Insurtech is a recent manifestation due to three reasons: the arrival of millennials associated with a technological evolution, the need to ensure concepts promoted by new technologies (e.g. AI, big data, cloud, and IoT), and the emergence of different economic models as the collaborative economy.
Despite being a recently used buzzword, “insurtech” does not have an established definition. Some people think insurtech is a subset of fintech, whereas popular opinion believes insurtech should be segmented from fintech. This distinction is most likely a result of fintech primarily being associated with banking activity while insurtech is more associated with insurers applying tech in broad applications. We adopt the second opinion in this report and define insurtech as follows:
“Insurtech” companies are technology-led companies that enter the insurance sector by taking advantage of new technologies that provide coverage to a more digitally savvy customer base. It is a new application with a focus on consumer experience and convenience.
The insurance industry’s lack of innovation has manifested into five major challenges: talent acquisition, data storage and protection regulation, digital ID authentication, and new business model regulation. These challenges have have created an opportunity for startups to incorporate the following technologies and business models into an otherwise static industry.
IoT, Big Data & Machine Learning:
At its core insurance is a data-driven business. With fast-growing connected IoT sensors — forecast to exceed 21 billion devices by 2020 — insurers will leverage big data analytics coupled with AI to handle the high-volume-real-time data generated by those sensors. As a result, insurers will be able to deliver highly-personalized, real-time insurance and risk management services across the automotive, health, and home insurance sectors. The combination of these technologies will be the key to stay on top of providing valuable solutions demanded by an increasingly dynamic market and diverse set of data.
Breakout Business Models
The relationship between policyholders and insurers is fragile. The delicate nature of the relationship stems from the act of keeping or filing unused premiums by insurers and policyholders respectively.
P2P refers to a business model which address these misaligned incentives by allowing individuals and companies to choose the parties with whom they will share their insurance pool with. By having a self-picked pool, the insured self-select a group with the least amount of risk by increasing transparency.
This model plays on cooperation in order to disincentive fraudulent claims. As a result, P2P companies may have excess funds be resdistributed at the end of the coverage cycle back to the policyholders, donated to nonprofits at the choice of the insured group, or apply a different means of uniting a group of individuals while mitigating risk for themselves.
The key reason behind the disruption of the insurance market can be summarized in this Jeff Bezos quote “Your fat margin is my opportunity.”
The market will change — like others before it — as a result of the rapid adoption of new technologies. The current insurance distribution channel is disorganized; backtracking through the insurance process back to the client, they have dealt with brokers, MGAs, carriers, and re insurers. While this inefficient process continues, the insurance industry’s margin grow thicker and thicker.
Perhaps inspired by the Bezos’s observation of outdated business models, insurtech startups focused on distribution are mobilizing quickly in order to identify the best ways to cut out the middle-man as much as possible by providing a platform where consumers and businesses can compare insurance quotes and buy insurance policies. Startups with this mission have already raised a cumulative $1.5B in funding within the past two years. The insurance market will see a huge shift from its current, linear distribution channel to a more ambiguous, free-form structure with its emphasis on the customer.
Fusion Fund and Insurtech
Given our team’s technical background, we naturally have an interest in insurtech companies with technological (versus business model) innovations. We are particularly excited about startups applying AI/ML, Big Data Analytics, and IoT solutions. Although companies we are focusing on are not comprehensive of all innovations addressing insurance we believe the companies using the fore mentioned technologies will have great market potential and defensibility in the insurtech industry.