Why insurtech enablers are fairy godmothers
Insurance incumbents in particular, struggle to integrate the latest technologies with their complex legacy systems and as a result, they are seeing increasing pressure from all sides. First, new challenger insurers have capitalized on the incumbents’ low NPS to grow fast and go public at a higher multiple (starting with Lemonade last summer and then many followed suit). Second, embedded insurance has provided an opportunity for re-insurers to grow vertically, by-passing insurers altogether for distribution. In addition, low-interest rates over the past decade have resulted in lower portfolio yields and a necessity for traditional insurers to improve underwriting margins.
In this context, incumbents need to catch-up fast and deploy best-in-class technology across the business if they don’t want to be left behind. However, most insurers don’t have the technological capabilities in-house to do so.
This is an opportunity for insurtech enablers to act as fairy godmothers to insurers. Just like Cinderella needed a magical transformation from her fairy godmother to catch the eye of a prince, insurers need a technological transformation from the insurtech enablers to help them deliver better experiences and unlock operational efficiencies.
Why now: Covid-19 as a catalyst
When the global pandemic hit, many were quick to judge it ‘impossible’ for insurers to function in a digital-first world. However, incumbents were able to adapt to the situation impressively quickly. They proved to everyone (including themselves) that they can be agile and deliver large scale digital transformations. While there are many success stories to be celebrated, it is also a wake-up call. There’s no going back, insurance leaders cannot unsee the opportunity that technology represents when rolled out at scale.
The current situation is well reflected in a recent EIS survey: 99% agree that insurers must undergo digital transformation to remain competitive but 88% say legacy systems are preventing them from transforming quickly enough. This is why 59% expect to see increased investment in digital transformation in 2021, part of which will go to the insurtech enablers.
Who are the fairy godmothers?
The first wave of innovation with Guidewire and Duck Creek in the US is now two decades away. Since that time, insurtech enablers in Europe like Tractable, Concirrus or Shift Technology have grown steadily. But it’s only recently that we’ve seen an acceleration in the number of early-stage insurtech enabler deals, which will be further accentuated with Covid-19 tailwinds. Interestingly, some of the new challenger insurtechs have also recognised this opportunity and so have decided to spin-out their proprietary technology into end-to-end SaaS solutions for insurers. That’s the case of ByMiles, for instance, who are spinning out their proprietary technology to support incumbents with usage-based insurance.
Although there’s opportunity for technology-driven improvements across the board, some areas are more exciting than others.
1. Building the ecosystem infrastructure to connect different players
Why it’s exciting: The industry has traditionally been siloed with clear functions for each stakeholder. With reinsurers taking part in embedded insurance, insurtech challengers growing their market share and big tech eying insurance distribution, roles are not set in stone anymore. Technology can be leveraged to optimise the workflows across the ecosystem and to adapt quickly in the increasingly fast-moving environment.
Supercede is building a bridge between cedents, brokers and re-insurers by building out the network and automating the admin.
PremFina is building a bridge between brokers, MGA and insurers by offering flexible financial products and best-in-class digital workflows.
2. Enabling the move to prevention
Why it’s exciting: We’re shifting to more flexible and engaging insurance models (usage-based, embedded at point of sale). The next step will be prevention. This is a win-win for everyone involved: policyholders actively engage with the data tracking and lower their risk in exchange for lower premiums. In turn the insurer benefits from a lower claims frequency.
DynaRisk is offering cyber risk assessments that can be used by the insurer to drive sales and by the policyholder for risk management.
HealthyHealth is collecting digital health data to quantify a risk level used to adjust premium pricing.
Yulife is offering adjusted group life insurance premiums and engaging risk management tools.
3. Upgrading workflows and customer experience to 21st century
Why it’s exciting: The world is changing. Thanks to new technologies like IoT sensors in cars or buildings, we are seeing fewer small predictable events like car crashes. These product lines are increasingly standardised, and insurers are facing high price competition. Differentiation relies mostly on brand and offering a great customer experience. This is where low-code/no-code solutions can have a high impact. Insurtechs in this category often have the option to expand outside of the insurance vertical into industries facing similar challenges e.g. banking.
Unqork (US) is a no-code app that enables insurers to quickly build high-quality experiences and workflows across product lines from policy issuance to claims management.
Instanda is a no-code app that enables insurers to easily configure new products and remain flexible once launched.
Nuclicore is a no-code app that enables insurers to build software compatible with all legacy systems, internal or external.
4. Empowering actuaries and underwriters to focus on value-add tasks
Why it’s exciting: Every year, we are seeing an increase in large unpredictable events and their probability. Indeed, extreme weather events resulting from climate change and pandemics are becoming increasingly common. It’s particularly hard to measure their implications on commercial insurance, which is already the most complex and opaque line to price and where a lot of the work is still being done manually. Instead, technology should be used to do the heavy lifting whilst actuaries and underwriters can focus on the more interesting qualitative assessments and adjustments.
Akur8 helps actuaries and pricing teams make better decisions faster through uniquely high performing, transparent and production-ready rate modelling.
Hyperexponential helps actuaries rapidly and effortlessly build, deploy and refine specialty pricing models.
Cytora helps underwriters to identify profitable risks that match risk appetite and portfolio goals, and to streamline resulting action points.
Describe Data helps assess and optimise individual and portfolio risk in order to improve underwriting margins.
What’s the fairy godmother’s magic wand?
Two drivers of magic for insurtech enablers right now are API-first products and a dynamic commercial flywheel.
(1) Although the insurance sector does not benefit from the same tailwinds that the fintech sector has with open banking, it seems that we are seeing an API-driven transformation here too. The benefit of building with an API-first approach is the flexibility that it offers. By catering for a wide range of IT set-ups, product lines, geographies and stakeholders, insurtech enablers can help incumbents fully capture the opportunity that the ecosystem has to offer.
(2) Building a commercial flywheel is hard but it is necessary to build the momentum needed to overcome the challenges posed by painfully long sales cycles. Looking at successful insurtech enablers, we can identify a few commonalities:
· ROI: clear ROI measured in POCs and/or over time
· Stickiness: ease of use and integration, demonstrate strong POC to ARR conversion
· Retention: target blue chip clients, should not churn
· Product: maximise self-serve, partner with consultants for the rest
· Growth: ability to land and expand across geographies and product lines, leverage partners to distribute product
Concluding thoughts
Incumbents have been facing increasing internal and external challenges, ranging from low interest rates to new competitors eating into their market share. As discussed in this article, Covid-19 has shaken the industry and now the opportunity to disrupt the insurance sector from the inside is higher than ever. But don’t expect a 30-day transformation for Cinderella in this story, it will take some time before incumbents start seeing the results.
Just last week, Zego announced a $150m round at a $1.1B valuation, making them the leading data-driven commercial motor insurer. We’ve backed them since Series A and we’d love to partner with more European insurtechs. If it sounds like you, give us a shout!
