Is the insurance industry ready for the challenge of InsurTech?

Could the next generation of InsurTech startups cut out established companies (source: Matt Artz)

It took a little bit longer than in other sectors, but technology is now starting to disrupt the insurance industry.

InsurTech is now firmly on the minds of entrepreneurs, investors, and corporates. In fact, according to Google, searches for ‘InsurTech’ are trending strongly up, and have doubled over the last six months.

Searches for the term ‘InsurTech’ have peaked in the last few months (source: Google)

But what does the future look like for traditional insurance companies? Are they focusing on the real threats to their core? What can they do to protect themselves and capitalise on the opportunities that always come with new technologies?

The scale of the insurance market

It’s not surprising that startup entrepreneurs and investors have started to look seriously at the insurance industry. The market is massive and if startups manage to get some of the action, then there’s potentially lots of money to be made.

Global private health-insurance revenues will nearly double over the coming years (source: McKinsey)

Globally it’s a market worth $4.5 trillion, with estimated growth of 3.7% over the next few years. The private health-insurance market alone is set to nearly double by 2025, according to latest analysis by McKinsey. The growth is even higher in emerging markets, with the sector growing by up to 20% every year. The signs are positive across the whole industry.

But there are challenges too: namely, changing consumer expectations and increasing competition. In my mind these things go hand in hand. Online players like Amazon have radically changed consumers’ buying expectations over the last decade — not just in retail but in general, for any type of buying. Customers now want a very personalised service, accessible on-demand on their phone, wherever and whenever they are. They want the lowest cost too and are happy to search hard for it. These expectations are now starting to infiltrate insurance.

Changing customer expectations have fueled competition and the emergence of new digital-first insurance companies

Professionals in the insurance sectors understand this. In an interview with World Finance, Pekka Luukkanen, CEO of Nordea Life Finland, recently said that Millennials were increasingly “expecting a more immediate and dynamic service from their insurers, [and] some companies are struggling to modernise their offerings”. I think that captures the market changes very well.

Changing customer expectations have fueled competition and the emergence of new digital-first insurance companies. These startups feel, rightly or wrongly, that the insurance incumbents don’t have what it takes to evolve and develop over the next five to 10 years. They can see a gap in the market that’s growing wider every day. Hence, the increasing competitive pressures in the sector.

The role of technology

So, how do insurers respond? So far, it’s fair to say that they recognise the issue, have invested wisely in technology and are just about keeping pace with consumer demands. For example, according to EY, in the near term, global insurance technology spend is expected to grow at a rate faster (6%) than the sector’s real rate of growth (3%-4%).

The largest established companies have put their money where their mouth is. “Some of the world’s biggest insurers have committed more than $1bn to investing in technology start-ups as the industry attempts to play catch-up with other parts of the financial services sector and boost profitability,” wrote the FT last year. In fact, the latest figures from CB Insights show that insurers and reinsurers invested in more than 100 InsurTech deals last year; they only invested in just 1 in 2012. That’s an exponential increase.

The number of investments in InsurTech companies by corporates is on the rise (source: CB Insights)

These insurers are also investing in technology to reach new clients and reduce the cost of sale. While just five or 10 years ago, insurance salesmen were still knocking on doors or calling to make a sale, now it’s done mainly online. For example, in the UK nearly half of new home insurance sales and more than two-thirds of motor insurance sales are through aggregators or other digital platforms.

Insurers are also using technology to lower delivery costs, and make savings at the same time as having to invest in better customer service departments. It’s in this context that automation is starting to play an increasingly important role in the insurance market. On this front, there are a number of specific technologies that established insurers are watching carefully: Robotic Process Automation (RPA), Big Data and blockchain.

A blockchain-based smart contract system could potentially bring all parties in the insurance value chain together on one platform

The latest RPA technology allows companies to automate parts of the process that have, to date, been undertaken manually — everything from accessing and calculating risk to automatically checking and assessing insurance applications. In fact, one technology startup Lemonade recently boasted that it had paid a claim in under three seconds. RPA will have played some role in that. In fact, according to EY research, RPA is estimated to be able to save insurance teams 25% of their time and resource.

Blockchain is slightly less prevalent in the industry but will play a vital role in the future. A blockchain-based smart contract system could potentially bring all parties in the insurance value chain together. The result would be reduced documentation, reduced dependence on manual checks and faster settlement. In fact, blockchain is estimated to be able to save potentially 90–95% over traditional systems.

Smart wearable devices have transformed how insurers can collect data and assess risk (source: Gian Prosdocimo)

Finally, the Internet of Things and Big Data make it possible for insurers to collect, automatically process and extract insights from much larger data sets — and provide more personalised services. For example, wearable devices are now more prevalent. They can be used to collect richer data on the lives of customers and get a deeper insight into risks. This data could enable insurers to assess life-insurance risk on a case-by-case basis, potentially allowing bespoke insurance premiums.

Insurance startups are turning into competitors

But while established insurers have focused on squeezing out the efficiencies and using technology to reach new groups of consumers, there is another emergent technology trend that they don’t seem to have focused on so much thus far: some InsurTech startups are becoming fully fledged, regulated insurers in their own right.

Some InsurTech startups are determined to become regulated insurers and sell to consumers directly

Up to now, many of the most exciting InsurTech startups have worked with established incumbents. The most recent acquisitions in the InsurTech sector, are fine examples: Adsensa (acquired June 2017 by Exari) is a document analysis software provider; REG UK (acquired April 2017 by Disruptive Capital Finance) is a regulatory technology company; and RiskMatch (acquire April 2017 by Vertafone) is a web-based solution for insurance brokers. All of them are looking to sell their services to businesses.

But some InsurTech startups are determined to become regulated insurers and sell to consumers directly — players like Lemonade, Gryphon, and Coya. This particular market is small for the moment, but given the scale of the sector in general, it will surely rise. Right now, only 7.7% of digitally active consumers use InsurTech products but this is set to increase.

One of these startups is especially intriguing. According to reports, the Berlin-based startup Coya is “planning to build a digital insurance provider and has applied to German’s financial regulator BaFin for full authorization. It plans to launch to the public in 2018.”

Its seed round was a relatively substantial $10 million, much higher than the typical round, at least for a European startup, and Peter Thiel led the investment. Peter Thiel is, of course, a savvy investor. For him to buy in to Coya, the underlying rationale behind its ambition must give an indication of fundamental market direction. In addition, in this instance, it’s his experience from PayPal (co-founder) that’s most interesting and relevant.

PayPal’s founder, Peter Thiel, disrupted the payments industry (source: Wikimedia)

At the start of the FinTech revolution, many startups worked with banks to drive efficiencies in their supply chain, or used the latest technology to distribute existing bank offerings to new customers. They were working hand in hand with the banks. PayPal was different. Rather than provide its services to banks, it stood alone, went out to secure its own customers and worked in direct competition to the banks.

According to a recent FT report, PayPal now operates a Luxembourg-based bank subsidiary through which it originates PayPal Credit services internationally. And a recent regulatory submission said that PayPal “invest[s] our cash and cash equivalents and customer accounts in highly liquid, highly rated instruments which are uninsured. From time to time, we may also have corporate deposit balances with financial services institutions which exceed the Federal Deposit Insurance Corporation (“FDIC”) insurance limit of $250,000.” PayPal is managing its own customer funds.

Peter Thiel’s vision could be to do the same through Coya as has been done at PayPal: cut out the established industry players and manage customers’ risk and money directly. This is a serious play for the European insurance industry, and something that the rest of the sector should be reviewing carefully.

What next for traditional insurers?

So, where does this trend leave established insurers?

The pace of change is only going to accelerate — technology advances on an exponential not linear basis. What would have taken 10 years in the past in terms of technology change now happens in a few years. With AI and machine learning it will be down to a couple of months before we know it. And then days. This means that if an incumbent falls behind, it is difficult — if not impossible — to catch up.

Established insurers should be looking to invest in and acquire technology startups as part of their strategic transformation

So faced with increasing competition from ambitious and well-funded InsurTech companies that want to become fully fledged insurers, what should the incumbents do? First, they shouldn’t run away in fear or start to resign themselves to defeat. They have to recognise that there are big, exciting, opportunities here.

Secondly, they can’t rely solely on their internal innovation teams or consultants. Managing a transformational process on their own would be extremely challenging. Insurers need to recognise their limitations. They are not set up either to develop or nurture new bleeding-edge technology; they are experts at understanding and managing risk, not driving innovation. Insurers also have to recognise that the top tech talent is based in Silicon Valley, where many do not have offices. It is very difficult to attract such talent away from the promising startup economy. These people don’t naturally fit into corporate settings, and are quite disinclined to join large corporates.

Faced with these options, established insurers should be looking to invest in and acquire technology startups as part of their strategic transformation. They should be watching the market carefully, and seizing opportunities with the best and brightest InsurTech firms. Together, when executed properly, a startup and an established insurer are so much stronger — the established insurer gets a massive injection of innovation and the startup benefits from vast resources, brand, channel and decades of experience in the market.

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Many established corporates are already thinking this way. Allianz, for example, recently took a stake in Lemonade, investing alongside notable Silicon Valley players including Google and Sequoia. And Aviva’s CEO recently said that they want to turn the company “into a fintech”. A bold statement for an established company whose legacy goes back to the founding of Norwich Union in 1797.

But all established companies need to start thinking this way. If they don’t, they will inevitably see their $4 trillion industry fall into the hands of new players and Silicon Valley investors.

Paul Cuatrecasas is CEO of Aquaa Partners, a specialist investment bank that advises established companies on digital transformation and acquiring technology companies