What impact will Insurtech really have on the insurance industry?
The global insurance industry is valued at $8Trillion. According to San Fran based investment bank, Financial Technology Partners, just last year insurtech companies raised a whopping $2.6 billion. The development of new technologies and the Internet of Things have changed the way people do things, creating new opportunities in an already profitable market and leading to the rise of insurtech. As it sounds, insurtech is insurance transformed by technology and has been gaining attention as a resourceful investment for some time now. Half of incumbents believe they will lose 20% of their business to insurtech start-ups. While it is true that there have recently been significant investments in insurtech, we are yet to see any substantial presence in the market. Will 2017 be the year that insurtech starts making an impact?
Some Insurtechs to Watch:
Lemonade has been licensed as a “full stack insurance carrier, but only in New York thus
far. They advise consumers to ‘Forget everything you know about Insurance’. Their entire process happens via a mobile app; with the intention of replacing brokers/agents with bots and machine learning. They are hoping that this process will decrease the time it takes to provide a policy – their words, “Instant everything”. They also aim to provide a more customer focused approach by treating the premiums as the property of the insured.
Metromile are out to challenge existing auto insurers with $192 million raised from crowdfunding. One of Metromile’s first moves will be to purchase Mosaic Insurance who operates in all 50 U.S. states, instantly giving them access to the complete US insurance market. According to Metromile’s CEO, Dan Preston, roughly 70% of risk variance can be attributed to miles driven. Metromile charges insurance by the mile using a dongle given to customers, in addition to a $35 monthly base fee.
FinanceFox is another of many insurtech start-ups raising record finance. FinanceFox is a Swiss company who have created an app that aids consumers in managing all their insurances online. It allows users to access their insurance policies, as well as renew or end their policies, all with only a couple of clicks on a smart device. The highlight of the app is that it gives independent, vendor-neutral insurance advice.
Spanish bank BBVA set up Propel Ventures, a fintech venture capital company in February earlier this year. They announced a couple of months ago a 14.1 million dollar investment into a US insurtech company, Hixme. Through its application, Hixme provides US employers a range of health insurance products they can offer their employees, allowing workers more choice when it comes to health insurance while still being subsidised by their company. US employees have never had such personalised health insurance before.
Although there are several insurtech start-up companies making headlines and attracting momentous funding, one thing is clear; the fundamental principles of insurance are yet to be tampered with. We have seen a similar trend with the rise of fintech. Fintech (Finance and Technology) has seen changes in the product offering, changes in the channels in which they can be accessed and an improved focus on customers, but the foundations of banking essentially have not been altered. However, regulations are indeed changing. Governing bodies such as ASIC, the Financial Conduct Authority (UK) and the Office of the Comptroller of Currency (US), have recently introduced new regulations in attempt to keep on top of the loopholes and risks emerging from fintech start-ups. This is good news for financial incumbents as it somewhat levels the playing field against nimble companies; but be aware that Australia is currently behind in developing fintech regulations.
How are the big insurance players planning to innovate and compete?
Many of the large insurance groups are throwing money at the problem in the hope of avoiding much of a disruption. Some insurance companies are on the search for ventures to add to their own core business. Others are setting up internal start-ups, encouraging entrepreneurs to develop the next big thing under their roof.
But will either of these approaches work? The challenge with larger companies is that they lack nimbleness because of their sheer size and the need to keep board members and stakeholders happy. It is a common theme among large companies to play it safe and avoid risk. While these larger insurance businesses have the right intentions by engaging with entrepreneurs and new investments, will they be able to see through unprecedented ideas with all the risk that accompanies them?
According to a PWC report, 32% of insurance companies have nothing to do with insurtech.
Largely still operating as a paper based industry, this comes as no surprise. Other findings from the report show that although ‘insurers recognise the importance of most insurtech related trends, they focus on commonly adopted ones and are still less responsive to other emerging waves of innovation’, despite the fact that they have the opportunity to be leaders in this movement.
Will disruption come in the form of tech giants like Facebook, Google or Apple?
Most will be aware that Google has already attempted and failed at entering the insurance industry. After only a year of Google Compare which sold auto insurance online, Google decided to pull the plug. They never disclosed the reason for shutting down the insurance comparison site except that it hadn’t seen the success that they had hoped. Many insurance agents were sceptical of Google being able to succeed in the insurance industry, some specifically accusing them of supplying “toxic solutions” to the market. But Google haven’t necessarily given up on insurance altogether; investing in insurtech start-up Lemonade. (Watch this space!)
For now, despite their large databases, the tech giants don’t seem to be anything to worry about. But it would be wise to keep a close eye on them, especially when self-driving cars officially enter the market.
What kind of surprises can we expect?
Will 2017 be the year that insurtech makes an impact in the market? Will insurtech make any impact at all? Only time will tell which insurtechs, if any, will get the formula right and bring the long-anticipated disruption to the insurance industry. Nonetheless we may be able to predict how insurtech will make its impact.
It is likely that the foundations of insurance will not be changed significantly. Instead we will see a change in some of the existing products, and new products will be developed for new needs, such as those created by the sharing and the on-demand (usage-based) economies. Big data will assist in developing more personalised products; and more partnerships will develop between insurance and tech companies through the Internet of Things and technology, such as self-driving cars.
It can be expected that insurtech will not take 100% of business from insurance companies. Rather there will be a diversion as to where and from whom insurance is directly purchased from. As long as underwriting and claims are still required, insurance companies will not be disappearing. Many insurtech start-ups are focused on providing easy and convenient ways of purchasing insurance, and will have policies underwritten by an existing insurance business. This will result in a reduced income for insurance companies if they don’t get into the insurtech market themselves; but by exactly how much is hard to say. It will also result in less direct contact between insurance companies and the end customer. This could mean a decrease in brand awareness for insurance companies, which may lead to a focus on the providing company and less importance placed on who the insurer is.
To leave you on a more positive note, insurtech is inclined to attract much needed talent to the insurance industry. It has been estimated that by 2020, property and casualty insurers will be in need of 400,000 workers as a result of retirements and a lack of interest in the industry from younger generations. 9 of the top 20 best places to work in Australia 2016 list put together by Great Place to Work were information technology or software companies. Insurance companies have the opportunity to take advantage of the growing popularity of the tech industry and attract younger tech-minded talent.
Do you have a prediction for what insurtech will bring to the industry?
Do you think insurtech will have much of an impact on Insurance Brokers in Australia?
Leave us a comment, it would be great to hear your thoughts!