CBInsights cites a new epoch for insurtech in the ‘20s
Maintaining the status of a budding aspect of the financial services sector since the 2010s, insurtech, the report claims, is reaching an era of confidence both among customers and the operating companies themselves.
“While many InsurTechs themselves may still be in their infancy as start-up businesses, our industry’s relationship with InsurTech is maturing,” said Dr Andrew Johnston, Global Head of Willis Re InsurTech.
Turbulent success during COVID-19
Although the future appears bright for insurtech overall, the report doesn’t shy away from the discouraging legacy of financial disruption which has resulted from the COVID-19 pandemic.
Insurtechs around the world managed to raise USD$912mn in Q1, yet this generated primarily in the first few weeks of the year; the report calculates that approximately 50% of the quarter’s total was raised in the first 35 days of a 91-day period.
The shifting parameters of insurance definitions that resulted from coronavirus could partially account for this dip, although myriad factors almost certainly contributed.
Nevertheless, despite not performing optimally, insurtech deals for the first quarter of 2020 were up 28% compared to Q4 of the previous year, indicating that the sector is enjoying turbulent but measurable success.
Considering the future
The report indicates that insurtechs will need to innovate and diversify their business model in order to transition to even greater success, with a renewed focus on sustainability being particularly highlighted.
As such, the following predictions (categorised into five factors) have been made about the immediate future of insurtech:
- Valuation and investment: The pace of investments will decline as the insurtech valuation bubble bursts, leading to fewer unicorns (companies valued at over $1bn) and a widening gap between Series A and B funding rounds.
- Collaboration: New insurtechs will begin widely collaborating with existing insurtechs and create a new ecosystem of partnerships and mergers. The report indicates that M&A within the sector will begin to blossom.
- Insurtech maturation: More insutechs will move past personal lines and towards more commercial areas. MGAs (Managing General Agents) will begin acquiring insurance licenses to become full-stack insurers.
- Success redefined: Owing to insurtechs inherently exploratory nature, there has been a lack of clearly defined metrics to measure a company’s success. The report considers that a consensus on this amongst the insurance community is not far away.
- Diversified geography: Although the US and UK have been the early champions of insurtech, the report indicates that budding companies in China and India may pull the locus of activity further East than previously experienced.
Insurtechs are winning the race with legacy system companies
Nestled in its own place within the world of financial services, insurance is arguably more unpopular than retail banking.
That’s hardly surprising given that, from a customer service perspective, insurance is something of an off-kilter transaction. You pay a sizable premium in exchange for a service you hope you will never have to use. This image problem is exacerbated by ubiquitous tales of insurers not paying out when it is time to make a claim.
The insurance sector has long been due to an overhaul, and this is where the disruptive force of insurtech comes in - one of fintech’s most upwardly mobile subcategories. Accordingly, last year, insurtech in the UK alone attracted £262m in investment, a growth of 60% on 2019, according to Tech Nation. Insurtech’s momentous growth has been captured in a new report by The AI Journal exploring this burgeoning sector.
What exactly is insurtech?
Put simply, insurtech refers to technological innovations that seek to make insurance cheaper to buy and more efficient to use. In a similar vein to fintech, the large, established institutions have been dipping their toes into insurtech, but it’s the disruptors who are genuinely looking to shake up the status quo, diving into and exploiting those areas that traditionalists have little imperative to explore.
Examples are price comparison sites (one of the earliest forms of insurtech that was eventually snapped up by the insurers it initially sought to disrupt), claims software, customisable policies, or even smart-tech-enabled dynamic policies whose premiums can fluctuate depending on changing circumstances.
The latter, for instance, could use someone’s fitness tracker or smartwatch to monitor fitness levels, thus reducing the premium of a life insurance policy; or track a GPS system that records the location of a car and assesses risk levels accordingly.
Most consumers tend to shop around for their insurance needs and perhaps end up buying their contents insurance with one provider, their car insurance with someone else, and their pet insurance with yet another underwriter. Managing all these different policies, with their varying renewal dates and payment terms can be complex. This has led to the increase in apps that pull everything together.
More prosaically, insurtechs are developing AI that uses machine learning to act as an insurance broker, eliminating the need for a human intermediary and therefore offering more cost-effective and impartial advice.
Insurtechs and risk
But there are some obstacles in the way of insurtech’s continued evolution.
Insurance companies are averse to risk. Understandably so, as at the crux of the industry is the role of the actuary, whose job it is to analyse and measure the probability and risk of future events. So it’s little wonder that there’s a reluctance among the traditional players to welcome the disruption that insurtech brings.
Insurance is heavily regulated, a minefield of legality and labyrinthine jurisdiction, which means the idea of shaking it up can be anathema. And why would they, when their old-school business models are working perfectly fine?
There’s an understandable nervousness and unwillingness to work with startups, who themselves need to work with the bigger firms in order to underwrite risk.
While it seems like a catch-22 situation, there is growing, if cautious, interest from insurance companies, who can see the benefits of insurance with a friendlier face, innovative solutions, and a competitive edge through differentiation. As that tentativeness dissipates, the growth of insurtech will gather even more momentum.
Tom Allen's analysis is based on the findings of a new report on the fintech and insurtech industries produced by The AI Journal.