Insurtech entered common vernacular in the market towards the end of 2015, but it’s been slow to take off compared to disruption in other areas. A report last year by the European Insurance and Occupational Authority (EIOPA) said that digitisation had not yet reached the point of truly disrupting the insurance sector.
For some, the insurance industry faces a unique myriad of challenges, that would naturally hold back new players or incumbents – traditionally seen as slow movers - attempting to embrace new technologies.
“The insurance industry has always been perceived to be a laggard,” says Jason Sahota, Charles Taylor InsureTech CEO, “and I use the word perceived because that isn't always the case. So, have they used technology yes, was it quite disparate yes, was it difficult to change in a regulatory environment, yes.”
“There are challenges in the insurance industry which meant it was difficult to bring technology in, so that first generation has been an education of technology coming in and how can it be applied. Whether that is through artificial intelligence, machine learning, robotics, or blockchain,” says Sahota.
Nicholas Berry, a corporate and regulatory insurance lawyer with Norton Rose Fulbright says the insurance market is 12-18 months behind the wider financial services space in terms of technology partners becoming a viable option for institutional players.
“One possible explanation for that is insurance is actually quite a difficult market to get into because of regulatory and capital hurdles,” he says. “And so, initially, some of the start-ups were reliant on partnering with insurers. That is still true today but these days most established insurers conduct incubator, or VC, or kind of start-ups programs to facilitate and encourage insurtechs to work with them.”
But the industry needs to move quickly, and it’s aware of it: according to a 2017 PwC survey of insurance incumbents, 56% of respondents believe between 1 and 20% of their revenue could be at risk from a new breed of innovative fintech players eying the insurance space.
The rise of insurtechs
Norton Rose Fulbright’s Berry says the unique complexities in the insurance market have held up insurtech players.
“For start-ups, a lot of them are not from insurance backgrounds, so they're not familiar with the regulatory environment specific to insurance,” he says. “This probably makes it quite frustrating for them in terms of the regulatory overload, particularly in the retail space.
“It also makes it harder to bring products to market, because you either have to be regulated or partnered with someone who is. It also probably slows down to a degree, some of the innovation, because of the hurdles you need to get over to get your products to comply with insurance regulations.”
For Oliwia Berdak, principal analyst at Forrester, however, many firms in the space are technology companies adding insurance as a core capability. “In insurtech a lot of the companies are really more tech than insurance, whereas in fintech you have a little more fin than the tech,” she says.
“In insurance, a lot of companies either started as a direct consumer proposition and then changed their model to also provide their services and their technologies to insurance companies, or started as technology vendors in the first place,” says Berdak.
Initially, insurtech startups were focused on the product and distribution angle, but they are now beginning to understand that opportunities lie in the insurance back end of the value chain around underwriting and claims admin, says Berry.
However, there are a lot of start-up insurtech companies out there that haven’t moved past initial planning and proposal stages, says Steve Buckell, director at Buckhill, IT and software engineers, who provide cloud insurance software, C2MS.
“They’ve got a prototype, but they don't actually have a product. You get insurance companies jumping on the bandwagon saying, ‘oh we must have that,’ so they go and throw a few million at it, and it never actually achieves anything,” says Buckell.
Are the regulators keeping up?
Across financial services, regulators often act retrospectively, and in the insurance sector that is no different. However, the UK’s Financial Conduct Authority (FCA) – the body responsible for overseeing the country’s insurance market – has consistently lagged with regards to insurtech, according to both Berry and Buckell. The regulator’s dalliance doesn’t help the market.
“If you’re writing rules and compliance, and telling people how to do things, you’ve got to write those rules in the first place,” says Buckell.
“The regulator might bring in a rule this year, but it’s going to take a year to do anything if you want to put anything into a software system, you’re going to lag behind a year aren’t you? And of course, within that time technology has moved forward as well.”
Berry suggested that the regulator’s sandbox initiatives show it is attempting to catch up with the insurtech market, but it’s an uphill task given the speed of change. “There's so much innovation and so much that doesn't quite fit within regulatory frameworks as they exist now, but it's almost impossible for the regulators to catch up,” he says.
“If you ask the FCA honestly why they introduced the sandbox I think one of the reasons would be because it gives them intelligence from what is going on at the cutting edge in some of these insurtech and fintech businesses. It is as much about information gathering for them as enhancing competition as the wider objective,” says Berry.
“I think the main challenge for the FCA and other regulators is first, they must keep up and make sure the existing framework continues to be relevant in the context of today's technologies and activities.”
“There needs to be a degree of international cooperation and I think the regulators do cooperate globally, but that is quite a challenge.”
The FCA did not respond to requests for comment for this article.
Room for collaboration
The PwC report states that while the majority of incumbents consider their company as good at idea generation, just 17% said they were confident in creating products with innovators.
The report goes on to state that incumbent insurers expect to see a 13% return on investment on insurtech related projects – a figure substantially lower than the 20% expected by the overall financial services industry in working on technology projects.
There have been changes in the dynamics of the market – such as online aggregators changing customer engagement and putting pressure on firms to evolve. But the industry is made up of institutions, with workforces in many cases that have been employed for nearly three decades, says Buckell. The receptiveness to adopt new technology systems just isn’t there, he says.
“There is disruption within the marketplace through the aggregators but at the end of the day, even that technology just filters through. It all comes back to the insurance company who are still using a 20-year-old legacy system,” says Buckell.
“When you are in a comfortable position where you are able to make 40, 50, 100 million a year doing what you do, and you've used the same technology system for the last 20 years or 25 years, it costs you a couple of million to run every year, but it’s making you all of that money, then why would you change it?
“The big insurers are there to provide funds or cover for brokers and scheme owners, so they're quite happy to let the scheme owners and the brokers innovate and get all the customers in, and then keep giving them the business,” says Buckell.
Despite the fact there's a lot of funding around, it's quite difficult to get early-stage funding, and because of regulatory hurdles, this has resulted in incumbent insurers remaining in control of insurtech innovation, according to Berry.
“Incumbent insurers are still - to a degree - in control of product design because they need to provide capacity for product. They have an element of control over which products actually find a distribution channel or a way to market,” says Berry.
The next cycle
A growing interest in the insurance of crypto assets and businesses providing crypto related services such as exchanges has caught the eye of a number of firms in recent times.
“A year ago it's something that insurers didn't take too seriously. Over the last six months, there's been a lot more talk in the wider insurance space, because there's a lot of demand from crypto exchanges and other crypto services providers for insurance,” says Berry. ”That's driven a discussion in the market involving established insurers and the larger brokers, and also there are some startups looking to take advantage of the fact that incumbent insurers seem a bit more reluctant to cover those businesses.”
And it looks like the players have been changing faces recently. Figures from Willis Towers Watson and Mergermarket state that deal value for global insurance M&A was up €37bn in the first six months of 2018.
“I think what we will see will be a greater rate of growth in the second cycle of insurtech than we saw in the second cycle of fintech. Part of that is we are seeing and there is a backdrop here which is there is a lot of M&A activity happening within the insurance sector at the moment,” says Sahota.
“It goes back to those key drivers, client experience and retention market share, as well as operational effectiveness. Those drivers are going to drive that adoption. I almost think of it as an exponential curve, that first generation cycle is getting that momentum running, but once you get that momentum going, it keeps increasing, and then we'll see an inflection point.”
However, for Buckell, an opportunity lies in compliance, which has little in the means of technology development.
“With the insurance companies that we deal with, MGAs, scheme owners, the financial services brokers that we know, compliance is a major problem and they have specialist units set up in order to be able to ensure that they are compliant. I don't see much technology around that at the moment,” says Buckell.