An Introduction to Insurance & InsurTech
Part I — An Introduction to Insurance & InsurTech
Welcome to our series on InsurTech!
Recently, the team has taken a dive into the insurance sector and the technological innovations shaping it. Insurance has faced a mix of challenges and opportunities over recent years in both public and private markets ranging from underperformance in broader public markets, lower deal count, value and M&A activity in private markets, and heightened risk ranging from from severe climate to driving performance impacting loss ratios and policy premiums.
While the space may come off as “boring” or not particularly innovative compared to the current buzz around artificial intelligence, a look under the hood will show that insurance was born as an innovative solution to high risk activities and has continuously evolved since its inception to shape how we view insurance today — as a broader financial safety net.
In upcoming articles, we’ll dive into a brief history of insurance and InsurTech, explore how insurance functions, consider the consumer’s perspective, and discuss the venture outlook for the sector. This first article, in addition to announcing the series, will provide a brief overview of the insurance industry origins, regulatory considerations for the United States, and the sector’s recent phases of evolution.
A Quick History of The Insurance Industry’s Evolution
The Origin of Modern Insurance
Insurance, in its simplest form, dates back to ancient civilizations and merchants who sought protection against losses during their long and risky journeys. The concept evolved over time, with various forms of risk-sharing arrangements emerging in different regions.
The insurance industry as we know it today began to take shape in the late 17th century in England, where Lloyd’s of London, a coffee house and the world’s first insurance marketplace, served as a meeting place for shipowners, merchants, and underwriters who were willing to insure ships and their cargo against various risks such as piracy, storms, and shipwrecks. Lloyd’s quickly specialized in maritime insurance but later expanded into other types of insurance including property, casualty, and reinsurance. Since then, it has maintained its status as a global insurance market leader.
The Emergence of Modern U.S. Insurance: Focused Customer Segments Before Broader Expansion
The early 20th century marked the rise of major insurance companies like GEICO, State Farm, and Progressive. These industry leaders initially targeted specific sectors. For instance, GEICO initially offered competitively priced auto insurance to government employees. State Farm started as a minor wind and hail insurer in Illinois, while Progressive provided non-standard auto insurance, such as motorcycle insurance.
These companies experienced rapid growth during the early 20th century. This growth continued into the mid-20th century, spurred by improved marketing strategies, including the use of postal mail for lead generation or more whimsical experiments such as the deployment of roller skates to increase operational efficiency.
Personally, I find the roller skating experiment fascinating because, despite the insurance sector being seen as “old-school” and relatively static, its origins are rooted in mitigating risk and developing market solutions that support challenging business models, from maritime trade to U.S. agriculture. Furthermore, this evolution has occurred within a complex and fragmented regulatory environment, a topic we’ll explore in the next section.
Multiple Stakeholders and Fragmented Regulation, By Design
Today, the U.S. insurance industry consists of a mix of private companies, government programs, and regulators. Insurance is primarily regulated at the state level, with oversight from insurance departments and guidance from various statutes. Industry groups like the National Association of Insurance Commissioners (NAIC) also promote best practices and coordinate regulatory efforts across states.
While these regulations seek to protect consumers and ensure market stability, they also create barriers to entry for new products and companies looking to issue insurance policies.
These complex regulations restrict the pace and scope of innovation within the industry. While it better entrenches market stability and trust, companies must carefully navigate regulatory requirements when developing new products or services. Hence, the insurance industry is not a space where new entrants or even existing players can “move fast and break things”.
US Insurance Innovation Since the 1990s
The transformation of the insurance industry over the last few decades has seen an acceleration following the emergence of internet technologies. Following Allstate’s $2.1B IPO in the early 1990s, a wave of InsurTech emerged seeking to improve digital distribution and embedded insurance options. The 2010s, in particular, saw the proliferation of major venture-backed InsurTechs such as MetroMile, Oscar, the Zebra, CoverGenius, Lemonade, Root, and Kin.
The startups have brought additional fresh perspectives and introduced new technological applications and business models to the industry. In particular, may of the novel products were tailored to the evolving needs of consumers. These developments have led to a more competitive and customer-focused insurance industry.
Below are some of the themes that have emerged since the acceleration of venture-backed startups entering the space over the last decade:
- Big Data for Business: One of the key areas of innovation in the insurance industry has been the adoption of technology. Insurtech startups have leveraged advancements in artificial intelligence, machine learning, big data analytics, and IoT (Internet of Things) to streamline processes, enhance customer experiences, and develop more personalized insurance products.
- Digital Discovery/ Distribution Channels: Online marketplaces and apps now allow consumers to easily compare quotes, buy policies, and manage insurance needs. This shift began with the internet, leading to online comparison platforms in the 1990s and 2000s like GuideWire and QuoteWizard. These paved the way for InsurTech companies like Lemonade, Oscar, and Root to innovate in digital distribution, branding, and customer experience.
- Personalized Insurance Products: US insurance innovation has seen the rise of personalized products. By using data analytics, startups offer tailored policies based on individual risks and behaviors, boosting underwriting accuracy and customer satisfaction.
- Usage-Based Insurance: The increase of usage-based insurance, using telematics and IoT devices, allows insurers to offer policies based on actual usage like driving behavior or health metrics for accurate pricing and risk assessment.
Before looking ahead to see what Insurance 3.0 may bring, we believe it is important to understand the different players involved in bringing insurance products to market. We’ll dive into this in our next article of the series.
Thanks for tuning in and stay tuned for our next post!
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