The insurance industry has proven very resistant to innovation. In fact, it has not really changed much in the past 200 years. The way insurance is sold and managed has changed, of course, but from the point of view of the consumer, things remain surpassingly like they were a century ago.
Today we talk with someone who is changing that. Kazuya “Kazy” Hata is CEO of JustInCase, a new breed of Japanese insurance company that offers insurance over the smartphone and then monitors how you use your phone, your lifestyle, and your social connections to determine what your premium should be.
We also talk about the next logical step for smart-phone-based insurance. Being able to ensure specific activities or possessions at will, maybe just for a few hours or while you are on a trip.
It’s a great conversation, and I think you will really enjoy it.
- Who actually buys long-term cell phone insurance
- What behavior might make you a “risky” smartphone user
- Why there are so few life sciences startups in Japan
- The future of insurance on demand
- Why P2P insurance presents a unique market opportunity
- Why it is so hard for insurance companies to innovate
- How Japan’s FSA is working to encourage insurance innovation
Links from the Founder
Welcome to Disrupting Japan, straight talk from Japan’s most successful entrepreneurs. I’m Tim Romero and thanks for joining me.
You know, the insurance industry is really resistant to innovation. The modern insurance industry was largely developed in the 17th and 18th century and it’s not changed a whole lot since then. Oh, the tools have changed: insurance is sold very differently today, risks are better understood and better quantified, better measured, and the emergence of the global reinsurance market has made the system far more stable, but the way insurance works from your point of view, from the way you and I see it, things have changed very little over the past hundred years.
Most of the change in the industry is driven by regulatory changes rather than entrepreneurial innovation, and for insurance, I’ve got to say, I’m pretty much okay with that. Insurance firms need to remain solvent for decades and theoretically forever, and the fail fast, fail forward philosophy doesn’t really work when it comes time to pay out life insurance or after a natural disaster, and yet, there needs to be a way to innovate and that’s what we’re going to talk about today.
Kazuya Hata or “Kazy” as his friends call him is the founder and CEO of JustInCase. JustInCase offers insurance over the smartphone and the first product they’re insuring is your smartphone itself. JustInCase then uses artificial intelligence to analyze your usage profile and your social connections to determine the premium you should be paying.
We also talk about the next logical step for a smartphone-based insurance, being able to enter specific activities or possessions at will, maybe just for a few hours or while you’re on a trip. The cellphone interface and the personal rich data which we continuously share about ourselves online, whether we know it or not allows companies to build up a personalized risk profile and both offer customized and flexible products and replace the number of fraudulent claims.
But you know, Kazi tells this story much better than I can so let’s get right to the interview.
I’m sitting here with Kazy Hata of JustInCase who offers not only insurance on your cellphone but actually sells insurance on the cellphone. Does that make sense?
Kazuya: That’s actually right, yes.
Tim: Well, thanks for sitting down with me. Okay, let’s talk about your product. You’re offering basic cellphone repair insurance for 200 Yen a month, right?
Kazuya: Well, at the very cheapest, yes, and that’s after the discount but we have about 30% on every discount, it can be as low as 200 Yen to maybe 400 Yen.
Tim: So that seems like it’s cheaper than AppleCare but more expensive than manufacturer’s warranties.
Kazuya: Right, right, right, because manufacturer warranty for the first 12 months normally comes without any cost.
Tim: Okay, and are you ensuring customers only at the point where they buy the products or are you insuring them, if someone’s had their phone for three years and wants to get insurance, will you sell them insurance?
Kazuya: Yeah, we are open to both cases, brand new, of course, and also, we will definitely accept the second hand older smartphone, but our policy currently is only up to iPhone 5S, so iPhone 4 or iPhone 3, that’s too old so we will not accept.
Tim: Oh, I see, so anything 5S or later.
Kazuya: Yes, 5S or later.
Tim: How many years ago was the 5S?
Kazuya: It’s like three years or four, or maybe five years.
Tim: Oh, okay.
Kazuya: Yeah, so it’s effectively everything.
Tim: So tell me about your customers. Are you selling to companies that are managing lots of phones, are you selling to individuals?
Kazuya: Right, our first product definitely – well, we want women definitely, but first product will be definitely by a man like late 20, 30, 40, maybe 50, like somebody who goes to the MVNO, not like SoftBank, DoCoMo which costs like $10,000 Yen per month but it can be lower, like 1/3.
Tim: And that’s just because it’s less expensive?
Kazuya: Yeah, it’s less expensive and it can cover the second hand older smartphone, not only brand new one, because typically like AppleCare only accept something so brand new or like 50 days old.
Tim: Okay. Well, listen, before we dive into the real details of the business model, let’s talk about you for a minute.
Tim: So you founded JustInCase with your co-founders in 2016 but before that, you were an actuary at Milliman, right?
Kazuya: Right, right, right, that’s where I started my career, yes.
Tim: Yeah, and your technical co-founder also worked with you at insurance companies as well, right?
Kazuya: He was actually my client at that time.
Tim: Oh, really? Okay.
Kazuya: But we know each other like 10 years.
Tim: But it seems to me like – I used to work in insurance and I know a lot of actuaries and actuaries tend to be very conservative people. They tend to be risk-averse in general. What made you decide to start a company?
Kazuya: Right, that’s a good question. I wanted to be a mathematician when I was 18 years old. I felt I’m the most genius person in the world, then I went to the university and everybody wants to be a mathematician. Everyone is a lot more smarter than me, yes, okay, so I need to do something different. Otherwise, why am I here? So since then, about 20 years ago, my strategy of my life is do something different if you think I can do it, so I have insurance knowledge, insurance experience, oh, okay, insurtech. Maybe that’s what I’m doing for the next few years.
Tim: Okay, but again, what made you decide to start a company? How did you mathematically look at, you know, these are the risks, these are the rewards, now it’s time to start?
Kazuya: Well, it is a lot easier, like 10 years ago when lifemed was created, now it’s more common to have a startup and funded by VCS or angels. Right now, it’s a lot easier. Even me two years ago when I was thinking or Google it, and then everybody’s doing outside of Japan but not in Japan. Why not? I’d like to do something nobody is doing.
Tim: Okay. Let’s talk about your app which is really kind of the center of the product. So the app actually uses AI technology to track the user’s interaction with the phone and determine their risk level and their insurance premium?
Kazuya: Yeah, yeah, that’s right.
Tim: What exactly does it monitor?
Kazuya: Well, it monitors based on whatever you allow us to get and such information includes gyro accelerator, sensors information or steps you walked today, distance you walked or you moved, and then we analyze the data, not one by one but as a group, a policyholder group, and then we categorize them as risky or less risky.
Tim: And do you use GPS location information?
Kazuya: We do use that when it’s necessary, yes.
Tim: And what about things like social connections?
Kazuya: Right, yeah, we are in the middle of a filing process to the Japanese FSA which is a regulator but we don’t plan to use that initially because it’s more complex.
Tim: I would imagine that your social network would be very strong indicators towards your credit worthiness, your stability with the phone, right?
Kazuya: Right, right, right. Yeah, yeah. If you are using it everyday, and then if you’re not, but obviously you’re not, the insurance business law is quite strict that insurance premium has to be fair among users. That’s where we think we are very strong at.
Tim: You mentioned you haven’t rolled that out yet. Do you think there will be resistance to that kind of idea, people being judged based on who their friends are or who their connections are? Do you think that Japanese people will accept that as a good thing or do you think that they will resist it as kind of a privacy invasion?
Kazuya: Yes, it’s potentially quite controversial but probably, we don’t use the information, only the information but we use multiple information, so in this smartphone insurance case, we don’t use that information but people might think this dynamic pricing concept, they might not like it, but we’re trying very hard to make it better for most of the people. So if you give us some kind of data to have a reason that you deserve the lower price, it’s not an extremely big deal but we want to go beyond that so like, healthiness if you like the steps, if you walk a lot, you’ll be healthier, so that’s where we want all.
Tim: But in terms of the flow of your relationship with the customer, when someone first signs up to get the insurance, you don’t have any of that data. You don’t have their tracking data.
Kazuya: We have nothing.
Tim: Yeah, so how do you set the premium?
Kazuya: Yes, we achieved the unclaimed discount, so our first product, smartphone insurance is three-month insurance period. Normally, insurance is like one year or whole life, but say one year, but we will only give them an unclaimed discount amount at the end of the period which is three months, so unclaimed discount means that if you didn’t claim this three months one period, you will have this amount of discount next period.
Tim: Okay, so when people first sign up, they get a fixed premium based on basically the phone they’re ensuring, and then does the premium change month to month or does it change only after that first three-month period is over?
Kazuya: After three-month period, so in the first three-month period, our AI will judge how risky you are, and then that riskiness will be determining for the next three months’ discount amount, the discount amount will be changing every three months.
Tim: Alright, three months is very short by insurance standards but do you see a time where people will be able to buy insurance for a few hours or a few days rather than rolling three-month periods? I mean, let’s say okay, I’m going on a trip and I just want my cell phone insured, swiped and I’m insured. Do you see that happening?
Kazuya: It’s happening. It’s actually our first product, smartphone. You use smartphone, if you use a smartphone, you’re going to use it every day, every second, right? But our first product smartphone insurance is wider, it will one day on-demand insurance for your belongings, so your camera, your watch, your glasses, pretty much anything that can be repaired with a cost can be insured. We don’t provide a huge sum of risk but that’s coming when we officially open our business and also afterward, as you said, protection for yourself like injury will be provided, like 24-hour basis.
Tim: Okay, I mean, that would really be a radical change in the insurance industry in Japan. Let’s talk about your P2P insurance pools because I think it’s a really interesting idea. So can you explain how they work?
Kazuya: Yeah, we think that’s exactly where the insurance concept is coming from. So you have a contract with us JustInCase as an individual but you can connect with your friends in our app by sending like invitation code, and then you and your friends will share the risk and return on the insurance. So risk and return is basically, return is your discount amount as we talked about, and then risk is when you claim or your friend claims, so if you do some kind of fraud claim, my discount will be gone. So in this mechanism, people will help each other, and then that number of the pool with people, friend, will be maximum of 10 people. If that’s like 10 million people or 1 million people, then that’s normal insurance.
Tim: Well, yeah, actually. So with that P2P pool, would that be cheaper on your platform than a regular insurance?
Kazuya: Yes, that’s why our price is a lot cheaper. We are confident we can do that.
Tim: That’s kind of unusual because going back to the actuarial science, any good actuary would tell you that a 10-million person pool would allow you to distribute risk and offer much lower premiums than a 10-person pool which would be really risky.
Kazuya: Yes, the volatility of the riskiness of the 10 people versus 1 million, yes, as you said, that’s correct but we don’t do business with only 10 users or insured, but we do do like 1 million, but we kind of virtually make the pool, all of the 1 million people as if they have a virtual pool. So our portfolio itself is 1 million, so it’s stable, just like other big insurance.
Tim: Okay, so the pool, the insured pool is really the same size and basically, you’re offering a discount for this sort of introduce-your-friend structure. So are you thinking that is going to be profitable because A, it will lower your cost of customer acquisition as people introduce their friends or B, friends will pressure each other not to make claims, or C, both?
Kazuya: Well, both, both, but B, it should be a little bit different because if you really break your smartphone, it will encourage you really claim, but insurance is always a battle with the insurer because of the fraud, so that fraud will be extremely lower. Maybe as you said, maybe the smallest scar on your phone, you might not claim because you don’t want to give friends trouble but that’s called win-win, right?
Tim: Yeah, okay. Yeah, they’ll be less likely to claim for little things and have all their friends lose their no-claim discounts in the next time.
Kazuya: Yeah, it’s just like motor insurance deductible for your rating.
Tim: That makes sense, and since these P2P pools are really just part of a larger pool, can members join and leave anytime they want or do they all have to join at the beginning of this three-month period?
Kazuya: Either, anytime.
Tim: So they can go in and out?
Kazuya: We are still finalizing how it works but entering, it can be anytime, but getting out, maybe only when you renew every three months.
Tim: Yeah, you want those P2P pools to remain pretty stable because that’s where the social effects come in, right?
Kazuya: That’s right.
Tim: Well, let’s talk a bit about your customer acquisition. So it seems that one of the biggest challenges you would have is that most of the people who want to buy insurance for their smartphone, they do it when they buy their smartphone, right? When the people at the SoftBank shop or the Apple store are walking them through how to use their phone, they say, “Oh, well, sign here if you’d like insurance,” and how do you get by that because that seems like a really tough challenge in terms of –
Kazuya: Yes, for this product, we understand that is the biggest challenge but we would try first of all with talking to MVNO, a low-cost carrier, which most of the case does not have the coverage for the older smartphone or repair itself. We think repair could give us a very risky individual or risky from the actuarial insurance perspective but why not? And also, second hand smart phone retailer, the second hand smartphone market is almost nil compared to the abroad, but in Japan, it just started so it’s good work.
Tim: What percentage of smartphones are sold through dealers like new phones versus the second hand?
Kazuya: More than 90% or maybe even 95% is the brand-new in Japan. I guess a question here that says Japanese tend to have older smartphone or a flip phone like ten years ago still in the house, really, for nothing, and the smartphone, the life on that smartphone, are used to change every year, like iPhone 7, iPhone 7S, but –
Tim: People are keeping it longer.
Kazuya: Yeah, exactly because you don’t have to anymore, right? It’s not worth upgrading after one year.
Tim: It is a challenge because you want to sell them insurance at the time of sale.
Tim: But you have to install the app before –
Kazuya: I guess if that is the biggest challenge, yes. In Japan, there is almost no preceding example that insurance company forces a user to install their app to enter into the contract, yes, yes, but we’ll try, we’ll try.
Tim: But it’s interesting and mainly, that kind of social sales, that social networking, the P2P insurance pools will overcome that.
Kazuya: Yes, yes, yes.
Tim: Particularly if you move into other products besides cellphones.
Kazuya: Yes, yes.
Tim: How big do you think this market is?
Kazuya: From my head, it’s about 1 billion or $2 billion?
Tim: Just Japan?
Kazuya: Just Japan because there is a lot of smartphone, and then about 50%, 40% is insured.
Tim: Japan loves insurance.
Kazuya: Exactly, yes.
Tim: I mean, I used to work in insurance and Japan is really over-insured from a risk point of view.
Kazuya: Penetration is super high globally, yes, probably one of the highest.
Tim: Yeah, I’m not sure whether it’s better to say Japan loves insurance or Japan hates risk. It’s kind of the same thing, right?
Kazuya: Right, risk-averse.
Tim: But that’s great for insurance companies.
Kazuya: Well, that’s right, that’s right, but the penetration thing is I think more like life insurance. Interestingly, Japan’s life insurance profit margin is the world number one. If that’s not one, number two. I think Hong Kong is number one or number two. Both have the long living life expectancy, so yes, not sure if it makes sense.
Tim: Japan is a great place to be an insurance company. So what’s next after smartphones? I mean, are you going to be using this platform to insure other things? Are you going to be may be using the mobile platform to sell other insurance products to younger generations?
Kazuya: Yes, we will be providing only one app and then we will be also providing some service for free that will make it easier for your insurance life if you have insurance product by other insurer, or credit card insurance that comes with credit card for free. As you said, it is a very big hurdle for somebody, let somebody to install an app to get into the contract, so will motivate.
Tim: But I mean, do you plan on insuring musical instruments or televisions, or game systems?
Kazuya: Yeah, yeah, yeah, yeah. That’s also our plan and we want to do something more maybe fun like – well, it’s almost like a joke but if you drink too much and you lost your last train, and then when you want to use a taxi or you want to stay, maybe that’s possible, right? The GPS information.
Tim: I think we’re getting into some serious moral hazard.
Kazuya: Yes, sure. Yeah, sure, but something. That’s super extreme but that kind of insurance will be a fun product, a fun product.
Tim: Are you considering teaming up with other companies, say one of the traditional life insurance companies and selling their products through your platform?
Kazuya: We’ve been talking to a big non-life insurance company and a life insurance company, both of them. Non-life mostly because our first product, second product will be non-life. Maybe big insurer sells our product initially might make more sense for both party rather than we sell theirs because our customer is a little bit younger generation and then their product is a little bit different. We don’t plan to compete with the many areas, maybe compete very small, minor areas, but we don’t want to do that.
Tim: Right, right. Well, it’s hard to become a life insurance company.
Kazuya: Right, anyways.
Tim: You need a lot more capital.
Kazuya: Exactly, yeah. Yes, exactly, yes.
Tim: Let’s talk a bit about Japan in general. So the FSA seems to be doing a lot to encourage innovation in the financial sector, particularly with banks. We are seeing a lot of pressure on banks to open up their APIs and work with startups, but we don’t see a lot of things happening in the insurance industry.
Kazuya: I completely agree.
Tim: Now, I mean, in fact, we are still buying insurance in the same way we have, we’ve got the same types of products we have had since the 50s. So is the FSA also pressuring insurance companies to be more flexible and innovative, and work with startups or do you find like you are sort of on your own convincing everyone?
Kazuya: Well, I do not think strongly that FSA is really, really pushing the big companies, just like say, five years ago, they were pushing the company, “Are you doing ERM? Are you doing ALM?” But not that much, but they are very seriously considering the digitalization of the insurance already and not as much as maybe bank side. Obviously, I’ve been talking to the FSA, actually different divisions. One is in charge of innovation, one is in charge of the insurance regulatory supervision, but there are many people anti-regulator that really support us. They are trying to change but it just takes years.
Tim: Have you had to go through all the steps of becoming an insurance company to offer this product or did you have a more streamlined process with the FSA?
Kazuya: Yes, because we are applying for – it’s what they call the mini insurance license which, to my best knowledge, exists only in Japan, in a developed country. It’s a lot less burden or a lot smoother. The only reason, it took about 12 months already for me to finish the process is P2P concept or app-only concept, that was completely new to anyone, but if I was going to do simple insurance, six months should be enough.
Tim: Okay, 12 months to get a new insurance product approved is really fast in Japan.
Kazuya: That’s right, yes.
Tim: Yeah, that’s not – so it sounds like they are encouraging innovation, or at least –
Kazuya: Yes, they are very supportive, yes.
Tim: So before we wrap up, I want to ask you what I call my “Magic Wand” question, and that is, if I gave you a magic wand and I told you that you could change one thing about Japan, anything at all – the education system, the legal system, the way people think about risk, anything at all to make things better for startups in Japan, what would you change?
Kazuya: I want make a rule or remove the rule that everybody can speak on the phone in the train or elevator. Seriously, seriously.
Tim: What do you mean? So you want to allow people to start using their phone in the train and elevators?
Kazuya: Yes, yes. Why not? Why not? It’s kind of unique in Japan, right? It’s not the same as the US, right? Really?
Tim: Well, yes, a lot of people still use their phones but why do you want to have people start using their phones on elevators and trains? I think it would drive people nuts.
Kazuya: Really? It’s more efficient, it’s more open to others, and – well, when I am moved to Tokyo and Tokyo on the west and the Kansai area is also very different, so that makes some people more friendly. Go to China. Nobody cares, that kind of things. If that changed, I think everything would be changed.
Tim: Okay, so it’s not just gaining a few minutes of efficiency on an elevator or a train, it’s something bigger?
Kazuya: Yeah, mindset, of course.
Tim: So what kind of mindset? What is the mindset you’re looking for?
Kazuya: Well, maybe it’s contradictory but they don’t care others and some people are very energetic but some people are a little bit too cold or cool, they don’t interact with each other. When I moved to Tokyo like 15 years ago, I felt very lonely not because I’m lonely but I was trying to find how to find this place and asking – Google maps was maybe not very yet. Everybody maybe thought I’m just putting tissues.
Tim: Oh, I see what you mean. Yeah, yeah. There is this kind of closed-off nature.
Kazuya: Exactly, that’s what I’m going to say.
Tim: Okay, in San Francisco, this was 15 years ago or so and I think this might be what you’re kind of getting to. I was sitting in a café with two of my friends and they were discussing a particular problem they were having. I won’t go into it. It had to deal with rendering graphics, and they’ve been talking for about 15 minutes about this, and then someone from another table kind of came over, said, “Excuse me, I overheard you talking.”
Kazuya: Yeah, exactly.
Tim: “I know a little bit about this. Do you mind if I sit down?”
Kazuya: Yeah, yeah, yeah. Yes.
Tim: “Sure, sit down,” and it turned out, this guy knew a lot, and the three of them started a company together.
Kazuya: Ah, really?
Kazuya: Great! Yes, yes.
Tim: So it’s that kind of openness is what you’re after?
Kazuya: Yeah, yes, yes, maybe the train phone call thing is not really related to that but –
Tim: Well, no, it is. I think I know what you’re saying. There is a closeness that maybe –
Kazuya: Yeah, closed, just like the insurance.
Tim: Well, maybe not closeness. There is a formality.
Kazuya: Formality? Right.
Tim: That prevents people from just opening up and sharing ideas, and talking.
Kazuya: Right, right, right. Right, in the elevator, you’re not supposed to talk, just like that.
Tim: Right, right, and you’re certainly not supposed to walk over to someone else’s table in a restaurant.
Kazuya: Yes, unless you’re drunk.
Tim: You know, I think that’s a great answer. I mean, the ability to express yourself and to put your ideas out there without fear of being criticized or told to be quiet.
Kazuya: Yeah, yeah. So just a little bit more noisy, right? It doesn’t really hurt.
Tim: Yeah, it’s a little more noisy, a little more social interactions, but that’s a good thing.
Tim: Excellent. Well, Kazi, thank you so much for sitting down with me today. I really appreciate it.
Kazuya: Thank you. Thank you.
Tim: Really great.
And we’re back.
The idea of being able to ensure expensive items like cameras or guitars for a few hours might really transform insurance. It won’t change their current book of business much. Property insurance, life insurance, health insurance, these are things you want continuous coverage of. However, here we have a case of new technology being used to create new transformative products.
The reason you can’t insure your camera only for the duration of your trip or your guitar only for the evening of your performance has not been that the actuaries could not figure out how to make the math work, no. It’s been because there’s been no way to sell administries policies affordably. Now that there is, we will start to see more and more of these new targeted products coming onto the market. In fact, we are already seeing this in auto insurance where onboard electronics share information with the insurance companies and consumers only pay for coverage while they’re driving and at a rate determined by their actual driving habits.
I was impressed that Japan’s FSA actually is trying to encourage innovation in insurance and that they’ve developed streamlined processes for smaller companies and startups to be able to introduce new products. One of the most innovative ideas in JustInCase’s model, however, is the small peer-to-peer insurance pools.
Now, these are the insurance pools in the traditional sense of the word since the risk is still spread over all of JustInCase’s customers, and that’s how the base rate is calculated. However, tying the no claims discounts to the behavior of small groups of 10 friends will certainly reduce the number of claims that are made. In fact, it might reduce them more than Kazi is letting on. The success of this whole business strategy depends on a rather delicate balance.
I think a lot of people would decide not to file a $60 claim because it would not be worth the trouble of annoying nine of your friends and causing them to pay more for insurance. The apologies you would have to make to all of your friends and the behind the back gossip incurred would just not be worth it.
In the short run, this reduces the number of claims made but in the long run, there is a real risk of the strategy backfiring and having people refuse to participate in these small private pools, specifically because of the additional social pressures that they will involve. Either way, it’s going to be very interesting to see how all of this works out for the insurance industry over the next five years.
If you’ve got a story about insurance or social pressures, for that matter, Kazi and I would love to hear from you, so come by disruptingjapan.com/show118, and when you come by, you will see all the links and notes that Kazi and I talked about and much, much more in the resources section of the post.
And hey, you know, Disrupting Japan is looking for a social media intern. You’ll help us make a greater impact in Japan and with Japanese startups, and you’ll get to connect with some of the most amazing people in Japan and help build the skills you’ll need to grow your own startup. Native or near-native Japanese fluency is a must here, so if this sounds like a challenge you’d be up for, send me an email at [email protected], and we’ll talk about it.
And most of all, thanks for listening and thank you for letting people interested in Japanese startups know about the show.
I’m Tim Romero and thanks for listening to Disrupting Japan.