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.
The approach among institutional insurance companies has changed, and following the entry of high-tech companies into the field of smartphones, the insurtech industry has grown with several innovative startups and has changed the habits of many policyholders.
In addition, COVID-19 forced insurance companies to accelerate investment in digital innovation and implement creative methods to fight for customer retention and the recruitment of new customers (see Insurers` Digital Strategies for Personal Customer Engagement).
Embedded insurance is seen as creating a faster and more personalized experience, thus more appealing for millennials and Zoomers. During a CEO chat, Next Insurance reported that a fifth of its revenue now comes from embedded products in addition to Hippo’s report that 50% of its business comes from embedded partnerships.
In spite of many experts’ belief that embedded insurance has enormous potential, Aperture’s recent report predicts that more than $5 trillion of insurance payments will be distributed by non-agents and brokers within 10 years.
This trend may have some repercussions for agents and brokers.
Embedded insurance is currently a red-hot topic in the industry. It has permeated many of our recent conversations as clients evaluate how embedded currently impacts—or could impact—their distribution plans. The sense of urgency is compounded by disruptor companies like Tesla throwing their hat, in a meaningful way, into the insurance ring.
Some recent perspectives on embedded insurance have focused on the technology requirements for carriers to play in this space and the architecture required to embed their products.
Others have a different take. For example, Coverager focuses on product design as the key to success.
While these capabilities are critical, we want to approach the promise of embedded through the lens of the oft-forgotten insurance agent. Our view is that the agent continues to have a meaningful role in an embedded world.
Many experts find that capacity for cyber insurance products has increased from previous quarters due to larger market competition and a slowdown of ransomware attacks (see Cyber Insurance, Ransomware & Hybrid Warfare Outlook).
The CIAB Q2 Commercial P&C Market Index reveals that, while the cyber insurance market remains constrained, premium growth for cyber insurance products peaked in Q4 2021 (34.3% quarter-over-quarter increase) and rise slowed down, (26.8% quarter-over-quarter increase for Q2 2022).
The increase in market capacity seems to have pushed many insurance players to differentiate themselves. Cyber MGAs such as At-Bay, Coalition, and Cowbell have or intend to transition into full-stack insurance carriers, citing “greater flexibility and potential for innovation.”
Cyber risk has undergone several episodes of change in its relatively short history, but escalating ransomware frequency and severity in 2021 and 2022 was unlike anything experienced previously.
The accompanying retrenchment of insurance capacity, coupled with a wave of demand globally, caused a supply and demand imbalance of such extremity that the average cost of cover more than doubled (see 5 Key Benefits of Ransomware Insurance).
Insurance Work Automation
Work automation continues to be an appealing tech segment for carriers, as evident by the large number of exhibitors and huge interest from insurance carriers. I’ve noticed great interest in automating damage assessment following a natural event or malfunction of equipment.
Assured Insurance Technologies, for example, offers a platform for claims intelligence based on structured data.
This platform handles claims end-to-end by offering solutions for FNOL, AI assistance for adjusting, and CAT preventive service for automated rapid response to NAT/CAT events. HyperScience, too, offers automated extraction and classification of claims data processing.
The negative status of stock markets globally had a large impact on private-market funding for InsurTechs (see 10 Biggest InsurTech Funding Rounds in 9M 2022). Thus, the S&P 500 went down ~23% in 2022. Based on Leader’s Edge interviews with venture capital representatives, valuations are down and available capital for funding is harder to obtain (see InsurTech Valuations).
Insurtech companies have been among the biggest victims of the public market sell-off, especially those that went public in 2021.
Notably, Metromile saw its valuation decline over 85% and was subsequently acquired by peer Lemonade, and it hasn’t been alone in losing a lot of value and being eyed by peers and incumbents.
According to TechCrunch, while leagues behind fintech as a whole, insurtech startups have still attracted a significant amount of investment over the last few years — $43 billion between 2016 and 2022, according to a recent report “The State of European Insurtech 2022”. That level of interest can’t have vanished entirely, but there will definitely be winners and losers.
Natural Catastrophe Risk
Weather-related risks are hot news, and so is the desperate need to decrease insurance protection gaps—especially for flood products—as losses in 2021 alone amounted to $20 billion (compared to $80 billion between 2011 and 2020). Munich Re estimated that just 15% of U.S. homeowners have flood insurance (Floods cost insurers $4.7 bn, while European winter storms $4.2 bn in claims.
Improving education on flood risks remains at the forefront of insurers’ efforts as they target homeowners and business owners, realtors, and builders.
Embedded insurance products—bundling homeowners insurance with the purchase of a house, could help improve flood coverage (see Role for Insurers in Building Flood Resilience).
As for insurance shortfalls, Swiss Re noted a $1.2 trillion protection gap from three risk areas—natural catastrophes, mortality, and healthcare, all could be saved through embedded insurance products.
Data and analytics tracking, targeting improving risk reduction, is a vision shared by providers across the risk and insurance ecosystem. Incentivizing preferred consumer behavior isn’t new to the insurance industry, which already offers discounts on auto insurance for accident-free and safe drivers.
A central theme is how big data and analytics could help foster a culture of transparency and innovation through partnerships. By combining internal and external data, companies can see new patterns through the power of data analytics.
Big data and risk reduction go hand-in-hand when carriers have the tools and technology to analyze millions of data points they accumulated. Insurtechs are filling this technology gap to help carriers manage and analyze, data to incentivize risk reduction and improve outcomes.
In spite of the setback for some of the insurtechs and digital insurance carriers, opportunity remains strong.
Carriers will still seek to move away from manual processes using automation and better utilization of internal and external data. Insurtech companies that target those pains will be well-positioned for traction and scale. As for the next year, we expect more carriers, distributors, and insurtechs to become more innovative in the tools and services they have to offer.
AUTHORS: Diyaa Shridi – CTO & Head of Product Incubation at Sompo Digital Lab TLV