The rise of InsurTech – friend or foe?

09 October 2017

Investment in InsurTech has exploded as insurers increasingly see efficiencies and business opportunity in technology.

The insurance sector is said to be ripe for disruption. And InsurTech firms, with their innovative products and more efficient processes, are the disrupters, or so the argument goes.

Insurers certainly face challenges. With digitalization, the risk landscape is changing, and a massive generational shift is leading to seismic changes in consumer attitudes.

At the same time, insurers are operating in conditions of excess capacity, stagnant premium growth, and lackluster returns.

But InsurTech is more likely to prove a boon to insurers, rather than a death knell, according to Gregg Holtmeier, Executive Vice President at JLT Re.

“InsurTech has the potential to be a real game changer for the insurance and reinsurance sector. At a challenging time for the industry, new innovations being developed by InsurTech start-ups present a window of opportunity for traditional carriers to modernize their business models while boosting both top and bottom lines,” he says.

InsurTech opportunity

The potential for change is huge. InsurTechs are using cutting-edge innovations such as robotics, artificial intelligence (AI), the internet of things (IoT), big data and predictive modeling to reinvent the way insurance products are created, underwritten, priced, and distributed.

To date, these technologies have been predominantly employed in the personal lines arena, but they are beginning to find uses in more complex segments such as commercial insurance and reinsurance.

Insurers’ Competitive edge

According to Holtmeier, the ability to extract commercial gains from technology will become a key differentiator for insurers in coming years. In fact, slow or late adoption of new technologies could in themselves lead to disruption, he believes.

“There are two sides to the InsurTech coin. InsurTech represents a genuine threat to the traditional insurance business model, but the winners will be the companies that embrace the benefits that technology can bring to the sector,” says Holtmeier.

“InsurTech is only a threat if insurers don’t get onboard. Technology is opening up new ways of selling insurance more efficiently, as well as creating the opportunity to develop new products and cover previously uninsured risks,” he says.

Opportunities in InsurTech:

Product development InsurTech can help increase demand for insurance and reinsurance by addressing new risks, closing protection gaps, and creating new products for the sharing economy.

Customer interaction Mobile devices and machine learning can enhance interaction with consumers and facilitate more frequent and meaningful communications with customers.

Underwriting Big data and sophisticated analytics can transform underwriting, enabling insurers to leverage real- time data, improving risk assessment and pricing capabilities.

Distribution technology can improve the accessibility of insurance, simplifying the buying process and facilitating product comparisons.

Claims InsurTech can optimize the claims management process and reduce cost through automation and machine learning, as well as help detect fraudulent claims.

Staying relevant

Changes in risk and consumer behavior have left some commentators questioning the future of insurance, at least as we know it today.

Businesses are increasingly more concerned with intangible risks such as cyber, intellectual property, brand, and reputation than they are with bricks and mortar.

Also, the way in which goods and services are consumed is changing, with a trend toward the shared or collaborative economy.

Traditional consumer behavior and expectations are also being up-ended. Millennials have grown up with technology at their fingertips, and expect products like insurance to be easily accessible while also offering flexibility and value for money.

Technology game changer

Technology assists insurers as they look to respond to these challenges and thrive in tomorrow’s economy, according to Holtmeier.

InsurTech offers ways to improve the insurance proposition throughout its value chain, removing cost, improving service, and opening the door to new products and services (see box).

“Mobile technology, coupled with increased availability of data and developments in machine learning, will enable insurers to reach consumers in a much more efficient way and should help bring down acquisition costs,” says Holtmeier.

InsurTech firms are already developing new approaches to insurance, such as pay-as-you- drive motor insurance and coverage for risks in the shared economy.

“Millennials will want to buy smaller policies that are more transactional in nature and that are fulfilled using an app on a mobile device like a smartphone,” says Holtmeier.

InsurTech partnerships

Technology-based insurance start-ups such as Lemonade (which uses AI and automation to offer home insurance) and Trov (which provides on-demand insurance for personal possessions via an app) are in direct competition with insurers.

However, the vast majority of InsurTech firms are currently focused on supporting and improving insurers’ businesses. And even the likes of Lemonade are backed by some of the world’s largest reinsurers.

The emerging picture is not of InsurTechs supplanting traditional insurers, but rather a mutually beneficial partnership. InsurTech firms need insurers’ and reinsurers’ expertise and capital, while insurers need access to innovation and technology.

“Insurers understand the regulatory environment and the insurance product, and can help InsurTech firms and venture capital firms get their products and services to market,” says Holtmeier.

“It is a smart move for a start-up to establish a strategic partnership with an insurer to get that regulatory and underwriting perspective on their platform,” he says.

Capital hungry

Access to capital is key if InsurTech firms are to deliver on their promise.

Billions of dollars are already being pumped into the InsurTech space. More than $7 billion of funding has been raised through close to 600 deals since 2012 and strong growth prospects indicate significant amounts will continue to flow into InsurTechs in the near term, according to JLT’s InsurTech Report 2017.

Much of the historical investment in InsurTech has come from venture capital funds, but growth in InsurTech investments by insurers and reinsurers has increased significantly since 2015.

In fact, the proportion of deals involving insurers or reinsurers exceeded 60% during the last three quarters of 2016.

Connecting the dots

JLT Re has pioneered a number of funding transactions for start-ups, bringing InsurTech firms and reinsurers together.

For example, JLT Re recently helped a personal motor insurer access additional funding from the reinsurance market via a bespoke quota share transaction, enabling it to scale up its business.

In another deal, JLT Re collaborated with a risk management provider in the solar industry to create a new and innovative risk transfer product that insures solar energy output.

“InsurTech firms are looking for investors, but they are also seeking expertise and risk capital. And this is where we already see an increasing role for reinsurers,” says Holtmeier.

Please contact Gregg Holtmeier on +1 (415) 930 9077 on gregg.holtmeier@jltre.com


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