Traditional insurance players who are first to embrace innovation in the face of disruption, stand to benefit.
Over the past 10 years, “fintech” has reshaped financial services and banking, practically becoming a household term. Now its younger sibling — “insurtech” — is rapidly reframing the insurance landscape.
According to McKinsey & Company, investment in insurtech firms is exploding. The estimated $270 million they attracted in 2013 shot up to $2.7 billion in 2015. Although the United States is home to 46 percent of these companies, insurtechs are a global phenomenon, with 40 percent based in EMEA (primarily the United Kingdom and Germany). The Asia-Pacific region is headquarters to around 16 percent, and is estimated to be the fastest growing geography.
Whether in property & casualty, health or life, insurtech is making insurance products more accessible. Digital innovations are helping customers to compare product, find the best prices and complete their purchases with ease. This is particularly appealing to millennials, who value the convenience of transacting online.
“Like fintechs, insurtechs are extending innovation throughout the sector, creating a competitive threat to incumbents but also potentially valuable opportunities for partnering on the changing terrain.”
— McKinsey & Company
The technology is also fundamentally challenging the underlying business model of the insurance industry. Using rich, sensor-fed data from telematics and the “Internet of Things”, insurtech companies are engaging customers in revolutionary ways.
For example, by helping drivers to minimize risky behaviours, they are lowering the cost of auto insurance. With insights gained from big data, analytics and machine-learning, insurtechs are enabling micro-personalization and a massive shift towards usage-based insurance (UBI) — also known as pay-as-you-drive and pay-how-you-drive.
Meanwhile, profitability among traditional insurers is waning. The “combined ratio” of total costs to revenue among American P&C underwriters climbed from 96.2 percent in 2013 to 100.7 percent in 2016 (representing a net loss). The industry remains heavily reliant on manual labour, including human judgement in evaluating risk, setting premiums and reviewing claims.
Increasingly, insurers are recognizing the necessity of digital innovation. “Insurtech is becoming more widely understood and accepted,” says PwC in a report based on a survey of 189 senior insurance executives.
With three-quarters of the respondents forecasting that up to 40 percent of their revenues are at risk over the next five years, more than half say they are “putting disruption at the heart of their strategy.”
They are right to do so – in a digital economy, the insurtech advantage will go to the first movers.