Member Spotlight: CFC
Could you introduce CFC?
CFC was founded in 1999 as ClickForCover.com. It was one of the first companies to sell cyber insurance online. Today, CFC is a specialist insurance provider underwriting cyber, transactional liability, intellectual property, technology and other risks. It wrote $1 billion USD in gross premium in 2022.
Since the start of the company, CFC has experienced double-digit growth in annual revenues. In 2021, CFC’s private equity investors valued the company at more than 40 times its EBITDA (a profitability measure), which was the highest valuation multiple ever achieved for an insurance MGA. This reflects CFC’s view of itself as a technology firm that works in insurance, rather than the other way around.
You joined CFC recently; what is your role and what does it involve?
I run CFC’s innovation team, which exists to develop new products and bring them to market. For us, an innovative product is any concept that would make traditional underwriters feel uncomfortable due to the nature of the coverage, the technology used, the distribution method or the target market.
This is quite a flexible framework for defining innovation. It includes insurance products that are similar to our core lines of business, but different in one of those four areas, as well as products that are drastically different.
In addition to running the innovation team, I am also responsible for the company’s situational awareness about broader strategic and innovation trends.
Why does CFC have an innovation team?
The innovation opportunity in insurance is huge. The insurance market only caters for around 2% of global GDP, according to Aon, and that figure has been falling since the 1970s. Insurers have not kept up with economic changes, such as the shift in investment from tangible to intangible assets. The challenge is to reverse the declining relevance of insurance as a sector.
Tell us about CFC’s innovation binder. What is it and what does it enable you to do?
A binder is a delegated authority agreement that allows MGAs like CFC to underwrite risks on behalf of insurers. CFC has agreed an innovation binder with its insurer partners. This means that they are delegating underwriting capital to CFC, which it can use to underwrite new innovative products.
This is the first agreement in the Lloyd’s Market which delegates underwriting authority for the ICX risk code (Lloyd’s uses risk codes to classify different lines of business; ICX is the category that defines innovation business). I believe there is no agreement like it in the wider insurance market either.
This achievement shows how much CFC’s insurer partners trust its vision for innovation and its capability to pursue new ideas.
Why is this binder important for CFC’s innovation strategy?
It is not possible to innovate by committee and certainly not by multiple committees from different companies at the same time. This binder allows CFC to test different concepts using underwriting capital from its insurer partners without having to ask permission on each concept.
Once a concept has been tested, CFC can return to its insurer partners, explain why the test was done, review the data from the test and consider whether to move beyond the incubation stage and scale the product. Insurers that have backed the incubation stage have the first opportunity to support new products as they grow.
How has CFC managed to secure this agreement?
The challenge with innovation is not coming up with ideas, it is discerning the great ideas from the good ideas. CFC’s innovation team has a well-defined governance process for assessing and testing ideas, which its insurer partners have agreed is a good approach and decided to support.
This process involves asking questions about potential profitability, demand, technology and other factors that are important to the success of a product. CFC scores each idea against 30 questions to create a consistent approach for evaluating ideas. You can never be sure a product will be successful before you test it, but making sure that every product you test meets certain criteria increases the chance of success.
Where does CFC see opportunities in underwriting new products?
CFC’s strengths include underwriting technology, distribution technology, a strong understanding of insurance for small and medium-sized enterprises (SMEs) and a broad distribution network, particularly in the US. CFC’s approach to innovation involves leaning into those strengths.
CFC is most interested in areas where there is an acute need for insurance, but insurers in the past have concluded it was too difficult or risky to provide cover. I am cynical about how scalable any insurance product is that requires a lot of education for customers. The best products, particularly for SMEs, are products that customers instantly understand and feel the need for. They are also sold at a convenient time and location. For example, it is clear to someone buying a holiday what the risk is, so when travel insurance is offered at the moment when they purchase their ticket, the take-up is high. This also applies to commercial insurance products.
Another area of interest is parametric insurance, where pay-outs are triggered based on third-party data rather than an assessment of loss. This reduces the amount of trust required in a normal insurance transaction. Parametric insurance has been used for weather and catastrophe risks for years; CFC is looking at how these risks affect SMEs and how to create new products that address their needs.
There are also several emerging risks that create new opportunities for insurance products. There are new risks involving the carbon transition, where insurance has a role to play in facilitating investment into the most effective carbon offset projects. The advances in artificial intelligence (AI) will likely change the range of insurance products in the coming years. For now, AI-related risks may be included under other policies, but over time separate products for AI risks may emerge, similarly to how the cyber insurance market began in the 2000s. CFC is working to understand the new risk factors that AI could pose.
Another emerging risk you are looking at involves a gene editing technology called CRISPR. What is it and why does it matter?
CRISPR stands for Clustered Regularly Interspaced Short Palindromic Repeats. In my opinion, it is one of the biggest scientific discoveries in the history of humankind. CRISPR is, effectively, genetic scissors. It is a bacterial agent combined with an enzyme. It allows people to target specific genes in a person’s DNA and remove that gene or replace it with another.
This has significant consequences on health care. It could be used to manage genetic conditions such as sickle cell anaemia. There are also conditions such as autism, ADHD, Parkinson’s and some types of cancer which genes are thought to contribute to. If genes are identified that cause these conditions, it may be possible to manipulate human DNA after birth to remove these genes.
There is also potential for this technology to be exploited. One possibility is a bespoke genetic weapon that targets specific people or groups based on their DNA and has no effect on others. This represents a new war and terrorism risk. It is also possible for people to modify their own DNA, or the DNA of others, at home. People are already using genes from elsewhere in the animal kingdom to modify their own DNA, or breeding pets with characteristics from other species.
On a larger scale, as humans begin to change their DNA and add new elements, this could drive new areas of societal conflict. Many societal conflicts today are based on factors such as race, nationality and belief. As CRISPR changes what it means to be human, with people introducing non-human elements into their DNA, future societal conflicts could arise based on differences in our genes.
How should companies in the insurance industry practically respond to significant technological developments like CRISPR?
It starts with situational awareness. The first step is to work out the timeframe in which it will have an impact. This allows the company to understand when to expect changes in demand and what time should be spent on it. It is also important to monitor how this timeframe changes. For example, ChatGPT represents a development in AI that was predicted, but came earlier than most people expected.
The next step is analysing any available data, understanding the potential risks of the technology and looking for patterns that could represent the economic downside when these risks are realised. If there is an acute economic downside, there will be customers looking for insurance, and that is the right time to think about launching a product.
For any topic, there is some work that should be done in advance to understand it and choose the right time to intervene in that market with the right product.
For example, now may not be the right time for a CRISPR insurance product, but understanding how pharmaceutical companies are responding to this technology is critical. Are existing insurance products covering any new exposure they have as a result of CRISPR? If so, the near-term opportunity is to amend existing coverage to fit the problem, such as updating risk ratings. In the long term, there may be an opportunity to create a new product, with new wordings, modelling and policy documents.
Why is CFC a corporate member of InsTech?
InsTech helps CFC with situational awareness. We want to know about emerging issues and risks. InsTech is also a unique place to meet like-minded companies and those we can partner with. We also value InsTech’s intelligence and analysis, so that we can get the answers to specific questions we are interested in.
What sort of companies would you like to connect with and how can they get in touch with you?
CFC is interested to connect with companies that want to monetise their data and understanding of emerging risk areas. CFC is looking for long-term strategic support to develop and trade the next generation of insurance products. You can contact me through LinkedIn.