Does the ever close union between insurers and tech companies pose a threat or golden opportunity?
The insurance industry is not renowned as a hotbed of innovation. But start-up insurance technology (InsurTech) companies are increasingly offering new and innovative protection products for insurance buyers by leveraging technology to deliver lower costs.
Many start-ups see the huge global insurance market as ripe for disruption. And they are turning to technology, data and analytics to address changing protection needs.
In doing so, they are seeking to simplify the insurance buying process and satisfy growing demand for new products that are personalised and easy to buy and understand.
Such innovative approaches are increasingly attracting the attention of both strategic and financial investors.
For example, peer-to-peer US insurer Lemonade, which has secured investment from the likes of Sequoia Capital, has employed a respected behavioural scientist as its Chief Behavioural Officer to “reverse the adversarial dynamics that plague the industry” and help build more “consumer-friendly processes”.
Much of InsurTech activity to date has focused on distribution. Some new companies are also looking to leverage their data and analytics capabilities by providing technology assistance to incumbent carriers and brokers. This, in turn, enables them to identify discerning pricing and underwriting trends and provide the bespoke solutions that clients are calling for.
While there has been less direct competition with insurance carriers so far, growing activity in the peer-to-peer space suggests this may be about to change.
Companies such as Lemonade and InsPeer are bringing concepts of the sharing economy to the risk transfer business by using cutting-edge technologies in ways they claim are not available to legacy carriers. They are also home to talent that insurers alone might not attract.
Insurers are seemingly very aware of these potential competitive advantages, with 90 per cent saying they fear losing business to a start-up, according to PwC’s recent report ‘Opportunities await: How InsurTech is reshaping insurance’ .
The same report found that almost half of insurers fear that up to 20 per cent of their business could be lost to standalone FinTech companies within the next five years.
Despite the temptation to view InsurTechs as a threat, many carriers have decided to embrace their innovative approaches in an attempt to pave the way towards more efficient operations and improved customer interaction. This enables them to adopt a different perspective with the technology capabilities they already have.
As a result, many of the world’s largest (re)insurers have established their own venture capital funds to invest in InsurTech. Some have also established in-house technology hubs or incubators to explore new technologies and business models.
This, along with considerable interest from financial investors, lead to strong investment growth in InsurTech companies last year, increasing by 237 per cent to $2.6 billion, according to CB Insights.
Technological advancements are also changing the risk landscape for insurers.
Some new innovations bring undoubted risk management benefits, with driverless cars, for example, likely to result in significantly fewer accidents while smart factories will optimise production efficiency by monitoring machine performance and up time.
New technologies also create new risks that will provide insurers with future opportunities (and challenges). For example, driverless cars and the sharing economy will create very different motor liability and property needs.
Similarly, the introduction of smart or green energy devices in homes could be accompanied by protection products that deal with shortfalls in energy generation or spikes in demand.
Experience and expertise
It is clear traditional insurance companies will play a crucial role in mitigating such risks in the future. Start-ups often lack expertise that insurers have in spades – such as knowledge of regulation, risk and distribution.
Technology firms may have fresh approaches, but they must nevertheless learn from insurers. Google’s decision earlier this year to pull the plug on its auto insurance online website, Google Compare, suggests InsurTech’s penetration of the insurance industry may not be entirely straightforward.
In addition, start-ups will not usually want large amounts of insurance risk on the balance sheet and will look for reinsurance solutions or managing general agent (MGA) arrangements with carriers. Lemonade, for example, has the backing of highly rated reinsurers, including Berkshire Hathaway and Lloyd’s.
Close collaboration is therefore likely to be mutually beneficial to both new and established (re)insurance companies in the future. JLT Re has been building relationships with technology companies and InsurTech firms and bringing them together with (re)insurers.
There are many opportunities for (re)insurers to tap into the InsurTech and wider technology space, and help meet the changing protection needs of consumers and business. InsurTech could be a game changer – embrace it.
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