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InsurTech refers to financial services, but it is not FinTech – or is it?
Let’s not get confused. A way to understand what InsurTech is all about is by distinguishing it from FinTech. FinTech is synonymous with innovation in the banking sector. Insurance and banking are both but distinct areas within FinTech or, better say, financial services.
Insurance is an enormous market which has been stagnating in uncreative boredom for over a century. The innovation wave that is revolutionizing the insurance sector is a fairly recent phenomenon. Just like an arrow-stricken apple, the insurance industry has been “awakened” by the aftermath of the 2008 financial crisis. The whirlwind of new financial regulations and more strict compliance enforcements following the crisis, opened a tremendous opportunity for innovative startups to disrupt and take on the challenge created by the banking gap.
The World Economic Forum recently said “the most imminent effects of disruption will be felt in the banking sector; however, the greatest impact of disruption is likely to be felt in the insurance sector”.
From the Old Age to the Digital Age
The large traditional insurers struggled to adapt to a digital age and their customers – they had little interaction with – which made it difficult for the latter to maintain brand loyalty and retention.
On a positive note, there are several factors that make the insurance industry ripe for disruption.
The potential for new technologies (coupled with an increasingly connected world) will have relevant effect on insurance businesses. These include the shared economy, usage-based models, IoT, autonomous cars, wearables, digital health including genomics, drones, blockchain, underwriting automation and variations of artificial intelligence.
Or, even more importantly, brand new markets that are opening up, as the opportunity of insuring digital assets.
Cases of disruption
InsurTech startups focused on distribution are driving disruption in the small business insurance market while traditional carriers position themselves for change. The key players of this ongoing shift are e-brokers, aggregators, adjacent players, technology enablers and traditional insurers/distributors (Munich Re, Aviva, Axa, etc.)
According to the Q2 2017 summary report on the Insurance Technology startup sector published by Venture Scanner the main sectors where InsurTech startups play are the following:
- Car Insurance (130 startups, $6.6B total funding)
- Health/Travel Insurance (132 startups, $9.3B total funding)
- Life, Home, P&C -Property & Casualty- Insurance (114 startups, $ 6.9B total funding)
Even though the Insurtech industry disruption is perhaps not as fast as fintech yet, the innovation in the space is booming. Consider three peer-to-peer insurers such as Berlin-based Friendsurance, the UK’s Guevara and Silicon Valley’s Lemonade. They’re disrupting thanks to the sharing economy and reversing the traditional insurance model. They insure everything from car to home insurance. It works in small pools with a cash-back bonus at the end of each year they remain claimless or what’s left goes to causes or even discounted from the next renewal.
Distribution was the first part of insurance to be disrupted, with China’s first truly digital insurer launched in 2013 by a joint venture made of Ping An, Tencent and Alibaba. Zhong An is China’s first property insurance company that sells all its products online along with handling claims. The Chinese digital insurer is part of the largest InsurTech raise in history – over $930M.
Other startups are raising funds to target every aspect of the InsurTech industry. Startups playing in the distribution space, include one the UK’s highest funded InsurTech company, BoughtbyMany ($9.15M). Boughtbymany finds niche groups who have challenges finding good insurance today (e.g. people affected by diabetes, young drivers).
Cuvva ($2.5M funding) and Trov, whose backers include AXA, and funds raised stand at over $46M, offer micro insurance and pay-as-you-go. There are smart technology plays including Neos, proprietary sensor tech for the home that can detect and flag risks before they become claims, which has partnered with Hiscox, and Domotz.
While most InsurTech startups offer new technology or augment, fine-tune or resolve existing market challenges, some, like chat-bot Spixii pivot from one model to another whereas others directly challenge existing business models.
In March 2017 US Travelers acquired for £400 million the UK SME insurance broker Simply Business and marked one of the largest investments to date targeting the continued shift towards digital distribution in the small business insurance sector.
Many other (re)insurers are partnering with technology companies to explore areas like connected car, alternative distribution, smart home and others;
– Nationwide established a distribution partnership with Sure to pilot mobile-based renters insurance;
– Generali partnered with Google Nest, to create a new offering for home insurance customers in Europe;
– Aviva established a life insurance joint venture with Tencent and Hillhouse Capital in Hong Kong
Main (new) waves in InsurTech
The rise of this new wave gave an impetus to the production of literature revolving around InsurTech. Reliable data and a wide range of thoughtful reports have been published in the last few years on the market trends in the new insurance business.
According to the latest report from Accenture, Artificial Intelligence (AI) and the Internet of Things (IoT) account for almost half of total investment in insurance technology startups globally. Investment in AI and the IoT also increased significantly, to almost US$1.7 billion in total. Analytics, artificial intelligence (AI) and the Internet of Things (IoT) accounted for 56 percent of the total number of deals that took place in 2016 – and approximately 70 percent of the total value invested, according to the Burnmark Report.
Another key element of the insurance industry is cybersecurity, along with the pressure to contain and manage the risk better. The current level of security of connected devices is still low as each device is a potential entry point for data breaches and interconnectivity can increase the damage significantly. This will also fuel the demand for specific cyber insurance solutions.The insurance industry is going to be rapidly affected by AI, and Robotic process automation (RPA) is disrupting the traditional value chain of this business helping insurers reduce processing costs and times, particularly through the use of a two-tiered approach that explores both individual processes and those carried out by teams. The impact of AI is exponentially augmented by the amount of (big) data insurers are collecting since decades, as well as the recent increase in computing power and sensors everywhere. The use of large volumes of data and intelligent algorithms is allowing a pattern-recognition faster, more efficient, and more useful for every aspect of the insurer life.
Similarly, blockchain is very much in the spotlight as it could finally bring the transparency and reliability needed to make dynamic, small-scale insurance underwriting possible. A blockchain is a distributed database that can record transactions in a verifiable, secure, and permanent way. Digital currencies such as Bitcoin rely on blockchain technology (public ledger) to record and verify transactions and avoid “double spending.” It’s also possible to use blockchain to create “self-executing” smart contracts.
New algorithms for predicting risk, using machine learning, will allow for vast automation of the underwriting process, and managing contracts and identities with the blockchain will reduce the resources needed for fraud detection. The other major industry using connected devices is car insurance. Not less important we find the concept of microinsurance protecting low-income people against specific risks in exchange for insurance premium payments tailored to their needs, income, and level of risk. According to the CB Insights Quarterly InsurTech Briefing, “blockchain and smart contracts have excellent potential in the worlds of microinsurance and parametric insurance, where contracts are of necessity simple and standardized.”
Another area where we see a lot of buzz is on-demand insurance, so insurance enabled by smartphones and allowing you to get the policy on-demand rather than annual coverage. Startups like Shore and Cuvva are basically slicing and dicing a policy into “episodic insurance”.
Funding data on InsurTech show that M&A escalation in this field is an emerging trend started in 2016, which saw a record number of tech-driven service providers being acquired, a trend that is expected to continue throughout 2017. Market conditions are ripe for continued M&A transactions, with growth being the most important driving factor: M&As emerge as the most viable expansion option for InsurTech. It seems that M&A has replaced organic growth for many in the insurance distribution sector.
Do you want to know more about the M&A escalation in Insurtech?? Stay tuned for more on this channel…