Insurtech scored one of its best years in 2020, says S&P
Among the achievements recorded are:
- US$3.83bn in IPOs, the largest sum since 2015 ($2.96bn), with Q4 netting $1.59bn alone
- 20 IPOs in total
- Nine flotations
Insurtechs represented four of insurance’s top five largest IPOs:
Despite this success, S&P tempered its praise by nothing that strong IPO showings did not necessarily translate to overall market success. It notes that Lemonade stock has been regarded as consistently since July, while GoHealth’s fortunes have been less positive (although its stock is now on ).
Furthermore, Lemonade must still overcome its enduring struggle to turn a profit. An article from Nasdaq posits that, no matter how popular it is with the millennial generation, the company’s 70% net loss ratio is simply unsustainable.
Digital transformation fuels investment
The emphasis on insurtech investment could be explained by the wider market’s recognition that will be essential to insurance’s survival in 2021 and beyond, particularly as tech ecosystems the sector.
“Investors are backing insurtech startups – having raised US$12bn globally since 2010 – in a display of confidence for technology driven businesses,” said Shay Alon, MD and Global Lead for Life and Annuity Software at Accenture.
“Most carriers recognise that ecosystems are already disrupting their businesses and that disruption will intensify. In addition, the COVID-19 crisis is likely to permanently realign protocols in the market as consumers come to expect constant access to their personalised digital services.
“The industry has been on a steady path toward fundamental change, but the pandemic has been a real inflection point for why there is no time to waste in their journey to a more digital future. Customers have moved online and insurers must meet them there,” he concluded.
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.