InsurTech: Are We Gambling On The Future of Insurance?
I was walking the floors of one of the local casinos and thought to myself, "Look at all this risk." The insurance industry itself is seen by some as a form of gambling. In some ways it is, but insurance companies know how to hedge their bets by leveraging data and statistical functions to establish pricing, just like casinos determine payout odds. There is a reason the jackpot symbols rarely line up on the slot machines!
gam·ble /ˈɡambəl/ (verb) - take risky action in the hope of a desired result.
According to CB Insights, VCs pumped $6B into InsurTech startups between 2011-2016, with nearly 3/4 of that coming in the last 2 years. The chart at left tells a growth story. What are investors betting on, and why? Let's see what they are looking for.
It's not just about technology
InsurTech is exciting to investors because many believe insurance is ripe for disruption. Technology brings efficiency to markets and provides more options to consumers. According to Celent, the insurance industry spent $176B on IT in 2016, and Allianz Research tallies global premiums at $3.9T. Therefore, roughly 4.5% of all premium goes to IT costs. Insurance clearly has technology and still is inefficient. Therefore, InsurTech is not just about technology (a common misconception because of the reference to "tech").
It's about a different operating model
Insurance operations have many layers, MGAs, insurance carriers, TPAs, reinsurance brokers, reinsurance carriers, each with its own corporate HR, IT, & Finance functions. InsurTech companies do not have as many layers. Therefore they are more efficient.
According to McKinsey&Company, the InsurTech startups are focusing most heavily on distribution, with the focus of 37% of startups. Startups are finding new ways to bring insurance to consumers. Legacy insurance systems and infighting keep carriers locked-up and unable to move at the speed of start-ups.
Speed. Another big advantage to start-ups is their speed. A decision that takes 2 hours to implement in a start-up can take 2 weeks in a large insurance company. By the time the stakeholders agree on the solution, finance approves the business case for the investment, security conducts a risk review, and legal does a personal information assessment, a whole new start-up business can go live.
Technology is very relevant
One thing for sure, InsurTech companies have heavily automated backend processes. This requires some cool technology. While some bits are new, like blockchain and chatbots, most of the underlying platforms and infrastructure has been around for years. The UI, workflow, data, and integration platforms are evolving, but not by leaps and bounds. InsurTechs are leveraging these core platforms to build efficient and automated business processes, driving cost out of the system. This is what interests the VCs and scares the carriers.
Some VC activity is going to technology companies. For example, VCs pumped more than $36M into Relayr, an IoT device company in November, 2016. Corporate Venture Capital from insurance companies is also going into cybersecurity start-ups.
Is it a gamble?
At a recent InsurTech conference, I heard a speaker say, "10 years from now the industry will not be the same." The speaker was a CEO of a US insurer and a 30 year veteran to the industry. The conditions are ripe for change. Pressures mounting from alternative capital markets, low interest rates, and changing consumer engagement models are disruptive forces in the industry. Added concerns about retiring baby boomers and an upcoming talent crunch, the industry will be working hard to reinvent itself.
Investing in any start-up activity is high risk. The outcome is still a few years away. There will be winners and losers - mostly losers. At the same time, the winners will win big. InsurTech's most successful start-ups may not even exist yet. We are still early days. If anything is a sure bet, the industry will change rapidly over the next few years. Feeling lucky?