seen insured or reinsured in your time in this industry? One where you looked at it and were like, huh, that’s not something I would have even expected to to be able to be insured? 

Adrian Jones I’ll tell you what a lot of our friends overseas think is the strangest risk they’ve ever seen, and it’s title. They have no idea why we in America have a $20 billion title insurance industry because it largely doesn’t exist in most other parts of the world.

Max Simkoff Because they have a working land registry, by the way.

Adrian Jones Yeah, yeah. It all comes down to that. Gosh, so you know, we do a lot of really esoteric stuff, like everybody talks about how Madonna had her legs insured at Lloyd’s or something like that, like, I don’t know if that’s apocryphal or not. We do a lot of specialty stuff. Like we’ve got a company that we back that gives trade credit insurance to the off-takers of solar installations. And if we had another half hour, I could explain what that means. But it actually is very helpful for helping solar installations get built and financed, and so it’s an important part of the energy transition, but it’s a trade credit insurance product. There’s a lot of weird stuff like that, but we actually love it.

And so I’ll tell you one little story. I say this a lot. I compare the French and English. You know, the French and the English have been at each other’s necks for well, more than a thousand years. And so when the French go on vacation, they go to places like Ghana and Uzbekistan and far-flung locations. When the British go on vacation, they go to the South of Spain. And so we think about risk the same way. We are looking for the Ghanas and Uzbekistans of the world, not the South of Spain, and we tend to find them.

Max Simkoff Interesting. I actually had one last question come through, and I’ll ask this one and then we can end, because I actually want to know the answer to this, too. And this one says: “Adrian, if you were to start a company at the intersection of insurance and real estate, so if you were going to take the personal risk and go and launch a company, what would it focus on?” 

Adrian Jones Well, I would have done what Max did, but Max got there first. No, I genuinely do think that the biggest opportunity right now is in title. It is a market which I think everybody in the industry wants to see innovate, and I think States is very much at the forefront of that. So frankly, that’s what I’d do. And if not title, then I’d probably do something around the appraisal process because all of these are frictions that create difficulties and add costs to homebuyers at a time when they’re already under a tremendous amount of stress. So let’s just eliminate all of those frictions. And I think ultimately that is the best thing that could be done for the real estate business. 

Max Simkoff Awesome. Adrian, as usual, great talk. Thank you for taking the time. Your insights and experience are extremely valuable. I really, really appreciate it and had a great time today. And thanks again for making the time. 

Adrian Jones Thanks, Max.


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