Insurtech is changing. Here are five questions that will matter in 2019

In many ways, 2018 was insurtech’s breakout year.

News coverage roughly doubled, search interest reached its highest level ever, and the industry became the target of State Farm’s now infamous Robo Agent commercial.

Despite registering an increasingly large blip on the radar of consumer consciousness, this was also a year of consolidation.

Though there were newsworthy funding rounds (including our own), according to Deloitte, insurtech funding was comparable to 2017 levels while the number of new players in the space actually fell.

It all points to an industry that is growing up, but facing some major questions.

Here are the issues at stake for insurtech in 2019.

1. Is the era of the early stage insurtech startup over?

It’s not necessarily surprising that the number of new entrants to insurtech is falling.

There are fewer opportunities to partner with insurance companies, and the innovation teams at most primaries are both capacity and business line constrained. In turn, they can handle only a finite set of partners.

New entrants are either solving a burning pain downstream of distribution (while still walking the tightrope of burn vs. insurance sales cycles), or are eschewing working with primary insurers altogether.

As a brokerage, Cover works with 30 different carriers and very few of them are tooled to be able to interface with us in a seamless way. Very few have payments APIs and only a small number of them allow any partner to bind a policy immediately.

Until there are changes in technological capabilities at some of these incumbents, this ceiling on partnerships will remain in place.

2. Can standalone insurtechs thrive without partners?

For those insurtechs not partnering with incumbents, the difficulties are arguably greater and these challenges will continue in 2019.

This is because these companies are trying to tackle four fundamentally separate businesses all at once; that is, distribution (selling insurance), the underwriting of insurance, claims servicing and management, and regulatory overhead.

Each of these functions is a discrete business within insurance.

From my perspective running a distribution business, if you can’t get the basic economic model right to begin with (acquiring good risk at reasonable cost and underwriting at a profit), you’re going to be challenged, irrespective of how much money you’ve raised.

Getting it right across all these functions is a very challenging thing to do all at once. It may also be the only viable option for some technology companies.

These challenges have been reflected in some of the financial results for insurtechs that came out in 2018.

3. Can insurtech innovate beyond distribution?

Most of the money that has moved into insurtech has floated into distribution.

Objectively, this makes sense since distribution is the life blood of the insurance business.

Coupled with an excellent product and customer experience, it makes for a great jumping off point into the rest of the insurance value chain (though challenging, it is mechanical).

The reality is that distribution businesses are going to get very big because they are tech and product-oriented companies focused solely on delivering on all of the block and tackle aspects of customer experience that incumbents do poorly.

After all, who hasn’t received a random cancellation notice, tried to read the legalese of your policy or change your deductible, or use a credit card without paying absurd fees?

With an established edge in product and customer experience, distribution insurtechs are going to take a look at, and focus product development efforts on, cutting out intermediaries to capture more of every premium dollar.

This isn’t to say that this will be the only place for growth or innovation.

Look at the claims servicing side of the industry. This is still, amazingly, a largely paper-driven process. There’s so little tech that actually supports it yet it can make up upwards of ten percent of every premium dollar for some companies. In my mind, it’s ridiculous that more innovation hasn’t happened here.

4. Can insurtechs scale sustainably?

Despite the increasing attention paid to insurtech, there is a fundamental issue that companies need to address in 2019: the unit economics of the policies they sell.

Last year saw some established insurtech players raise significant amounts of money but, despite this, they are really bleeding.

This isn’t just to do with the pace at which they are scaling their sales or engineering teams. The unit economics of the policies they’re selling just don’t make sense right now.

It should go without saying that you cannot lose $1.60 for every dollar you underwrite and be sustainable.

If you’re trying to scale against that kind of backdrop, the task becomes exceptionally challenging. These loss ratios can only prevail for so long before some of these companies find that the funding capacity starts pulling away.

From day one, we have made sustainability a key tenet of Cover’s strategy. We’ve been careful about the kind of risks we take onto our book, in order to keep loss ratios where we want them to be.

Whether insurtechs can achieve this sustainability is going to become increasingly significant in 2019.

5. Will incumbents finally embrace insurtech?

Watching State Farm’s Robo Agent commercial, you would be forgiven for thinking that shunning tech in favor of human agents was a conscious choice.

The reality is that many incumbent insurers simply aren’t ready to implement even modest technological changes and some carriers won’t have significant capabilities for a decade.

But one way or another, incumbents will have to respond in more meaningful ways.

Insurtechs have moved into the space with a beginner mindset and are rebuilding the consumer experience from first principles. The types of experiences we can deliver are a clear differentiator and our speed simply can’t be matched by incumbents.

This more customer-friendly version of insurance is only going to continue gaining momentum in 2019. Incumbents will need to do more than commercials propagating straw-man arguments.

Will this mean fundamental changes to the way incumbents themselves operate? Personally, I don’t think they can change enough on their own.

Instead, I think it will become very obvious to the senior leadership at some of these companies that rather than targeting insurtechs with commercials they will need to embrace them.

They’re not only going to have to eventually make acquisitions (if they have the opportunity), but they are going to have to give significant leeway to these acquisitions to build out the future of the company.

If they don’t, they may find that they’re left behind sooner than they think.

by Karn Saroya, CEO & Co-Founder of Cover