InsurTech dreams: Idealism meets reality
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InsurTech dreams: Idealism meets reality

Charting the latest evolution of start-ups in this sector.

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InsurTech. It’s a short word that makes a great many people flinch slightly as they await the latest pitch from someone with a “great idea” that they would like to sell to a re/insurance company.

Everyone has heard the latest InsurTech idea – or project, or drive. But is the world of InsurTech start-ups starting to evolve? According to Willis Towers Watson’s (WTW) Quarterly InsurTech Briefing for Q4 2019, the last months of 2019 saw some new developments in this sector.

Andrew Johnston, Global Head of InsurTech at Willis Re, says that one of the big highlights of the report is that the quarter recorded $1.99bn of funding for InsurTech projects, driven by a handful of very large deals – concealing the fact that the number of new start-ups actually fell over the quarter.

However, there was also a 90% uptick in deals in the middle, $40m+ range. By investment value, there was an almost even split between P&C and Life insurance InsurTech funding. And over the course of the quarter there were five of what WTW called “unicorn-making” rounds of funding – investments that push businesses’ valuations to a billion dollars or more.

Another major highlight was an increasing amount of activity outside of the U.S. – in particular, China, India and Western Europe, which are clawing back America’s four-or-five year competitive advantage.

A question of terms 

But the report also points out that while it is always extremely difficult to gauge and confirm that a company, especially a start-up, has officially ceased trading (unless the company itself announces it), WTW’s data indicates that over the past three years, some 184 InsurTechs might have closed their doors.

Johnston stressed that that’s an estimated number, based on what WTW has been tracking. To place it in context, it only relates to businesses that have been able to raise money, so he suspects that the real number is higher. WTW estimates that about 2,000 InsurTechs exist globally, and perhaps up to 60% of those firms may never raise any money; the chance of them succeeding is quite limited.

An additional complexity is that according to Johnston, the term “InsurTech” was probably coined circa 2012 in the more mature re/insurance markets such as the U.S., as an offshoot of the then-burgeoning FinTech phenomenon. He thinks that there were a number of firms at that time, in those markets, that began self-identifying with the term “InsurTech” – a term that was not universally adopted across the globe until 2015.

As a result, Johnston points out that it is quite possible that there were firms in China or India in 2012 that were for all intents and purposes InsurTechs but not identifying as such. In addition to the early self-adoption of a nascent term, the U.S. in particular has been a very mature environment promoting investment into technology and start-ups in the FinTech space. There is a culture of industry investors in the U.S. and the UK (in particular, private equity and traditional venture capitalists) that have been prepared to take a chance on the InsurTech space for a longer period of time.

“I also think that it’s partly indicative of the insurance landscape that existed in the U.S. beforehand, which is ripe for some degree of technological integration,” he notes. “For example, UK consumers have been buying insurance online since about 1999, so the ability to set up a relatively rudimentary aggregator and disrupt the current landscape now is limited, because you have so much competition, and that market is saturated.”

In the U.S., however, highly transactional low-margin business is being highly innovated around by digital distributers and online aggregators, says Johnston. “In particular, price-comparison digital SME and BOP product providers are still seen as a relative novelty in the U.S., whereas in other parts of the world it’s been done for the past 20-25 years,” he points out. “Consequently, the ability to innovate around certain things is arguably easier in the U.S. with comparatively less-sophisticated technology.”

The numbers game

However, in terms of what’s driving success and cessation, Johnston says that it can be any number of things. A company shutting its doors is not necessarily doing so because it’s not a good firm, or that the technology or business case is bad. It can simply be that it didn’t get funding in time, or personnel issues or difficulties with local regulators interfered, or simply that there just isn’t enough to go around for everybody.

“How many of the same business do we need, as an industry?” Johnston asks. “The insurance industry has a relationship with only a small number of third-party vendors. In modelling, for example, there are only a handful of companies that the entire insurance industry works with, and only three or four major data providers.”

Johnston says that with InsurTech, it’s a similar situation. Most firms that find success are able to do so because they’re a part of the community. These community-builders are the companies that are most likely to be successful, he suggests, rather than the individual InsurTechs doing single projects for individual firms.

Over the next couple of years, he says, the number of surviving InsurTechs is going to be whittled down to those firms that can really crack that community nut. There is a degree of luck in this as well – one good partnership as a springboard can mean everything in this market.

A decade of change

In hindsight, the past decade will be seen as a period of transition between the pre-financial crisis insurance industry and the new digital age, says Mike Wasyl, Managing Partner at InsurTech DeerCreek – a corporate innovation and growth strategy company focussed on bridging the gap between emerging technology and enterprises within the Banking, Financial Services and Insurance (BFSI) sector.

According to Wasyl, InsurTech has evolved to no longer be an optional part of business. The rise of BAT (the technology trio of Chinese firms Baidu, Alibaba, and Tencent), has helped accelerate the shift toward digital platforms.

“In the past, InsurTech was used as a means of simply shifting traditional business lines online, as well as assisting with calculation,” says Wasyl. “Companies would silo each different insurance type and information in their own database. Now, companies are combining all of their data into singular databases to better understand customers. This has allowed insurers to begin to identify people more by their behaviours than on traditional measures such as sex, age and race.”

Wasyl also thinks that there has been a fundamental shift in expectations from consumers. In the past, insurance companies’ main focus was on internal operational efficiency. However, he feels that there is now a shift toward a customer-first business model – with consumers now used to personalisation and seamlessness, they are demanding the same from insurance companies. A Morgan Stanley-BCG survey found that over 50% of respondents would switch insurers for a better online or self-service experience.

Incorrect predictions

James Willison, Managing Director of Web Connectivity Limited (WCL), a wholly owned subsidiary of Advisen based out of London, points out that initially, InsurTech companies were going to disrupt insurance companies – but that there has not been the major disruption that many anticipated.

Willison says that InsurTechs were quick to realise that innovating in a heavily regulated industry such as insurance comes with its own unique set of challenges. Now the trend has moved from InsurTech disruption toward collaboration with existing players in the insurance and reinsurance market and technology start-ups. For example, Lloyd’s of London is on the fourth cohort for its innovation labs and there are many other examples of companies looking to establish a formal structure around the collaboration process.

“InsurTechs that stand out from the crowd are ones that make an insurance company’s life easier,” Willison adds. “One of the biggest issues facing insurers today is the ability to meet client demands for more efficient and cost-effective ways of doing business. Successful InsurTechs are those that can help insurance companies to increase their process efficiency, in order to enable them to service their existing business better. Combined with that is an ability to help insurers identify business opportunities that typically were too expensive to underwrite using new and the most cost-efficient methods of assessing risk and pricing.”

Willison also points out that insurance companies are also looking for InsurTechs that will help them bring a new product to market quicker, due to a technological sting in the tail that is complicating modern life: “Technology is moving at such a rate that the current process of three to five years development time for new products means that by the time it hits the market it is already out of date.”

This feature originally appeared in Reactions.