Tech-driven innovation is fundamentally changing the Global insurance industry. Emerging capabilities including telematics, artificial intelligence, machine learning, and automation have transformed nearly every aspect of the insurance value chain and continue to create new and improved omnichannel experiences for customers.
InsurTech makes insurance more accessible to the masses by simplifying the buying experience. For many, it’s a matter of convenience that guides their decision-making process when choosing an insurer or product. In other words, people want coverage for themselves and their loved ones in quick, easy, and affordable ways – and insurtech platforms provide just that.
Insurtechs are the driving force of this evolution, and investors are taking note. Venture capital (VC) investment has grown faster than the more mature private-equity or public-markets funding.
According to McKinsey’s report, in 2021 alone, the total amount of VC invested in insurtechs surpassed $11 billion, double the amount invested in 2020. In addition, private-equity investors are increasingly looking to invest sooner, further increasing the amount of capital flowing into the market.
This has created significant pressure on insurtechs to scale—and to do so quickly. While some insurtechs may choose to merge with incumbents, others will focus on scaling independently. The path to accelerating growth differs depending on the type of insurtech player. In this post, we focus on two common types: emerging carriers and distributors, and ecosystem players.
The development of Insurance technology has been a rapid progression. Insurtech is having a significant influence on managing risk and insurance, and there is still a lot of room for growth.
Insurers are aggressively investing in technology companies and are working internally to build new solutions and platforms. And the insurtech business continues to expand, with new firms entering the market and creating a name for themselves.
The next few years will determine the insurtech winners—both among emerging carriers and distributors and the next generation of ecosystem providers—in an increasingly polarized competitive landscape. Those with a clear path to scale will be poised to become industry leaders and accelerate profitable growth.
Emerging carriers and distributors are B2C startups, often digital-native brands, looking to disrupt how insurance is bought and priced. To scale successfully, they need to establish a path to profitability, prepare a clear investor story, and refresh their strategy to extend the growth trajectory and challenge incumbents.
Once insurtechs have raised capital and acquired customers, the biggest hurdle is driving a path to profitability.
In our experience, insurtechs at this stage often find it difficult to scale their initial unit economics. However, once insurtechs have built differentiated technologies and processes in their core markets, many are successfully tapping into new revenue generation opportunities in pursuit of profitable growth.
For example, a life insurance insurtech chose to commercialize its technology platform and pivot from an agency to a B2B platform provider.
The company entered a $1 billion to $2 billion annual premiums market, with a pricing strategy that enabled margins upwards of 30 percent. At a time when investors are much less inclined to make pure growth bets (compared to the past few years), insurtechs that demonstrate solid economics and a realistic path to profitability will stand out from the crowd.
Traditionally, insurtechs have struggled to perform well in public markets. Insurtech share prices are down roughly 75% from January 2021. Investors are often unsure whether to assess these emerging insurtechs as insurers or tech companies, and the time needed to achieve profitability can cause concern.
Once they get a policy, customers can also manage them online, again, without having to wait for their agent. Thanks to mobile apps that personalize the entire experience, they can check the status of their policy whenever they want, wherever they are.
However, vast amounts of data are generated with all the digitization. That’s why technologies, like Artificial Intelligence and machine learning, come in handy as they can automatically interpret data and enable insurtech companies to scale their customer base.
More significant shift of insurance trends is on the way. Big data technologies and intelligent systems are causing a shift in the way insurers handle risk, which might have a long-term impact on business models.
The need for new technology, as well as the expertise required to develop it, has no boundaries. Customers now more than ever want efficiency, accessibility, and clarity.
But this doesn’t mean that insurers have to close their companies and make room for insurtech startups. Many of them have seen great benefits of the collaboration and investments in various insurtech companies.
This has allowed them to provide a better customer experience by embracing new technologies and involving fresh ideas in their operations. In this post, we’ll go over these advantages in further depth, as well as see how insurtech is changing the insurance business for the better.
When share prices and initial growth expectations come under pressure, there is a clear need to refresh the investor story—and back it up with a solid fact base.
For insurtechs based in Europe, where there is less IPO activity than in North America, leading with a clear and compelling investor story becomes even more important.
This involves developing an initial hypothesis, gathering data-driven evidence from financials and operations, and coaching management to clearly articulate the story to investors. When done successfully, this process can not only build investor and shareholder confidence but also help an insurtech gain clarity and alignment on the strategic path forward.
After achieving scale in their core markets, insurtechs will naturally set their sights on new and attractive segments and geographies that can unlock next-horizon growth opportunities. This is the time for a full strategy refresh—an exercise that requires analytical rigor and external perspectives.
The goal is to create a road map for an ambitious growth trajectory and to identify a clear set of enablers and strategic M&A opportunities to achieve these growth targets.
In our experience, the most successful insurtechs have clearly defined the playing field where they can win and doubled down on specific customer subsegments (such as millennials or brokers). Once the strategy comes into focus, insurtechs can then bring the model to new geographies and drive growth on a global scale.
Ecosystem players are B2B utilities that enable a better insurance ecosystem (for example, by improving claims processing).
To drive accelerated growth, they need to refine their go-to-market (GTM) approach, increase the efficiency of their engineering and professional services functions, and explore opportunities in adjacent markets.
As large insurance groups have started to build their own utilities, the imperative to scale quickly has become more urgent than ever in a winner-takes-all market.
Insurers are increasingly basing policy pricing on conduct rather than demographics. Vehicle telematics is a way of gathering data on your driving patterns and distance. Telematics data is commonly used by insurtech companies to provide tailored driving input, safe-driving bonuses, or possible cost savings on your vehicle insurance policy.
Auto insurers in particular are making use of vehicle monitoring technology known as telematics. Progressive has been ahead of the curve on telematics since 2010. The insurer is well known for its Snapshot product, which allows the insurer to more efficiently price a customer’s auto coverage based on driving habits.
Root is another company with ambitious goals for using telematics to price car insurance. The company says that it prices customer policies entirely based on behavioral data, and it uses machine learning on a wealth of data from a user’s phone to price policies, using the magnetometer, accelerometer, gyroscope, and other sensors to detect driving behaviors, like hard braking, abrupt turning, and distracted driving. Its ultimate goal is to eliminate the use of credit scores in insurance, and base prices entirely on behavioral driving data, not demographics.
Thanks to the advancements in IoT, telematics technology is typically incorporated through a mobile app or a device that connects to your car’s diagnostics port. These systems are usually free and are used to assist drivers in making better and safer driving decisions.
Vehicle telematics not only discloses how you drive, which is exactly what insurance wants to know, but also locates where you drove, when you were there, and for how long. This has sparked some privacy worries, as well as questions about how the data would be used to charge customers in the future. As usage-based policies grow their popularity, it may be time to consider whether the potential savings outweigh the privacy risks.
However, before signing up for usage-based car insurance policies, they have to be very careful and read the terms. As every company has its own definition of what is it to be a safe driver, so it’s essential to find out the exact behaviors that are being measured.
Usage-based insurance programs generally measure speeding, acceleration and harsh braking, along with mileage and the time of day you drive. You get a driving score and often tips for improving your score. The better you drive, the better your auto insurance rates.
Inflation is one reason why drivers may be interested in usage-based insurance, as it can potentially reduce your car insurance bill.
Customers want insurance coverage that caters to them, and big data and smart devices make this possible. Usage-based coverage is one type of insurance product that has increased in popularity in recent years.
According to a survey by TransUnion, 61% of drivers said that they would allow their insurance carrier to collect real-time data about driving habits and mileage if it could lower their premiums. It’s shouldn’t be too surprising that some customers prefer usage-based coverage given last year’s drastic drop in miles driven due to coronavirus-related shutdowns. Most big auto insurers like Progressive, Allstate, and Nationwide offer usage-based coverage options now, while Root’s entire business model is focused on maximizing its pricing power by using machine learning on the telematics data it collects via usage-based coverage.
Property insurance is another area using big data to create customizable, niche products. Palomar has created niche insurance products — like Hawaiian hurricane insurance or residential earthquake insurance — thanks to big data. The company uses its price modeling techniques to analyze risks down to ZIP code level to price rates, as opposed to using broad territorial zones, allowing it to better pinpoint risks and underwrite profitable policies.
According to McKinsey’s report called Unleashing the Value of Advanced Analytics in Insurance, significant breakthroughs in computing technology and the explosion of new digital data sources have extended and redefined insurers’ fundamental disciplines during the last 15 years.
For generations, the capacity to correctly estimate risk and price policies accordingly has been the cornerstone of the insurance industry’s value creation.
Big Data technologies give insurers access to bigger data sets and more comprehensive information about individual customers, allowing them to provide policies that are more closely aligned with the risk posed by a person rather than the demographic category they belong to.
Moreover, Big Data can also help insurers craft more personalized policies. Devices like the Fitbit and Apple Watch’s Health App can track and promote healthy behavior, leading to reduced rates, kind of like how a telematics sensor in an automobile can track consumer behavior to reward safe driving behaviors. The information obtained in this individual-focused approach allows insurance policies to be tailored to each person’s behavior and condition.
The integration of technology and insurance will play an increasingly important part of our lives. The industry is massive — with property, casualty, and life insurance premiums amounting to $5 trillion globally, and 11% of GDP in the United States — and ripe for disruption.
Big data will enhance risk mitigation as insurance companies provide customers with better catered products at fair prices, and serve a broader range of customers. There are a number of companies, including early mover Progressive and newer companies like Lemonade, Root, and Palomar, that are pushing the boundaries of innovation and are worth watching in the coming years as the industry undergoes a massive transformation.
Artificial intelligence & machine learning
In order to take advantage of all these vast amounts of data, insurtech companies need to leverage intelligent algorithms and extract valuable insights. While artificial intelligence and machine learning are still in their infancy in the insurance industry, they will become indispensable in order to capitalize on data-driven insights. Moreover, these technologies have the potential to automate many processes and make the jobs of insurance agents much easier.
For example, Lemonade manages and oversees claims with the use of a proprietary AI named Jim. Machines are approaching the stage where they can be trusted to undertake more complex decision-making tasks.
Artificial Intelligence and machine learning may also be used to create more thorough consumer profiles by combining external information with internal data to create a complete customer profile.
AI is increasingly being leveraged to enhance the customer experience while creating efficiencies for the carrier and service team. Chatbots that can intelligently route customers to the best available agent is a popular use, but Artificial Intelligence can do much more. For instance, when a policy is being written, insurers can apply AI to conduct background research and more closely monitor for red flags. AI is emerging as a valuable tool from a risk perspective as well, providing a more holistic view of customers and helping to determine if there have been any involved with fraud.
According to an article by Fintech Magazine, AI may be used to analyze call volume, cause, and the type of consumers who are most likely to call at a specific time of day to the call centers, which are typically the initial point of contact between the insurer and the client. Understanding these massive datasets is critical for decreasing wait times and ensuring that the best-qualified customer support personnel are accessible at the right moment.
The insurance business is one of the most competitive industries and faces multiple challenges. These challenges are not just caused by changing customer expectations and behavior or by the advent of ‘disruptive‘ organizations from outside the industry, although that is a growing concern for quite some time now as well.
Companies may also use AI in risk management to delve deeper into claim trends and get more detailed in evaluating which initiatives would truly improve results. Intelligent algorithms can help teams determine which data points they need to focus on in order to get better results.
The overall impression
Insurtech makes insurance more accessible to the masses by simplifying the buying experience. For many, it’s a matter of convenience that guides their decision-making process when choosing an insurer or product. In conclusion, insurtech could be expected to continue driving change in the insurance industry, making it a more attractive and accessible option for policyholders.
Technology also enables insurers to better serve their customers by being more efficient in the way they do business, which means greater transparency and ease of access for policyholders.