Promising to transform insurance, an emerging technological movement takes root.
“The insurance industry right now is in the midst of a sea change transformation that has no proxy nor historical precedent,” asserts Guy Fraker, chief innovation officer for insurancethoughtleadership.com and its offshoot, Innovator’s Edge, which matches insurtech companies with executives and investors.
“No industry has ever been faced with what the insurance industry faces right now,” says Fraker. What distinguishes the insurance sector’s metamorphosis from other industries, he explains, is the simultaneous technological change both internal and external to the industry.
The broad and evolving term for technological initiatives affecting the insurance industry is insurtech, though definitions vary (see below for sidebar “What is Insurtech?”). Poised to forever alter the insurance value chain, insurtech solutions use exponential and connected technologies to provide customer-centric insurance solutions and money-saving process efficiencies for insurers.
Insurtech is not just about applying technology, such as artificial intelligence (AI), application programming interfaces (APIs) and the internet of things (IoT), to improve the insurance value chain. From on-demand insurance for automobiles and personal property to a focus on the customer journey to achieve brand loyalty, insurtech presents new ways to think about insurance in an expanding, digitally connected world.
“There are many areas pushing an acceleration of change where insurance is going to be challenged,” says Pierluigi Fasano, director of enterprise architect reinsurance and IoT group practice leader for Swiss Re, which is investing in insurtech. “Customer engagement, everything toward risk awareness, how you change the buying experience, underwriting and risk products,” he adds, are some areas where insurance is undergoing transformation.
Five years ago, Fraker observes, “there were not that many insurance companies that had their own venture capital arms, and now some insurance companies are considering their venture capital investments as their entire innovation strategy.”
There are several ways to characterize insurtech companies that have emerged from outside the industry. Matteo Carbone, founder and director of the Connected Insurance Observatory, offers a graphic of some insurtech companies along the insurance value chain (see “An Insurtech Startup Sampler”).
The insurtech revolution is here and growing rapidly. According to estimates from Innovator’s Edge provided in October 2017, there are about 5,000 insurtech companies. About 50 percent of insurtech companies are working in the property-casualty space, with the other half evenly divided between life and health insurance.
Interest in insurtech is also accelerating. InsureTech Connect, purportedly the largest insurtech conference in the world, hosted 3,800 attendees in October 2017 and is expected to draw more than 5,500 in 2018.
Converging Influences
Insurtech’s growth is the result of a multiplicity of simultaneously converging influences. Expanding investment, technological tools and digital connectivity are just some of the drivers spurring the insurtech revolution.
To investors, insurtech is a vertical under financial technology or fintech, which introduced bitcoins, roboadvisors and digital banking. Investors see insurance as ripe for technological change, explains Lisa Henderson, chief strategist of products and insurtech consulting at Milliman, Inc. They are hoping to achieve similar returns to those in fintech, which attracted $150 billion in investments and is now a $900 billion market.
Insurtech investment is also growing, as evidenced in Figure 1, below.
Figure 1
Henderson projects that insurtech investment will grow in the next decade. “We’re just at the beginning,” she says.
Caribou Honig, an insurtech investor and the chairman and cofounder of InsureTech Connect, observes, “A year ago, there were a lot of seed-stage companies, and now this year (2017) I am seeing companies that are seed-stage and series A in venture capital speak.” While insurtech was a subcategory of fintech, he explains, it is now a whole category unto itself, because the insurance industry alone is a large part of the economy and differs from the financial industry in companies, regulators, tactics and solutions.
Capital investors may have jump-started insurtech, but insurance and reinsurance companies are increasingly investing in insurtech. Five years ago, Fraker observes, “there were not that many insurance companies that had their own venture capital arms, and now some insurance companies are considering their venture capital investments as their entire innovation strategy.”
Honig explains that many “incumbents are leaning into this too, investing or partnering with startups.” Insurers see insurtech as an opportunity to “play offense” by improving margin and market share, as well as “defense” to improve cost structure by adopting technology, he adds.
Insurtech’s growth is the result of a multiplicity of simultaneously converging influences. Expanding investment, technological tools and digital connectivity are just some of the drivers spurring the insurtech revolution.
Ten of the top 25 property-casualty insurers (ranked by direct written premium) have been investing in insurtech startups since 2015, according to CB Insights, a data aggregation service that provides strategic analysis for business decisions.
Those that have invested in the most startups (as of June 2017) are USAA (12), American Family (10), Assurant (8), Liberty Mutual (6) and Nationwide (4).1
One of the earliest and largest investors from the property-casualty insurance industry is the insurer and reinsurer XL Catlin. Its venture capital unit, XL Innovate, has invested in insurtech companies including Slice, Cape Analytics, Lemonade, Notion, Embroker, Pillar Technologies and New Energy Risk.
SwissRe’s insurtech company investments include CarlQ, Ignitia, Tyche, Wellthy Therapeutics and Vouch.2 Munich Re also contributed funding for Helium, Waygum, Lemonade, Trōv, Simplesurance and Slice, according to CB Insights.3
What is Insurtech?
Sources interviewed by Actuarial Review agree that insurtech is becoming a very broad term.
Like the ancient parable of the blind men and the elephant, the definition of insurtech is often molded by perspective. To investors, insurtech is a category of financial technology or fintech. When insurtech began making headlines a couple years ago, it initially referred to startup companies, technologies, applications and products from outside the insurance industry.
XL Catlin’s Vinita Saxena sees insurtech as being centered on leveraging new technologies at its core. “It is also important to point to the broader insurtech ecosystem, which includes the startups, technology companies, insurance companies and venture capitalists, all working to transform the traditional insurance business model.”
“The hallmark of being an insurtech company,” is ultimately a question of how the company solves problems, says Caribou Honig of InsureTech Connect. “If their default answer is to solve problems in marketing, finance, operations and even compliance through software and hiring an engineer, it’s a tech company.” However, if a company’s default answer is to solve problems by hiring a functional expert, such as marketing and finance consultants, then it’s not a tech company.
As insurer-based technological initiatives and insurtech-insurer partnerships continue to grow, what is considered insurtech will be expanding and overlapping. “My philosophy,” says Matteo Carbone of Connected Insurance Observatory, “is that any players in the insurance sector will be insurtech, meaning organizations where technology will prevail as a key enabler for achieving the strategic goals of the organization.”
In the meantime, insurers have been pursuing initiatives that are not necessarily considered insurtech. Insurers, for example, have been pursuing IoT technologies that are now part of the insurtech umbrella. The technology that supports predictive modeling also falls under insurtech, and distinctions are necessary for understanding.
“Insurance has historically used technology and mathematical models to do predictions like probability of loss and projecting distribution of losses in the future,” says Swiss Re’s Pierluigi Fasano. Therefore, he does not consider predictive analytics using past data as an insurtech-only attribution.
Fasano advocates introducing “forward-looking models” that offer the ability to predict the future based on dynamic models measuring evolution of risk drivers rather than relying on data from long periods of the past. “It makes a jump in those areas where the velocity and depth of change makes it difficult to base pricing on long-standing models with three to five years of past data,” he says.
Ultimately, “the face of pricing is going to change,” observes Stephanie Gould Rabin of Holborn and the CAS Insurance On-Demand Working Party. “Pricing will become more dynamic and on time, requiring more robust predictive analytics, which will also be facilitated by insurtech.”
Technological Growth
The growth of exponential technologies is also driving the rise of insurtech. “Smartphone penetration is 80 percent, cloud offerings are sufficiently mature to be able to provide real big benefits, and artificial intelligence is getting to the point where machines can interpret pictures of a loss event,” Honig says.
Enabling customers to self-serve during the claims process and shifting the underlying technology stack in the cloud “is even more impactful in the long run,” he observes. “It provides a cheaper and more flexible infrastructure for the entire insurance value chain.”
The explosion of data from audio, video, digital, geospatial, IoT and other sources and the affordability of cloud storage is also driving insurtech, says Marty Ellingsworth, president of Salt Creek Analytics. It leads to AI algorithms “that can be used to classify and count and measure things using those new elements that you were not able to use before,” he explains.
Growing digital connectivity, Ellingsworth says, presents insurers with greater opportunities. “The reason why insurtech resonates with business and consumers is because they live in a mobile world,” he explains. When insurers connect more with their customers, he notes, it opens a two-way street that benefits both insurers and their policyholders.
“The real core of insurtech,” Fraker notes, “is solving a customer pain point and gathering data while doing (so)” to expand product and service offerings or to realize operational efficiency gains.
The successful players in insurtech “use the same data on different steps of the value chain,” Carbone observes. For example, an insurer can use telematics for underwriting to gather useful data for claims management or for delivering services. “In this way, you are optimizing the return on investment (ROI) on the technology,” he explains.
Customer Centricity
Digital technology behaviors are also changing the relationship between customers and their insurers, Carbone explains. “Human interactions are diminishing in frequency while digital interactions are exponentially growing.”
Traditionally, customers and insurance companies have communicated on a transaction basis for sales, the claims process and renewal. However, insurers are realizing the growing expectation that customers want to hear from them digitally.
Encouraged by insurtech, insurers are steadily viewing marketing and customer service from new perspectives. To maximize customer experience — the overall result of interactions between insurers and their policyholders — more carriers are mapping out the customer journey.
Customer experience drives customer loyalty, Ellingsworth explains. The idea is to get to the current and future demographics to create customer lifetime value at each stage of a person’s insurance needs and to anticipate future ones to retain customers over their lifetimes. This will “ruin the pipeline of prospects other carriers have been relying on for years,” he adds.
Carbone explains that the customer journey starts with awareness and includes choice, purchase and policy management (see “An Insurtech Startup Sampler”). At each stage, insurers are identifying “micro moments” to reach customers with the appropriate messaging. For example, insurers could send push notifications to customers during travel to offer destination-specific coverage.
Ultimately, Ellingsworth says, insurance will be more customer-centric rather than product-centric. “That is the whole point of insurtech,” he says. By combining connectivity and the resulting expansion of data, he believes that insurers will be able to cover multiple perils across multiple products that best serve the needs of individual customers. Current examples of customer-centric insurance products are on-demand, usage-based and peer-to-peer coverage.
An Insurtech Startup Sampler
Matteo Carbone of Connected Insurance Observatory developed a chart of insurtech companies, classifying them by both insurance value chain and customer experience.
The chart below shows the functions of insurtech companies through a simplified customer journey. They are as follows with the insurer’s view of the process in parentheses:
- Awareness of the insurance product (marketing/advertising).
- Choice (marketing/underwriting).
- Purchase ease (sales).
- Use of products designed to improve interaction with customers for the claims process.
The horizontal bars below the categories feature insurtech companies that support the overall states. The first bar shows IoT-related insurtech companies. The second bar reflects P2P (peer-to-peer) insurtech companies.
Since insurtech aims to address everything from underwriting operations and distribution to delivering insurance in new ways, experimentation and growth will vary.
Breaking Barriers
The insurance industry’s expected transformative change will rely greatly on the interplay between insurance companies and technology firms working to inspire change. For insurers, Henderson observes, there “is that push-pull of needing to be innovative and meeting market demands of being quick, fast and easy while still making sound risk decisions.”
Technology companies and insurers currently approach problem-solving from different perspectives. Viewing insurance from the outside, tech firms perceive insurance as similar to other commodities, through the customer’s eyes. “They are going to the white board and asking, ‘What needs to happen to start from scratch with new infrastructure?’” Honig explains. “[For] a lot of the startups, their thesis is cutting the cost structure. They don’t have legacy systems,” he says, so they are building their systems to operate in the cloud.
Fear of change is another factor, observes Stephanie Gould Rabin, head of corporate strategy and senior vice president of Holborn, a reinsurance brokerage firm. Insurtech “pulls at the heartstrings,” she explains, because “it represents the possibility of a substantial change of how they do business and whether they will have a job.” As a result, she says, “People will obfuscate, deny, criticize and do anything else it takes to ensure their job stays the same.” Rabin is also co-chair of CAS’s Insurance On-Demand Working Party, which covers insurtech’s influence on product, consumer behavior and actuarial practices.
The insurance industry’s expected transformative change will rely greatly on the interplay between insurance companies and technology firms working to inspire change.
For insurance industry outsiders, change can appear to be painfully slow. “The insurance industry is something of an immovable object,” Honig observes. “Even the internet did not change the game.”
Vinita Saxena, senior vice president and senior enterprise risk officer of XL Catlin, acknowledges that the insurance industry has been slower to embrace technology than have some other sectors. She notes that there are plenty of inefficiencies and cost layers in the existing workflows and processes due to outdated and entrenched legacy systems.
While the outsider view on insurance can spur new ideas and innovation, insurtech companies also need to appreciate the nature of insurance, sources say. Fasano says that the insurance industry sees itself as being financially responsible for covering the lives of people. “Insurance exists to neutralize risks,” says Fasano. “We manage money given by someone else to protect them.”
Further, insurers are dealing with how to use data and technology appropriately. Fasano is cautious about AI-based assumptions and applications. “You can discover correlation that has nothing to do with causation and meaning,” he says.
Growth Areas
Since insurtech aims to address everything from underwriting operations and distribution to delivering insurance in new ways, experimentation and growth will vary.
In the commercial insurance space, Saxena says, insurtech is currently centered on distribution, targeting small-sized and medium-sized businesses through digital brokerage and policy comparison platforms.
She also anticipates that commercial insurers will leverage sensors and IoT for loss prevention and proactive risk management. Examples include digital sensors at construction sites that help predict damage and help reduce risk due to fire and other destructive environmental conditions. “I also think we will see greater use of drone technology in underwriting and claims in commercial insurance,” Saxena says.
In the short term, she expects growth “in areas that lower costs and include efficiencies in the insurance value chain, primarily around underwriting and distribution.”
Saxena also sees continuing interest in insurtech solutions that address back office issues of poor data gathering and manual processes that hinder a better customer experience. “Artificial intelligence will have a role to play here, much like what we have seen in fintech, such as roboinvestment advising,” she observes. There will be greater interest in plug-and-play solutions coming from insurtech companies that help transform the current legacy systems and lower operating costs, such as cloud-based solutions.
Fraker suggests a key to insurtech success. “Anytime you take a well-defined job to be done, a tech app that meets and exceeds the job, and business acumen, you are probably on to something that can go viral,” he says. Some of the “most successful insurtechs” such as Pypestream and WeGoLook, “started in other industries without realizing that insurance was a potential market for them.”
“If we get technology that speeds up payment and changes how claims are settled,” Rabin observes, “actuaries will need to adjust reserving methodologies.”
One such example cited by sources is Snapsheet, which is serving 50 insurance companies, including USAA, The Hartford and Safeco. The company originally developed its app to help body shops estimate car repairs with pictures, explains C.J. Przybyl, the company’s president. Seeing the potential benefits for insurance companies, body shop owners introduced him to insurers.
Snapsheet’s mobile app and dispatch platform help insurance carriers settle claims faster, reducing the average cycle time to fewer than three days from first notice of loss. About 90 percent of claims are processed by photograph. “If we get technology that speeds up payment and changes how claims are settled,” Rabin observes, “actuaries will need to adjust reserving methodologies.”
Some insurtech companies are often called “disruptive” because they are rethinking ways to offer insurance. Two well-publicized companies are Lemonade and Trv. Lemonade is a new homeowners and renters insurer that uses behavioral economics. According to its webiste, it offers “instant everything” through AI, from completing applications to one-click premium payment and formless claim filing. Trv offers on-demand coverage of scheduled personal items instead of blanket coverage. Trv started in Europe, and its operation has been approved for at least 30 U.S. states so far.4
“By using the technological platforms and direct distribution model online … they [Lemonade and Trv] have a lot more margin to play with,” Fraker says. “You are not paying commission, for starters, and you’re probably relying a whole lot more on artificial intelligence than human bodies and deep learning for risk selection — so you are not married to a distribution system that is very expensive and difficult to change,” he adds.
Conclusion
As insurtech begins to take root in the insurance industry, experimentation to discover transformative and optimal solutions will continue. Because insurtech is sometimes described as “disruptive,” it can attract skepticism.
Those who see insurtech as disruptive cite peer-to-peer homeowners coverage through Lemonade, usage-based automobile insurance via Metromile and on-demand personal property coverage through Trv. However, sources generally do not see insurtech disrupting the insurance business model. Fasano, who conducts due diligence on some of Swiss Re’s insurtech investments, says he is “waiting to be surprised” by insurtech because virtually all of its applications are serving the traditional model.
Carbone notes that insurtech will not disrupt the insurance model nor will it replace traditional insurance products. While he believes insurtech will introduce insurance products personalized to individual customers, its most important contribution will be improving the insurance value chain. “It will bring the insurance model to the next elevation,” adds Carbone. “It will bring superpower to the insurer that can use the technology.”
Because insurtech is sometimes described as “disruptive,” it can attract skepticism.
Saxena observes that insurtech, “will take several years to play out in a meaningful way” in the insurance industry. But in the long term, she sees insurtech helping to find “new and underserved markets and products that better cater to a new generation of customers.”
To Fasano, the “best disruption” of insurtech will be to “find ways to make insurance affordable and accessible to many more people than we have been able to do.”
1 https://www.cbinsights.com/research/largest-pc-insurers-rank-startup-investments/ (obtained 10/16/2017).
2 https://coverager.com/five-startups-selected-swiss-re-insurtech-accelerators-2nd-cohort/ (obtained 10/20/2017).
3 https://www.cbinsights.com/research/reinsurance-tech-startup-moves/ (obtained 10/20/2017).
4 https://www.trov.com/blog/on-demand-insurance-has-been-approved-in-california
Annmarie Geddes Baribeau has been covering insurance and actuarial topics for more than 25 years. Her blog can be found at www.insurancecommunicators.com.
