Insurtech Firms: Are They a Threat to Insurance Companies?

Innovations in the insurance sector are changing at a breakneck pace, forcing legacy firms and insurtechs to be more competitive. Who will be the winner?

One of the most disruptive trends in insurance is the growth of insurtech firms. Companies like Lemonade, Root, and Oscar are challenging traditional insurers by offering new ways to buy insurance.

Insurtechs offer innovative products to make it easier for consumers to understand their needs and find affordable coverage.

Insurers have also been investing significant time and money to integrate cutting-edge technologies into their operations and keep up with digitalisation. The question is: will insurtechs eventually make the old guard obsolete?

Technological change is exponential in nature

In a world in which technology is changing faster than ever before, it's critical to understand how exponential technology affects businesses. However, it can be difficult to separate reality from the hype.

There is no doubt insurtech firms have the potential to change how insurance works for consumers. But they will face many challenges in making this happen. For example, they will have to become more established and reliable for insurance companies before they can compete with them.

Most governments also require authorisation before companies can sell insurance policies. This means insurtechs will have to play by the rules, which can limit their ability to enter the market.

Insurance companies are already changing

Even though insurtech firms have just started disrupting insurance, traditional insurers aren't sitting idly by. Instead, they're innovating and trying new things so they can compete with these upstarts. For example:

  • Some insurers are offering new products like coverage for Uber drivers
  • Others have reduced costs by using technology to streamline operations, automate the purchasing process, and better use data.
  • There is also a partnership ecosystem between insurtechs and insurers that is driving innovation. These partnerships lower barriers to entry for insurtech firms while providing traditional insurance companies with access to the latest technologies.

According to Romi Stein, Co-Founder and CEO at OpenLegacy, "The insurance giants have great technology overall. Everything from how to calculate damages and generally to handle their business. The issue is all of this is locked inside legacy systems, mainframes, IBM i machines. This means they need a way to build new digital solutions so they can build apps on mobile phones and so forth. The issue is integrating between the two isn't easy, and you want an easily automated way that builds cloud-native solutions to enable that digital economy."

There is no doubt insurtech firms will continue their push into insurance. But it's unlikely they'll completely replace legacy firms in the near future because of these challenges.

How disruptive are insurtech companies?

The main areas of the insurance industry that insurtechs disrupt are process-based, such as buying insurance, underwriting policies and processing claims.

They are also disrupting the distribution of insurance by offering improved customer service by providing easy online access, enhanced options for communicating, such as callbots or video conferencing, and reducing distribution margins.

According to Shantanu Tewari, Head of Insurance Practice at Newgen Software, "One-size-fits-all is no longer an option for insurance providers today. Clients today expect customised policies tailored to their needs. And matching offerings to the customer's needs has always been the top priority of insurers. In today's competitive scenario, to be a step ahead, insurers need to reimagine and reinvent their offerings by leveraging the best of breed technologies available."

Insurtechs are also changing how insurance companies differentiate their products by adding new benefits, such as virtual assistants and gamification. They're even trying to solve problems that insurers have been struggling with for years, like controlling costs and attracting the best talent.

"We continue to see experienced professionals from within the industry take the leap from some of the best insurance carriers in the world into the insurtech space, which will only increase the quality of offerings across the space," added Andy Cohen, President and COO of Snapsheet.

A shift toward collaboration is the most productive outcome

The prospects for insurtech firms are bright, but it's implausible they'll displace conventional insurers anytime soon. Instead, the market is likely to see a shift towards collaboration between existing players and newer entrants.

Not only is collaboration the most favourable option, but it's also the most productive. Collaboration enables insurtech firms to become more established and helps legacy players improve their offerings.

Furthermore, it's not only insurtech firms that hold some risks for legacy insurance companies; the opposite can also be true at times. Considering competition can get fierce in the sector, collaboration might not always be an option.

The threat to insurtech companies often comes from three main areas; often when legacy insurance companies:

  • 1) Build in-house insurtech capabilities
  • 2) Acquire the competitors of insurtech companies
  • 3) Outspend insurtech companies on lobbying

Insurtech firms need to offer service at scale, which means having the ability to deliver their services to a large number of people. For such scalability, they often launch new products through their APIs and partner with cloud-based providers, which make it easy to bring new products or services to market with less testing.

In summary, the insurance industry is in a state of flux. But one thing is sure: consumers will be the biggest benefactors, as they gain access to more choices and better services when buying insurance.

Are insurtechs a threat to insurers? The answer may be "yes". Or it could just as well be "no", depending on how one looks at them. What's clear, though, is insurtechs are here to stay, and they will continue to shake things up in the insurance industry. Nonetheless, cooperation between insurtechs and insurance companies may yield the most beneficial outcomes for both sides in the end.


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