KEY TAKEAWAY:
--The first wave focused heavily on upgrading customer experience by emphasizing digital channels, data analytics and user-friendly interfaces. But there remains ample room for further improving specialty lines, embedding insurance into transactions, closing protection gaps and streamlining workflows for agents and brokers.
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The insurance industry is a pillar of the global financial system, with over $10 trillion in premiums written annually. This vast market has been dominated by large, established players for decades. However, the emergence of insurtech startups over the past 10 years aimed to leverage technology to disrupt incumbents struggling to adapt.
Many predicted these startups would rapidly overhaul old-line carriers. But the first wave of insurtech taught the valuable lesson that innovation builds on traditional fundamentals rather than replacing them outright. While they did not revolutionize insurance, early insurtechs made the case for incorporating advanced technologies into the future. While there has certainly been disruption in insurance in the past decade, there are still many hard problems to solve in the industry, and incumbents have proven to be more resilient than many initially thought.
The first wave focused heavily on upgrading customer experience by emphasizing digital channels, data analytics and user-friendly interfaces. But there remains ample room for further improving specialty lines, embedding insurance into transactions, closing protection gaps and streamlining workflows for agents and brokers.
Key Lessons From the Evolution of Insurtech
1. Incremental Advancements: The first wave of insurtech didn’t revolutionize the industry but made vital strides in better customer service, signaling a gradual transformation.
2. Digitalization Imperative: Insurtech v1.0 effectively conveyed the inevitability of digitization to key stakeholders, paving the way for venture-backed companies. However, exit metrics of some ventures might seem underwhelming.
3. Fundamental Importance: Revolutionizing insurance requires more than technology; startups must understand and align with fundamental insurance basics. It’s a bottom-line industry where loss ratio and risk capacity play pivotal roles.
4. Valuation Challenges: Valuing early insurtechs was complex. Generous valuations based on growth metrics faced scrutiny as underperformance in public markets raised questions about the accuracy of top-line metrics like EV/GWP/revenue. Understanding market specifics is crucial for accurate valuation.
As the hype cooled, insurtech valuations faced more scrutiny. Investors shifted from rewarding growth potential to analyzing defensible moats and sustainable unit economics. Unlike traditional software companies, insurtechs face inherent loss volatility and intense competition, resulting in lower gross margins challenging software-style premium multiples. Future valuations will require assessments beyond top-line growth to accurately gauge quality.
See also: Insurtech Startups Are Doing It Again!
Emerging Opportunities in Embedded Insurance
Embedded insurance seamlessly integrates coverage into a user journey for a non-insurance product. This concept has existed for years but is accelerating with mobile adoption and application programming interfaces (APIs). Research predicts the total addressable market will rise from $63 billion currently to nearly $500 billion by 2032, representing a 23% CAGR.
Early successes have come in extended warranties, travel insurance and auto coverage. Apple’s warranty cross-selling generates an estimated $8 billion annually, demonstrating embedded insurance’s revenue potential. These simpler products allow straightforward bundling into existing purchases.
As more buying shifts online, embedded products can flourish by gaining consumer trust. Companies managing this integration have the chance to meet their customers’ coverage needs. While still early days, embedded insurance shows promise to expand insurance accessibility.
Some fundamental questions to answer are:
- Value Chain Dynamics: Key questions include identifying the primary beneficiary in the value chain — whether it’s the distributor, incumbent or embedded participant.
- Regulatory Scrutiny: Regulators will examine how regulators will approach new insurance offerings, especially those delivered online or through mobile devices.
- Monopolistic Trends: There must be an exploration of potential monopolistic bargaining power within distributors and whether the market can accommodate multiple embedded products.
Strategies for Closing the Global Protection Gap
Insurance coverage globally falls severely short of total insurable risk exposure, leaving a protection gap of $1.8 trillion, by some estimates. Shortfalls are most acute for catastrophe, mortality and healthcare perils.
Though not a complete solution, embedded insurance can help close gaps by meeting customers where they are. Travel insurance penetration expanding from 24% to 50% would generate over $70 billion more in annual premiums. Similar opportunities exist across insurance lines for creatively addressing unmet needs.
Modernizing Specialty Insurance
Specialty insurance delivers targeted coverage for unique exogenous risks facing individuals and businesses. It makes up over one-third of all commercial premiums. The market’s size and complexity have insulated it from disruption.
But specialty lines often contain antiquated products, inefficient underwriting and fragmented distribution. These challenges create openings for innovation. Integrating lessons from prior insurtech waves with specialty’s nuances offers a road map.
Opportunities exist to leverage data and alternative sources to develop more tailored specialty products. Automating underwriting can also substantially trim processing timelines and costs. Agents and brokers will maintain import roles but face pressure to adopt technologies improving customer experience.
Categories such as medical malpractice, long-term care, cyber and climate risk seem especially ripe for solutions boosting efficiency, expanding capacity and bridging information asymmetry.
See also: The Next Wave of Insurtech
Streamlining Workflows for Agents and Brokers
Agents and brokers remain indispensable distribution partners in commercial and specialty insurance. They aim to provide consultative services while growing customer bases and maximizing retention. Many agencies still rely on manual processes that constrain expansion and boost expenses. Several insurtechs target this problem by offering workflow automation for faster quoting, expanded risk appetite and increased placement precision.
Targeting individual pain points in isolation has limitations, however. True transformation requires integrated platforms spanning customer-facing and back-office functions. This complete solution raises the technological bar across the entire value chain. Insurtech's next wave will see carriers, agents and startups collaborating to embed specialized coverages within transactions while also streamlining antiquated business practices. Leveraging expanded datasets and process automation can unlock growth opportunities too costly to pursue through traditional methods.
Insurtech’s evolution has built on insurance fundamentals while intelligently incorporating technology. Succeeding will require pragmatism in solving problems all sector participants face in risk assessment, preference matching and delighting customers.
For more on this topic, here are two much more detailed looks at the history of insurtech and at the next wave: A timeline of the last 100+ years in Insurance in the U.S. (Part I) and The next wave of Insurtechs (Part II)
