The insurance sector has traditionally operated within the same conventional business models and regulatory frameworks with which we have become so familiar, and with only modest modernisations over the last few decades. Insurtech, which refers to the myriad technology solutions that maximise the efficiency, accessibility and simplification of existing industry models, comes at a time when the industry is struggling to remain competitive in a low interest rate environment amid mounting pressure to increase profitability and efficiency.
The insurtech landscape predominantly comprises small and early stage businesses. According to CB Insights, 59% of insurtech funding deals in 2016 were done with start-ups based in the United States, followed by Germany (6%) and the UK and China (5% each). Global annual funding in insurtech businesses increased from USD 140 million in 2011 to USD 1.7 billion in 2016. It is clear that insurtech will play a transformative role in what has come to be regarded, perhaps rightly so, as a stale industry.
Technological advancements will help incumbents to modernise their businesses and increase efficiencies using increasingly sophisticated applications of the Internet of Things (IoT), big data, and blockchain, amongst others. Solutions ranging from autonomous vehicles to cutting-edge software and algorithmic solutions will stimulate creativity and expand the insurance market. For an in depth look at the application of these technologies in the context of insurtech, refer to this recent study by the University of St. Gallen’s Institute for Insurance Economics. Opportunities, for example, to create new digitally customisable insurance policies, even as far as to allow one’s friend to borrow one’s car via an app on a smartphone, will empower companies in every sector to offer customers more.
The industry’s regulatory challenges are such that partnerships between incumbents and start-ups naturally need to be an important feature of insurtech’s future landscape. Aspiring start-ups could be a pathway to creating additional yield for the incumbents whilst helping them manage the risk of obsolescence by keeping their finger on the pulse of innovation; such partnerships would simultaneously provide a pathway for innovators to more efficiently come to market and scale. Although this might feel intuitive, a study by PwC reports that 43% of incumbents consider fintech to be core to their strategy but only 28% consider partnerships with innovators and less than 14% are involved in incubators, or generally developing and supporting ventures.
The rise of Insurtech appears to mark the beginning of an irrevocable transformation in the insurance industry. A promising future will be contingent on the innovativeness of the next generation of businesses and the incumbents’ willingness and ability to change.
Zafar Kanani and Cassian Ortiz