Insurtechs Looking to Change the Insurance Landscape

Insurtechs are popping up like springtime dandelions, ready to play a role in changing the insurance landscape.

The global insurtech market size was valued at $3.85 billion in 2021 and is expected to expand at a compound annual growth rate (CAGR) of 51.7% from 2022 to 2030, according to Grand View Research.

InsurTech firms raised a record $15.4 billion in funding in 2021 — nearly double 2020’s levels — with 566 deals completed, according to CB Insights. Most investment activity was in the property & casualty space, which accounted for 73% of insurtech deals through the third quarter of 2021, EY said.

While funding for insurtechs fell 58% to $2.2 billion across 143 deals in the first quarter — down from $5.3 billion also for 143 deals in the fourth quarter 2021, according to CB Insights — there’s still plenty of activity and interest in the sector.

Like the shift in public opinion on dandelions — once viewed as annoying weeds to now seen as an important early spring source of food for bees — so to has the market's view of insurtechs evolved. In the early days of insurtechs — remember when the buzz was all about "big data"? — many thought they’d replace traditional insurance industry players. Instead, most insurtechs are working to help the industry evolve in every aspect of the business: underwriting, analytics, modeling, sales, customer service, payment and so on. Traditional insurers and established "first-generation" insurtechs often have venture capital arms to invest in insurtechs.

Today, insurtechs are increasingly ripe for insurer investments and partnerships, McKinsey & Co. writes.

McKinsey’s analysis of about 2,000 global insurtechs found 66% focused on P&C lines of business, (led by auto insurance). No two insurtechs are the same — except they share a vision of how the insurance business might be improved.

“Insurtechs are the catalysts because left to their own devices, highly regulated financial services industries tend to be slow innovators,” said Angus McDonald, co-founder and CEO of Cover Genius, the insurtech for embedded insurance that protects the global customers of the world’s largest digital companies including Booking Holdings, Intuit, Descartes ShipRush, eBay, Wayfair and SE Asia’s largest company, Shopee.

Traditional insurers are struggling to make a profit because their mindset is wrong, McDonald said.

“Traditional insurers take a product mindset,” McDonald said. “They build an insurance product, and then try to distribute it through their channels, whether it’s broker or direct. That mindset needs a rethink. At Cover Genius, we start with the consumer, and what they need, and that’s driving what we do. Embedded protection takes a technology-led approach, and offers customers tailored protection directly in their online or offline experience, whether they're booking a flight, making a retail purchase, or signing up for a loan or card from a bank. If you start with the solution, you’re not worried about the insurance product. The underwriting models need to be developed to have the consumer lens rather than the product lens.”

As companies continue to go through their "platform modernization, cloud migration and data management journeys, opportunities to leverage predictive analytics towards actionable business insights are being left on the table," said Kashif Syed, head of Insurance, Americas for Tazi.ai, which uses no-code AI.

“This opportunity cost is further exacerbated by the long cycle times, lack of model explainability, and siloed efforts that make the modeling experience cumbersome and [machine learning] concepts adoption low,” Syed said.

“This presents a great opportunity for insurtechs to help industry players establish Machine Learning [Centers of Excellence] and to do so in a way that solves for the root causes that have historically impeded progress in establishing actionable, ML-driven business insights…[this] also requires that the industry invest in the staffing and organizational change management infrastructure to support the adoption of these tools and processes.”

Linh Ho, chief growth officer for Zelros, which offers AI-driven product recommendations software to help insurers boost sales and cross sell, said, the insurance industry is going through a big transformation. “Insurance is the most customer-obsessed industry at this time,” she said. “These 100-plus-year-old companies are trying to move as quickly as they can to better serve their customers with data. They don’t want to be the next Blockbuster or Kodak.”

The industry is shifting from trying to build its own solutions to becoming more comfortable working with insurtech vendors, she said. “My favorite customers say they will do it themselves, then 8-10 months later come back to us,” Ho said.

Laura Drabik, chief evangelist with Guidewire Software, said climate change is “the ultimate gray rhino.”

The impact of climate change has been outlined in a recent UN report as "code red for humanity.”

“It's not like the industry didn't see it coming. Natural catastrophe losses in 2020 were up 26.5% from 2019—which was a record setter on its own. From 2000 to 2010, the US saw an average of fewer than eight $US1 billion weather and climate-related disasters per year. Last year, there were 22."

She noted three ways that the industry can leverage insurtech to address climate change:

Rethink risk assessment: the climate system the industry has operated within over the last century is now gone. Traditional models and past loss experience just won't cut it any more. Insurers need a far more current and accurate understanding of risk in order to price it profitably or avoid it all together. Insurtechs that specialize in geospatial analytics is one technology that can help. For instance, insurtech solutions from companies like Betterview and Cape Analytics leverage aerial imagery, computer vision and predictive analytics to assess property risk instantly, on-demand.

Deliver innovative new products: Case in point: parametric insurance. Unlike traditional insurance, parametric coverage provides payment based on a triggering event (hurricane, earthquake, wildfire, drought) of a set magnitude, instead of the value of physical assets. Insurtechs like Demex enable insurers to manage parametric insurance, while helping corporations identify and transfer risks to pre-certified carriers that act as "shock absorbers" for the threats emerging from climate change.

Help businesses mitigate the risk to us all: New forms of pay-as-you-drive, usage-based insurance (UBI) policies, for instance, leverage smartphone-based telematics to reward consumers for driving less. According to Forrester Research, UBI policies will grow 50% this year and could account for 20% of all auto policies by 2024. This kind of coverage could soon also be used to encourage the deployment of autonomous electric buses and trucking fleets that platoon to make transit safer and more efficient. Insurtech solutions like CMT (acquired TrueMotion), IMS, etc. empower carriers to deliver pay as you drive, Drabik said.

A recent Cap Gemini report found that just 18% of insurers have the culture and the tech skills needed to take advantage of their data, said Tyler Jones, chief customer officer of CLARA Analytics, an AI-as-a-Service provider that strives to improve casualty claims outcomes for workers’ compensation, commercial auto and general liability claims.

“What you see here are tons of AI platforms and solutions for carriers promising to be able to wring the value out of your data. The challenge is most of these are development platforms, they don’t have a proven solution or a product. They have a platform that can build solutions. But now you’ve got to get the right data scientists, you’ve got to get the right staff, you’ve got to get an IT organization that’s going to help you manage your data in the background to really build these out,” Jones said.

This is expensive and slow, he said. “I think there’s going to be a pivot where people are looking for proven solutions that they can use out of the box today. We’ve seen the rise in Software As A Service. So you don’t have to have all this infrastructure. You’re going to see more plug and play products. CLARA is in a good position, because we don’t require our customers to do development.”

Insurtechs can also help improve the image and reputation of traditional insurers.

Alex Orechoff, director of vertical growth at Worldpay, which specializes in improving customer experience through fast digital payments, shared a story of a senior executive whose house burned down, and he had to ask for help from the people around him because he couldn’t unlock cash quickly enough from his insurance policy.

“Real time payments are important because anyone can be impacted by it," Orechoff said. "It’s a matter of how do you make your insurance company a partner in your recovery rather than the enemy."