Today insurers are striving to expand the reach of insurance: to render it easier to distribute and service, to close the underinsurance gap, and to develop new products that cover emerging “21st century risks” like cyber-attacks and terrorism.
To rise to these challenges means nothing short of a reinvention of the insurance sector, and whilst the pace of change has undoubtedly increased over the past five to ten years, it needs to increase more. And key to this will be how the industry reimagines itself through its use of insurance technology.
So where does the advance of InsurTech fit into this?
The money is very much on InsurTech to transform insurance. Already, InsurTech has attracted $3.5 billion in early stage capital for around 250 companies in the general insurance segment. To put this into perspective, Guidewire raised a total of about $25 million as a private company. So, something like 140 Guidewires have been funded in three years.
InsurTech’s most interesting subset are the group of businesses applying new technology to specific insurance processes. Octo Telematics offers a connected car platform that has collected incredible data: 2,000 parameters from smartphones and embedded devices over 175 billion driven miles. Or, WeGoLook, who extend the insurers’ reach with a network of 30,000 “lookers” trained to do field assessments, and then fast-flow data and images into a claims workflow.
Another subset that is attracting more attention and capital is the 60% of InsurTechs focusing on distribution, such as CoverHound, Embroker, and PolicyGenius. They believe a superior digital experience for comparison shopping will create liquid B2C and B2B insurance marketplaces. A commonly used mantra is that insurers should give up control of some customer relationships in exchange for new lead generation.
However, some distribution disruptors underestimate what it takes to be an insurer. Many are over-fixated on customer acquisition as their model and prime business driver. The challenge of acquiring a huge influx of customers is how to make money rapidly from them after absorbing huge losses in acquisition costs. This model will not work and the majority – 95 percent – of the investment in distribution insurTechs will be burnt off quickly and largely wasted.
Another large contingent of InsurTechs provide novel product offerings that compete directly with primary insurers. Very logically, some, such as Slice, and our customers Metromile in California and FRI:DAY in Germany, have focused on providing on-demand, usage-based products, and on serving the sharing economy. Others have focused on neglected market niches— such as Bunker Insurance and freelance contractors. And there are at least 30 insurTechs around the world experimenting with peer-to-peer risk-sharing models, though none has achieved any kind of scale yet.
Nonetheless, this InsurTech category makes ground-shaking claims. Indeed, one of the best funded overall, Lemonade, appears to believe that traditional insurers are, well, clueless. How else to read a statement like, “If you tried to create a system to bring out the worst in humans, it would look like the insurance industry today. Insurance is crying out for a makeover?”
It would be natural for traditional insurers to get annoyed at this, but the history of past investment surges in technology is informative. Excitement leads to over-investment in new sectors; many companies fail, and investors are disappointed, but the best ideas endure. This was true in the dot-com era, where two-thirds of public internet companies lost 80% or more of their value. It is likely to be true in the overheated Fintech and InsurTech sectors, too.
InsurTech offers a rich seam for great ideas to extend and enhance how insurance is executed, no doubt about that. That said, as with the banks, we should expect InsurTech innovations to be assimilated or adopted by insurers, through partnership or acquisition. This is how we will see insurers accelerate and extend their use of technology; to improve their operations, digitise interactions and exploit the power of new data sources and new data science in modelling and risk pricing.
By Keith Stonell, Guidewire, Managing Director, EMEA