First, let’s get the terminology straight: I chose this title for the post, because it’s catchy. To be precise, when we’re talking about FinTech, until recently this was synonymous with innovation in the banking sector, and this is also what is meant here. However, we have to distinguish between technological innovation in insurance vs. technological innovation in banking, which are both areas within FinTech (or technological innovation in financial services). I’m not a fan of buzzwords, but for the sake of readability, I will refer to the two areas as BankingTech and InsurTech for the rest of the post. And it seems that at least the latter has already widely spread.
I’ve started looking into InsurTech recently, and asked myself: Is InsurTech going to be as big a deal as BankingTech? And at a second glance, why did the FinTech hype start in banking already a couple of years ago, but in insurance it’s only starting now?
When comparing the “prerequisites”, there seems to be no reason, why banking should have come first. Both banking and insurance are enormous markets: insurance premiums amounted to USD 3,8tn in 2014 (1), and global banking revenues were USD 3,6tn (2). There are several other factors that, similarly to banking, make the insurance industry ripe for disruption, as outlined in a very informative post by Rob Moffat of Balderton Capital. Among these are
● Barriers to entry created by heavy regulation
● A generally bad customer experience
● The potential for new technologies to have relevant effect on insurance businesses.
However, it seems that there are two reasons that acted as a catalyst for the take-off of BankingTech. First, insurance is a very passive product. Ideally, we never have contact with our insurance provider — because ideally nothing goes wrong. According to a Capgemini study (3), around 70% of all insurance customers interact with their provider only once a year or less. In comparison, the study states, consumers interact with banks 200 times per year on average. The study is from 2006, but I don’t see why this would have fundamentally changed.
And then there was the 2008 financial crisis. While the crisis affected the entire economy, and AIG as one of the largest insurers of the world had to be bailed out, the ones most affected were banks. The aftermath of the crisis left the banking industry paralyzed. What followed was a regulatory tsunami, forcing the banks to put massive efforts into adapting to the new rules. Financial regulators, most notably the American Department of Financial Services (DFS), the Fed, and others, started investigating banks more closely and burdened them with heavy fines, as well as more compliance enforcements. All this is still ongoing and forced the banks to restrict their business and shift resources. This opened a tremendous opportunity for innovative startups in the banking industry — from non-bank lending, because banks could no longer provide enough capital, to consumer friendly apps and efficient payment solutions.
So of course the interesting question is: will InsurTech take off as much as FinTech (in banking) did? I think that there is a good chance, although possibly it will happen a bit slower. Looking at venture funding in recent years, the funding “gap” between Banking Tech and InsurTech is getting smaller. The ratio of venture funding in FinTech over venture funding in InsurTech decreased gradually from 9,1 in 2014 to 5,3 in 2015, to 4,4 in the first half of 2016 (4).
Also, similarly to banking, we can see that InsurTech startups are taking on more and more parts of the insurance business model. While the whole thing started with comparison and policy management apps, we are gradually seeing insurances move into core parts of the insurance business like claims management. Oscar is even an entirely new insurance company that achieved a USD 2.7bn valuation on its last funding round of USD 400m. Ottonova is a similar, but much earlier model out of Germany.
I think that the movement might take a bit longer than in FinTech, because of what was mentioned above: customers are more aware of banking and have a much higher frequency of interaction with banks compared to insurances, possibly leading to less pressure for innovation. However, this might not even be the case, considering the almost desperate-looking efforts that the insurance behemoths are making to connect with startups in different ways. For example, major insurance companies have already, although quite recently, set up corporate venture capital arms, for example AXA and Allianz in 2015, and Ping An Ventures already in 2012. On top of this, count insurance focused (and backed) incubator and accelerator programs. And according to CB Insights, venture deals made by insurers (or their corporate VC arms) have gone up from 4 in 2013 to 55 (!) in 2015 (5).
Anyway — either fast or slow, I’m excited to see what will happen in insurance over the next couple of years. Our first investment in the space, I’m sure, is not a question of “if”, but “when”.
(1) Global Insurance Insights, McKinsey & Company, 2014
(2) McKinsey Panorama (http://www.mckinseypanorama.com/products-services/global-banking-pools.aspx)
(3) World Insurance Report, Capgemini, 2006
(4) CB Insights (https://www.cbinsights.com/blog/insurance-tech-overview-q2-16/), KPMG The Pulse of FinTech
(5) CB Insights (https://www.cbinsights.com/blog/insurers-tech-startup-investing-2016/)