InsurTech definitions: what is insurtech?
A relatively still ‘up-and-coming’ aspect of digital financial services compared to its related category ‘fintech’, insurtech applies many of the same techniques and strategies utilised by others.
Chief amongst these is a desire to use innovative digital technology to augment pre-existing insurance-based operations in order to achieve greater efficiency, savings and customer outcomes.
“Our experience with insurers that want to leap into the digital era shows that as technologies evolve, these companies may end up automating 50% to 60% of traditional back-office operations.”
Pushing beyond the traditional industry
However, whilst McKinsey’s claim is particularly relevant for established insurance firms, insurtechs have a distinct advantage in that they do not need to ‘update’ their processes; they are usually the pioneers of changes that occur more generally at a later point.
This positioning at the forefront of the industry also means insurtechs can specialise in products and services that larger companies don’t prioritise, including:
- Customised policies
- Social insurance
Other transformative technologies include artificial intelligence (AI), robotic process automation (RPA) and blockchain.
Gaining popularity in the ‘new normal’
The legacy of COVID-19 could include the increasing prominence of insurtechs, which will add necessary competition and innovation to an industry which could become very active as global economies deal with the fallout.
A Q1 report published by CBInsights opined that insurtech will enjoy a prosperous decade as confidence among both customers and companies themselves develops.
The report estimates that global insurtechs raised approximately USD$912mn in 2020’s first quarter, generated primarily in the first few weeks of the year. Furthermore, the report calculates that approximately 50% of the quarter’s total was raised in the first 35 days of a 91-day period.
Therefore, 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 mixed yet measurable success.
Given the widespread disruption to practically every other sector, these results should be encouraging to insurtech companies and consumers too. The future of insurance could very well belong to these innovators.
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.