Insurtech: should you believe the hype?

Around the year 2015, the term insurtech was coined to refer to companies using technology to improve insurance. This was far from a new concept: tech firms for many years had sought to use digital innovation to improve the industry model through efficiencies, innovation and better analytics.

Fast-forward half a decade and this now established sector continues to generate an impressive amount of fanfare. They cover a vast range of innovations, from digital platforms that merge big data, automation and machine learning to reduce human labour, to satellite imagery that marries property data with artificial intelligence (AI) and cloud computing to enhance pricing, and automated chatbots set up to deal with customer queries.

The investment is coming thick and fast. In the first half of 2019, insurtech firms raised a record $3 billion in new funding, according to figures published in September 2019 by Hampleton Partners, which advises on technology mergers and acquisitions. Its data showed that developments such as usage-based insurance one example is known as pay-as-you-drive were boosting demand in the sector.

Growth but want limits?
The insurtech sector is now experiencing exponential growth. Hampleton’s figures also show that fundraises increased 27 percent in 2018, with 257 deals completed compared with 202 the previous year.

Figures released by Willis Towers Watson in July 2019 painted an equally buoyant picture, showing that insurtech investment had climbed to $1.4 billion in the year’s second quarter. It said this was the fourth consecutive quarter where investments had exceeded $1.2 billion, adding that global investment in this area had remained at high levels. The value of investments in property/casualty-focused firms rose by 283 percent compared to the second quarter of 2018, with life and health rising by 259 percent.

The rise in investment speaks for itself, but how important is insurtech to the future of re/insurance? Hannover Re executive board member Michael Pickel is clear about the potential.
“Insurtech is an unprecedented source of innovation for insurers and reinsurers. Therefore it should be key for every company in our industry to stay as close to developments in that space as possible,” he says.

“The success of a number of insurtechs also marks the first time I can think of that a larger number of new players are entering the insurance market. That opens up a lot of opportunities for us as a reinsurer.”

Pickel adds that he has seen a shift in the sector, from lots of companies with consumer offerings to many more with a business-to-business model, operating as service providers for existing insurers. A good example of this concerns the handling of data.
“Insurtechs offer solutions to transform and analyse data in new ways and make it the basis for higher efficiency and new products,” he says.

Others in the sector are equally effusive about its potential. Luca Marighetti, group head tech transformation at Swiss Re, says current technological advances change everything.

“On the one hand, the automation of knowledge work will allow for significant productivity improvements,” Marighetti tells us. “On the other, technology is affecting the size and nature of risk pools.”

The most obvious advantage for the reinsurer is the application at scale of advanced data analytics in everything it does. Marighetti explains that “this is a journey we started three to four years ago, and which will take a decade to complete assuming it will ever end”.

Behind the hype
It’s a complicated picture, clouded further by insurtech projects or integration initiatives that don’t add value.
Willis Re’s global head of insurtech, Andrew Johnston, says: “Where we see insurtech adding almost zero value beyond simply propagating the hype is around the adoption of technology for technology’s sake, with no real concern for the business and service proposition it ought to support.

“What is perplexing is the number of incumbent businesses who have made bad technology bets (both investment and adoption) trying to pursue technology which, even hypothetically, was only going to add limited value.

“Decision makers in re/insurance entities know our industry better than anyone else, and yet one can’t help but think that the insurtech hype, with its buzzwords and unrealistic promises of expense ratio nirvana, temporarily blinkered and confused many.”

The issue of who drives the direction of insurtechs is also raised by Ryan Jones, head of innovations at BMS Group. He believes insurtech is still in the early stages of development in commercial lines of insurance.

“Platforms that enable more transparency and speed across the transaction are more common in the market today,” Jones tells us. “The question would be whether commercial insurance buyers take more control over these platforms.

“We think experts and experience are still the key drivers to big and complex risk transfer exercises. They will also be amplified by analytics and the easier access to diverse capital. Personnel and skillsets are expected to evolve to include more technologists as well.”

A life of its own
If so much of the potential is still to be realised, the question remains has insurtech been overhyped?
“For sure, the number of new ideas has decreased,” says Pickel. “We think it is an expected development that there is a phase of proving the demand for new solutions. Nevertheless, we still see the value of these innovations for our industry.”

Johnston agrees. “Insurtech is definitely overhyped and hugely overvalued, and I think it has taken on a bit of a life of its own.
“If you look at the valuations some of these companies have relative to the business they’re writing, or the potential impact they can have on the industry from a financial perspective, there is not a lot of rationale that you can derive.”

He adds that the broader range of insurance software, not to be confused with insurtech is of enormous value, but insurtech has become overhyped by people conflating the two terms.

Jones agrees that insurtech has been hyped, but he adds “it has also been broadly undervalued”.

“In an industry that is facing certain types of disruption, it can be difficult to remain objective,” he says. “It can be even more challenging to accurately assess and consistently exploit the commercial opportunities when new technology is introduced.”

In many cases, he says, it is still as much about who you know as what you’ve built. “We’ve seen good ideas fall hard to the cultural inertia in our well-established industry. And quite often, the commercial expectations of insurtech don’t align well with the current insurance model.”

Returning to the definition of insurtech, Swiss Re’s Marighetti says: “If we mean insurance startups attacking incumbents (such as Lemonade), then the topic is certainly overhyped.”

He says insurance is a very complex business, and barriers for new entrants are extraordinarily high.

But, he adds: “If by insurtech we mean the application of new technologies in insurance-relevant spaces, I believe we are still at the beginning of a long journey, and that most insurance companies still have to grasp the full consequences.

“What keeps me awake at night is not the occasional ‘overhyped’ insurtech attacker, but rather how competing incumbents might be able to apply technology at scale ahead of us. Given the long lead-times of such applications, by the time we see the impact it will take years to catch up.”

There is one dissenting voice in the crowd. It belongs to Justin Davies, head of EMEA at Xceedance. “Insurtech has not been overhyped. It is absolutely critical that the re/insurance industry accepts that it must evolve or it will wither on the branch,” he says.

There are some re/insurers who recognise this, he says. Others are paying lip service but will not commit to the necessary evolution, and then there are those who are letting it pass them by. But even he admits “it is true that some individual insurtech companies have been overhyped”.

Evolution versus revolution
The debate is very much part of the evolution, says Neil McGeachie, managing director of Barbican Group Operations Services. To make his point, McGeachie points to Gartner’s famous hype cycle, which charts the ups and downs common to new technologies.

After the initial phase, known as the ‘innovation trigger’, the cycle’s four distinct phases begin with ‘peak of inflated expectations’ the stage McGeachie believes we’re currently at. The next phase is the ‘trough of disillusionment’, where those involved acknowledge that expectations have exceeded what is possible, and then comes the ‘slope of enlightenment’. Finally we get to the ‘the plateau of productivity’, where the benefits of the new technology start to become apparent.

“I believe that initiatives such as the Lloyd’s Lab [the insurance giant’s dedicated insurtech hub] will be central to our efforts to access and understand the true potential that insurtech offers,” McGeachie says.

“Only by bringing together industry practitioners and insurtech innovators into an environment that fosters new ideas will we really get to grips with what is possible, and what is inflated expectation.”

A collective environment promotes greater industry-level consensus, he adds.
“We cannot continue to chip away at particular aspects of the insurance process in isolation. We must work together to understand how we can bring insurtech to market in a much more beneficial and productive way, that will improve our industry for both practitioner and more importantly the end customer.”

Putting new technology to use will always generate contrary opinions and initial resistance, says Mark Appleton, director of global and major risks at HDI Global. He says it’s clear that the insurance industry is no different from other financial industries, albeit sometimes a slower adopter of new technology.

“With this in mind, it seems clear that there will be diverse and powerful influences on the future processes in the industry, which will have some effect on the way that business is conducted,” Appleton tells us.

He predicts the change will have “a marked effect on intermediation and risk pooling, leading to more efficient capital flows which may serve to address the increasing volatility in the insurance results globally”.

Willis Re’s Johnston concludes: “The increasing reliance on technology in the re/insurance industry is set to continue. Whether part of that technology, or at least the culture of adopting technology at pace, is still referred to as insurtech in years to come is unclear. In any case, technology is going to become a strategic vertical for every single insurance company in the world at some point if it’s not already.”

What is insurtech?
Willis Re’s global head of insurtech Andrew Johnston describes insurtechs as businesses that have been created with the express interest of deriving savings and creating efficiencies in known insurance models.

In the common parlance, insurtech and insurance technology have become synonymous. However, as Johnston adds, “there are some subtle and some not so subtle differences”.

Insurance software differs from ‘insurtech’ in that it is much broader than the recent cadre of businesses. Software covers processing, business process enhancement and specific core functional parts of the insurance value chain.
“We think that the value of technology, and the role of technology in the future of our industry is enormous, but we are imploring our clients not to make the mistake of lumping the two together,” Johnston says.

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