Ed Plowman examines insurtech’s development, and where it could go from here
Insurtech has been an industry buzzword for some time now – the concept has been around since 2010. But what does it really mean, what has it practically delivered so far, and where is it going – particularly in the post-pandemic world?
Technology for changing insurance
The focus of insurtech is applying technology so that insurance works better, improving the customer proposition and driving down frictional cost. This is not ‘new’ – insurers have been using technology in their businesses for decades already – but technology is moving on very quickly, and insurance has not been at the cutting edge.
Many advanced technologies can be applied throughout the value chain; Figure 1 shows the key ones. Other technologies, notably APIs and cloud services, are also critical as enablers of these applications.
Insurance for changing technology
We are in the infancy of the fourth industrial revolution, the fusion of digital with physical and biological systems. Insurtech is also about how insurance responds to these developments.
For the industry’s large commercial customers, the trends are clear – for the S&P 500, the value of intangible assets overtook that of tangibles in the early 1990s, and by 2018 the ratio was more than 5:1. In 1995 the top companies were GE, Exxon Mobil and Coca Cola; now they are Microsoft, Apple and Amazon.
For personal lines and SME businesses, we are witnessing the rise of the gig economy, the sharing economy, online retail, streaming services – the list goes on. Motor insurance is now the biggest global source of premium, with the main risk factor being the person behind the wheel. However, autonomous vehicles are coming, and the risk will become one of AI or algorithm failure.
Innovations to meet these new needs – cyber, parametric covers, on-demand products, digital platform integration, risk management services and so on – are both responses to and enabled by technology.
Insurtech is not just a buzzword, it has attracted serious levels of investment. More than US$6bn was invested into insurtech start-ups worldwide in 2019 (Figure 2). No accurate figures are available for how much incumbent insurers are investing internally in innovation technologies, but US$20bn per year is a plausible estimate.
While those are big numbers, global insurance premiums are more than US$5trn, so they represent only 0.5% of income. And the US$6bn invested in insurtech start-ups in 2019 is only 10% of the US$60bn invested in fintech start-ups across the whole financial services sector. There is still room for insurtech to ramp up.
Impact to date
What has all that investment really delivered so far? One measure of success is the emergence of ‘unicorn’ companies – privately held start-ups with valuations exceeding US$1bn. Insurtech has so far given birth to 10 of these: the most well-known is Lemonade in the US, and certainly the most successful is Zhong An in China. However, it is clear that, so far, no major industry disruptor has emerged along the lines of Uber in the taxi sector, or Netflix in the TV/film sector. The two most important reasons for this are:
- Insurance is a low-touch product for consumers – a grudge purchase once a year, unless you have a claim. And most insurance companies do a decent job of paying claims. Insurance may not be perfect, but perhaps it is good enough.
- Setting up as a ‘full stack’ risk-carrying insurer is a big and risky commitment; the underwriting agency model is far more practical as an entry point. However, this involves working with incumbents and limits the advantages that can be delivered.
Entering a new phase
The industry has also recognised that, even if the immediate disruption threat is low, doing nothing is not an option. Technology, with the economic and societal changes it brings, will change insurance whether the industry likes it or not. Insurers that make smart targeted investment in the right technologies will benefit from the new opportunities they create. Online sales and claims platforms, which many insurers have implemented, are certainly a start – but if digitalisation of the underlying business operations is not also addressed, this may be a case of putting ‘lipstick on a pig’.
The start-up community has pivoted to providing solutions that enhance specific links in the value chain, rather than setting up as competitors. These propositions are more narrowly focused, but also more often born from specialist knowledge.
FloodFlash is a great example, combining IoT water depth sensors, parametric payouts and high-resolution flood modelling to create a product that provides flood coverage for customers in high-risk areas that are excluded from traditional flood insurance. Several companies use machine learning, applied to external (and internal) data, to create scoring tools that assist underwriters with risk selection. Interesting examples include Describe Data, Sustema and Praedicat. Others are more directly actuarial. Examples here include Quantemplate, which can automate data processing tasks, and Hyperexponential, which offers an ecosystem for developing actuarial pricing models.
The short-term impact of coronavirus will undoubtedly be negative for insurtech. Many companies have put a hard stop on innovation investment, redirecting efforts towards focused projects that deal with the direct effects of the pandemic. Existing start-ups may face a struggle to survive.
The longer-term picture, though, looks far more promising. Many of the external digitalisation trends that were already happening are likely to be greatly accelerated by responses to the disease and lockdowns. Digital is no longer the preserve of Generation Z and Millennials – everyone is digital now. Added to this, the crisis has highlighted areas where traditional insurance has been inflexible or ineffective. This presents a huge opportunity for insurtech.
The actuarial perspective
Insurtech is also a huge opportunity for actuaries, with its applications running right across the value chain. Some of these applications are not traditionally within the actuarial domain, but introducing insurtech in these areas creates new and interesting sources of data – the lifeblood of the actuary.
Much of this data may not be captured in the neat structured database form that actuaries are used to dealing with, so they need to upgrade their toolkit and embrace data science techniques. They must also address insurtech leaders’ perceptions of the profession – many of them see actuaries as blockers of innovation, not enablers. If they do these things, though, there is great potential for expanding the actuarial footprint into new and exciting fields.
However, there are threats, too. Some actuarial tasks may get automated out of existence – and if actuaries stay in their comfort zone, abdicating new developments to others, the profession will lose relevance as the industry advances without it.
This is the great challenge of the age for actuaries. Should they stay in their cosy base camp, or strike out for the summit? It will be a tough mountain to climb, but surely the view from the top will make it worth the journey.
Ed Plowman is group chief actuary at Sompo Holdings in Tokyo, and chairs the IFoA GI Insurtech Working Party