Early year studies from Deloitte and McKinsey cited 2019 as the year for insurance firms to embrace new partnerships and join in the tech revolution. While the past year has seen increased investment in insurtech and growing integration of tech macro-trends that have disrupted several industries, the greatest change in the insurance space may have been a change to the landscape, according to Seth Rachlin, executive vice president and insurance leader at Capgemini.
“We’re seeing a definite beginning of what I would call a separation of the more mature ones from the rest of the pack,” says Rachlin.
Kelly Ward, AXA Partners’ sales, marketing, and distribution director, believes insurers are craving more from insurtechs and focusing on wiser investments.
“There is a level of attraction suggesting this is the next market to be disrupted. We’re happy to be disrupted because it can give us a commercial advantage if we work with the right insurtech. There seem to be a lot of organisations or insurtechs that pop up, and because they haven’t got that clarity they can’t get heard,” says Ward.
Where previous years have seen tech advancements disrupting the insurance space, 2019 saw market players pausing to ask questions regarding where investments should be made, which type of tech is actually useful, and who the new players in the insurance field may be.
Tempering the AI hype
Artificial intelligence (AI), machine learning, big data: the trends that have seemingly disrupted a number of financial industries have also entered the insurance space.
“The amount of hype around AI in the insurance sector is incredible. AI is a very broad concept and there are a lot of things that in the day would have been called predictive modelling or analytics that are being called AI because that helps the valuation and it helps you sell. So I think that the AI area is one in particular where you’re going to see a shake out,” says Rachlin.
“AI has been a catalyst for a lot of investment in insurtech. I think the possibilities of what AI can do for the insurance value chain are significant, but at the same time I think for a number of these insurtechs the promise has exceeded the capability.”
Rachlin believes the greatest opportunity for AI to appear in the insurance industry is in its most expensive processes, which he cites as underwriting and claims processing. Other areas, such as chatbots or virtual assistants, may need further development.
“It’s hard to sell people insurance that they don’t realise that they need, so the level of sophistication of chatbots has a way to go before they become effective sales agents. But you look at other contexts, you look at a company like Betterment where AI is helping to drive a retirement planning service that’s been widely adopted. So I don’t see it as an impossibility, I just don’t think we’re there in an insurance context yet,” says Rachlin.
Betterment utilises robo-advisors to assist clients in making investments and started taking investor money in 2010. Since then, AI-powered investors have seen a boom, with similar companies such as Wealthfront and Personal Capital cropping up. Client assets managed by robo-advisors are expected to reach $2trn worldwide by 2020, according to Investopedia.
The insurance industry has had to re-think where cash is being allocated, and the latest tech will no longer cut it, according to Craig Foster, chief executive officer of insurtech Leakbot.
“The thing we’ve learnt is it’s important if you’re the insurtech to develop some discernment between an insurance company that’s doing some innovation theatre for the wrong reasons, being able to discern between that and an insurance company that is deadly serious,” says Foster.
The past year has seen a focus on macro-trends in tech such as AI or machine learning, but technological advancements are not enough, says Foster. Making wise investments and partnerships have been preferred to a race to collect the latest tech.
“You often get instances where the board director has read the Harvard Business Review at the weekend and read an article all about AI and raised it at the board meeting … and someone gets a small budget to do an AI project, and those things tend to be a waste of time. If you’re the insurtech, it’s important to develop that discernment because you’ve got a limited amount of resources and you have to use them quite wisely on the opportunities that have got a chance at going somewhere.”
In May, the FT reported Aviva’s new CEO, Maruice Tulloch, planned to be “more disciplined” about the insurer’s investments. In similar fashion, Axa froze funding for its innovation project XL Innovate that same month, according to Insurance Insider.
“There’s been varying degrees of success of the [venture capital] arms where some [people] internally see that as a success and want to do more, whereas for others the jury’s out on the value of some of those minority investments. I think there was almost a lot of excitement and lots of changes and hope five years ago, and I think five years in things are starting to get real in terms of ill-advised investments or excessive costs in places. Some tough questions are being asked about what’s going on,” says Foster.
Despite these cases, studies suggest that overall insurtech investment is still on the rise. As of October 23, global investment in insurtech sat at $4.36bn, a five percent increase from total investment in 2018, according to advisory company Willis Towers Watson.
“We need something that’s kind of complete and makes sense,” says Ward.
“There are so many priorities that a big insurer is trying to manage, so in order for them to be distracted from some of those [priorities] and attracted to what an insurtech has, just having some exciting piece of tech is not enough. To have that tech and something we think makes sense is really what it’s about.”
Changing landscape and new players
According to Rachlin investment in insurtech will continue, but the focus will be on merging and acquisitions, as well as developing tech in-house.
“I think there will be investment because I think you’ll see some exits next year. You’ll see some exits that take the form of largely acquisition … and that the acquirers will likely be other companies, incumbent providers of software and data services to the insurance community as well as potentially some horizontal players who have capabilities.”
In many ways, the shift in investment strategy over the past year has led to a different insurance landscape, with a number of new players.
“You’re seeing investments from insurers in the insurtechs they’re focused on, so I think from that perspective you get in the beginning of that sort of process by which the winners and losers are getting separated,” says Rachlin.
“I think the other piece you see is that established players – be that either the big tech players or alternatively companies that have been in the space for a while – are gaining traction either through their own R&D or through acquisition or those types of things, such that I think that the playing field will be a little bit different in the year or two ahead than it has been.”
The emergence of bigtech firms in the insurance space was a concern for insurers going into 2019. A Capgemini and Efma World Insurtech Report from 2018 revealed that around 30 percent of those interviewed said they would consider buying at least one insurance product from a bigtech firm if available.
Bigtech will remain a competitive concern to others in the market heading into 2020. In April, Google’s Gradient Ventures invested in Flyreel, an AI product for property insurance underwriters. This followed an October 2018 investment in insurtech Applied Systems. Amazon has also begun to dip its toes in insurance waters: its Amazon Protect service has been active since 2016, and since 2018 the company has been investing in Indian insurtech Acko, according to reports.
On December 8, the Financial Stability Board (FSB) published a report suggesting that bigtech firms may run the risk of ruling rather than diversifying the financial services.
“Bigtech firms’ ability to leverage customer data raises the question of whether – and the degree to which – authorities could consider the potential to promote the mobility of data between the various actors that are involved in the provision of financial services,” the FSB said in the report.