Insuretech. An exploration of the latest FS-related market under technology driven pressure.

SUMMARY:

The rise of insurtechs looking to win a tech-savvy audience is applying pressure on insurance sector firms to offer innovative products and improve internal operations.

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Growing investor interest illustrates the perceived opportunities in insurtech, with investment reaching $1.6bn in 2016 and deal volume and value roughly doubling since 2014, according to CB Insights data. In the first quarter of 2017, deal flow saw a 50 percent increase compared to the same period in 2016, with $853m invested in total.

Investments from insurers themselves still represent a small proportion of total insurtech funding, but they are investing in other types of ventures: of 75 global insurers polled by Accenture last year, 17 percent invested in insurtech startups. The remainder backed other tech startups, but often with a focus on technologies that hold potential for the insurance industry in the future.

Regarding lines of business, 46 percent of insurtechs focus on property and casualty, with 33 percent on health, and the remaining on life insurance, according to a McKinsey & Company report. Specific technologies supporting access points to the insurance value chain are mainly related to Big Data, followed by Artificial Intelligence and Internet of Things.

Effective data analytics currently is “the absolute lifeblood” in insurance, as it helps sector companies with everything from customer acquisition and management to pricing and risk selection, according to Nigel Walsh, a Deloitte partner focused on insurtech and digital transformation at insurance companies. He says:

Anything that speeds up [insurers’] processing, understanding and the insights they can gain from the customer has to be a great thing. And for everything they connect and engage with, data is the key.

Despite the fact that the market is still smaller for insurtechs than for fintechs, hurdles for startups and traditional companies are consistent with those seen across the rest of the financial services sector, according to Walsh:

[Insurers] are all challenged with decades of legacy and a customer base that is moving ahead and building expectations based on new, fleet of foot, well-organized and easy to use experiences from non- financial services providers.

Walsh adds:

It sounds like a cliché, but it’s way more fundamental than that.  The bar raises daily, and it often feels like we are continuously on the back foot.

A key priority for legacy carriers is to improve regarding new technology adoption and get moving into the “new world” of insurance quickly, according to Walsh. This, in turn, has to be done without alienating or losing existing customers  – or doing so by choice, by setting up new companies.

Partnership needs

Coping with issues such as slow decision making and inability to absorb innovation at pace means fintechs will try to grab attention in the market on their terms, rather than relying on partnerships with established companies. The same is not yet happening in the insurtech space.

According to Walsh, fintechs are better positioned to operate independently, by unbundling banking services such as new current accounts, savings or loan products. The consultant points out:

What that means to the customer is lots more micro-services to deal with. The original fintech partnership desire moved on quickly, given the speed of engagement from some of the banks.

In insurtech, venture independence is not as applicable given the challenges associated with regulation and capital requirements. This means that at present, the partnership approach is still the norm, but still needs fine-tuning. Walsh says:

As the market has matured, more structure is needed [from traditional insurance companies and insurtechs] to process decision making and the number of proofs of concept (POC) that can be executed accordingly – you will hear that from too many startups in the POC merry-go-round.

Adopting an agile approach is often cited as the way forward when integrating startup propositions to insurance carriers, but this feels like an old message, according to Walsh:

Agile needs to go beyond just the IT delivery and move into procurement, legal, supply chain. I’m still hearing 500-plus questions asked of startups with a short response time.

To engage better with startups, companies need to match and set their expectations accordingly, according to the Deloitte consultant:

I would highly recommend less activity and more focus on successful outcomes. 

Increasing noise

While insurtechs are still predominantly developing offerings that improve or extend the offerings of sector incumbents, there is more noise around the speed of engagement from some of the carriers.

According to Nick Pester, an insurance partner at  CapitalLaw, who provides services including brokerage between insurtechs and established sector firms, insurers are incredibly risk-averse when dealing with startups – which is ironic, given their business is all about risk.  He adds:

One of the issues that we see with insuretech businesses is that very often, discussions between them and big insurers will get to a very advanced stage, and then just pull the plug because they got spooked or because one particular person within the organization  said they don’t want to do it or it doesn’t feel safe.

It is not enough to develop a potentially useful technology-led solution to a problem, says Pester, who has seen large companies taking on startup propositions merely because they are well-presented – and not because they could be particularly useful, or have been created by a team that understands business priorities or has management expertise. Pester points out:

What a lot of successful tech businesses do very often is have a chairman or non-executive director without any real role in the organization there just as a seal of approval – typically somebody who knows their way around the insurance market, who is there just to give that feeling of provenance and quality.

He adds:

But let’s be honest, a lot of these early-stage tech businesses who developed something in their garage and are now looking to do it on a global scale, need to have some evidence of management experience within their team.

According to Pester, as well as the usual advice of creating products that correctly fill market gaps as well as ensuring comprehensive documentation ahead of lengthy procurement processes, an important consideration for insurtechs is to avoid adopting a scattergun approach when pitching their offerings.

Pester gives a word of warning to ventures in the insurance space:

The more doors that are closed on somebody, the harder it becomes to open the next one. That’s because the insurance market is a place where people talk – and if a particular business has done the rounds in the market and hasn’t had any sign-ups, then that’s going to get around.

Finding alternatives

Given the difficulties faced by established insurers in implementing disruptive technologies to their offerings, Pester predicts a not-too-distant future where insurtechs will start to move away from their predominantly partnership-based approach to business.

He says:

We have seen clear evidence of an increasing number of very promising, high-potential tech businesses who are getting tired of dealing with the [insurance] market and getting frustrated by the number of knockbacks they get and how difficult it is to get past various hurdles, so they’re looking for other ways to do things, one being to set up their insurance carriers.

This isn’t straightforward as capital requirements are high, as pointed out by Deloitte’s Walsh. But sector companies are finding ways to get around it, says Pester, by launching their own initial coin offerings (ICOs) and partnering up with newer insurers that are more innovation-focused. He adds:

We’ve got contacts who have asked us to refer insurtech clients to them, where we think they might be interested in either investing in the company itself or providing them with underwriting capacity to go out and sell insurance.

These dynamics are all leading towards a consolidation of the insurance market, says Pester, where a handful of “super-carriers” will provide capital and distribute front-end capabilities across thousands of niche ventures.

Pester predicts a massive rush of businesses looking to occupy certain market positions. But for now, startups will have to try and find better ways to work with partners or by establishing an independent position in the market. He adds:

If [insurtechs] are looking for business in the insurance space now, it may feel like getting blood out of a stone. But if you’re one of the first few who manages to break those walls down, then you’re on your way to being a billion-dollar company.

For CIOs in the insurance business trying to engage better with startups in their space, there isn’t a standard answer – but working out the right model to get projects done is a start, according to Deloitte’s Walsh. This could mean carrying out initiatives on the edge of the IT strategy and portfolio, in the middle or a wholly siloed manner.

Walsh says:

As a CIO, I would choose the themes that are important to my business or business lines, build a cross-functional team of business and IT, set up small, short and sharp sprints that could be successful or not and clear gates to close out or proceed. Then I would allow folks to rotate through this area so that the same attitude and thinking can be applied to other areas of the business and vice versa.

Walsh advises applying the same approach to business-as-usual operations while removing cost and inefficiencies as rapidly as possible.

I would also communicate, communicate and communicate to ensure [the organization] is open, and everyone knows what they are doing, what has been successful, what we have tried and failed at and what our overall current direction of travel is.

My take

As colleague Denis Pombriant has pointed out, we live in an age where advances in technology are leading us down a road of relentless commoditization. The insurance market is not immune. Rather it is vulnerable to the disruptive forces that commoditization brings, largely because it is a service that can be optimized for the end buyer cost. There is enough available data for new entrants to use modern analysis techniques as a way to categorize and fine-tune risk profiles.

Insurance companies are behind the more general technology curve than others in the fintech space yet their challenges around collaborative innovation are consistent with those seen elsewhere in financial services.

Finding common ground between a business that might have a 100 years history and another that is 100 days old is culturally hard. Handling risk is something that the old timers claim to understand well.

But as millennials start to represent a more significant chunk of insurers’ business, large incumbents will be forced to react to new dynamics and find ways to innovate. Digitally savvy consumers see financial services – including insurance policies – as interchangeable as long as they meet their needs. Loyalty to them is a thing of the past.

If the experiences seen in banking are indicative of broader fintech trends, startups in the insurance segment will endure the slow, bureaucratic processes required to work with established firms, learning how and where they are failing. Then, they will directly chase new clients, funded by organizations that can identify fresh opportunities.

Tech giants such as Amazon should not be forgotten. Amazon is going after business that traditional insurers turn down because margins under their model are considered too low. Amazon already owns enough of the component parts and data required of a modern fintech/insuretech to view small margin talk as irrelevant. Its endgame is volume-driven margin, a model it has proven in its AWS services.

So far, large financial services firms have had the upper hand due to their large client portfolios, extensive historical experience and, perhaps most important, their deep pockets. Access to funding may no longer be an issue as the cost of building POCs plummets. At the same time, a new generation of customers is up for grabs.

The question remains – are those same, traditional firms taking notice or continuing to sit on their proverbial hands? Time will tell.

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