The insurance industry is in the midst of a technology shake-up, which has created a hot environment for startups. Insurance executives are spending nights sweating a few questions: How will insurance be transacted in the future? Why aren’t younger people buying more insurance? What do they expect from insurance products? Are startups going to destroy my business? Eat into my margins? We know many are trying, but whether they will succeed is an open question. The graphic above illustrates the frenetic amount of recent startup activity, across different kinds of insurance and different parts of the value chain. Are they credible threats or a lot of hot air? We at Jump believe that while there are tons of opportunities, a curated approach to scalability with an eye towards exits uncovers some risks that may be more attractive than others.
The setting of the stage: external forces and trends in insurance
We know insurance is a moated, bloated, and slow-moving industry, by regulation, incentives, and nature.
But, the last three years have seen more money pour into “insurtech” (~$3.4B in ‘15–16) than any other fintech vertical. Venture capital dollars are helping along some external forces:
- Changing the expectations of consumers. Insurers won’t be penalized for pixelated design next year, but if they spend 5 years on a large waterfall revamp, they will likely lose business.
- Squeezing inefficiency out of core services: claims processing, administrative overhead, customer service, billing, etc.; raising the bar to stay competitive and profitable, and putting downward pressure on insurance prices, which could fuel growth.
- Improving distribution, or the way insurers deliver products to agents and ultimately, end consumers. We believe that independent agents and incumbents with strong brands are not going away in the short-to-medium term, but there is still plenty of opportunity in digital distribution. Digitizing insurance can be complementary to independent agents, not entirely destructive.
- Enabling the spread of connected devices to process vast amounts of information. This will upend underwriting, pricing, and claims adjudication (e.g. smarter fraud detection).
- Lowering risk exposure, putting further pressure on price (for the same insurance coverage). To maintain the same profit levels an insurer needs to lower the amount it pays out in claims and/or lower the amount it spends to run its business.
- Creating better marketing targeting, powered by algorithms and real-time feedback loops. Insurance is about segmentation, and marketing optimizations allow for more granularity.
User-centered design is
- Educating consumers, creating better outcomes both for products purchased (not understanding what you’ve bought is generally bad for everyone involved), and for products that are not purchased due to a knowledge gap.
- Mitigating low satisfaction scores across the insurance industry, which may be rooted in the natural tension between insurers and their customers. Insurance naturally pits companies against consumers in situations of claims (they translate 1:1 to profits).
- Making complicated products more accessible and seamless to buy. An industry veteran recently said this to us, shining a light on the problem with incumbent thinking and the opening for startups: “Does design really matter for insurance? It matters to some extent but how important is it? It can easily be copied quickly. I guess I’m saying the advantage is probably short-lived.”
And all of the above are accelerating new products and brands employing a fresh voice with new affinity value, while covering new risks. These new players kill moats in the industry, promoting education, competition, and efficiency, and ultimately lower prices through this efficiency.
Why startups can win against (or with) incumbents
The insurance buying experience is time-intensive and complicated. Insurtech startups are taking on these challenges with a few competitive advantages:
- Continuous innovation is lacking in insurance; startups can bring Agile thinking to focus on user experience. Incumbents have strict controls in place which stifles risk-taking.
- Mobile and digital are not second nature to insurance incumbents. Younger populations (the future buyers of insurance) are also more open to new insurance products and brands and more likely to select into mobile/digital experiences.
- Startups can focus on a specific problem and solve it really well. Insurance is a complex product with many moving pieces. Picking one to improve is hard for full-stack insurers but not so much for smaller, heavily-incentivized teams.
- Incumbents risk cannibalization when they try to change. This adds another layer of inertia on top of all the obstacles to innovation.
In this environment, there are a lot of areas of innovation we are excited about. We identify the biggest opportunities (as we see it) in the next post.
This post was written by Prashant Shukla and Peter Johnson from Jump Capital. Prashant focuses on insurtech at Jump Capital, and was an early employee at Metromile. Peter leads fintech and insurtech investing at Jump Capital. We both thank all those who contributed to these posts.
Note: The above analysis employed information, insights, and data from Company websites, press releases, CBInsights, Towers Watson, Thomvest, Mintel Group, TechCrunch, Dig-In.com, WordStream, III.org, IBISWorld, E&Y, Coverager, Statista, Vertafore, WSJ, and InsuranceJournal.