09.16.20
21st Century Breakdown: It’s Time to Embrace 'Insurtech'
by: Rich Blake
For roughly the past decade, Silicon Valley entrepreneurs have set their sights on storming the gates of the heavily regulated, capital intensive, centuries-old insurance industry. Backed by venture capitalists, these start-ups have proliferated, their vision for disruption, bold. Frequently they’ve met with failure.
And although it’s taken a while, momentum has shifted, portending swift and possibly radical changes looming around the bend.
Against a backdrop of some sizable summertime upswings in digital assets tied to decentralized finance, there is increasing interest in fintech’s sister sector, "insurtech." Amorphous umbrella jargon though it may be, insurtech is indeed a thing. It covers an array of tech-driven insurance-disruption plays; this space is not to be ignored.
If broker-dealers needed reminding that the insurance industry is slow to embrace technology it just occurred this past spring: during the height of the pandemic lockdown phase advisors learned quickly that for a host of reasons – essentially, carriers and clearing houses hadn't squared away complexities – electronic signature solutions for annuities weren’t as seamlessly available as compared to mutual funds.
The fact that large insurance companies were able to take their time tackling even low-hanging digital endeavors is its own testament to the headwinds facing upstarts. The barriers to entry are that high.
But the acceleration of the digital era – the digitization of everything, across all sectors – has meant a new and more diverse menu of services as well as a massive operational streamlining that is re-shaping the industry. Ten years ago, insurtech was a pipe dream. That’s no longer the case.
"The modern concept of insurtech is the embrace of a strategy driven by collaboration and innovation rather than disruption," said Insurance Journal's Dan Epstein.
Slow Evolution in Stodgy Space
To recap, years-long whaling expeditions out of Nantucket circa the early 1800s led to seamen taking measures to sort out financial affairs for the families they left behind, leading to the dawn of the trust fund, followed by the industrial revolution prompting New England farmers to leave the countryside for jobs in cities, resulting in fears of death from machine accidents or any number of infectious diseases, spawning the creation of schemes involving third parties underwriting safety-net arrangements so that loved ones wouldn’t be left to starve; and then not much changed for more than a century until policies were combined with investment products to produce guaranteed income; now fast forward a few more decades to the past few years: deep-learning-trained artificially intelligent robots are able to autonomously handle tasks such as sorting myriad policy-type iterations so as to most appropriately fill/complement an individual’s coverage needs.
AI, machine learning (ML), data analytics, and a host of other new solutions are all being applied in the insurtech space. Like challenger banks a few years ago, insurtech firms are doing thoroughly modern things such as using new streams of data from internet-enabled devices to dynamically determine price premiums according to observed behavior, Fintech magazine said.
There are apps to harmonize and centralize policies, and for monitoring them, and even for creating bespoke micro polices, ad hoc and on demand (e.g. a tree removal team only works in the summer/fall and brings on seasonal workers so needs-based coverage can be pruned as needed). Apps can create customized group coverage. Software programs can crunch data and do actuarial estimations, saving time i.e. medical exams are being replaced by statistical proxies steeped in data science. Chat bots (“conversational e-commerce”) are now routinely how insurance companies interact with customers, Fintech magazine said. By 2025, the global chatbot market is expected to reach $1.25 billion.
According to Deloitte's Center for Financial Services, insurtech investments for the first half of 2019 were estimated to be $3 billion, although the total number of insurtech startups had declined.
M&A Driven
Some groundbreaking deals, combining traditional insurance technology vendors and new-era innovators, have taken place over the past few years, including Applied Systems' acquisition of Indio Technologies. This one paired Indio’s digitized commercial insurance application and renewal process with Applied’s agency management system, Epic, which serves thousands of agency and brokerage customers, Epstein noted.
Another example is the 2017 deal between Vertafore and RiskMatch. The latter is a business intelligence and analytics company serving insurance brokers and carriers. The deal allowed Vertafore, an insurance technology firm, to compete with Applied Systems for analytics and risk placement services by leveraging shared data and market insights.
In both examples, standalone technology solution companies are either being acquired or are partnering with industry leaders to apply those tech solutions to operational capabilities with existing reach into the insurance space in an effort to reduce complexity, create efficiencies and maximize the productivity of insurance professionals, Epstein said.
Insurtech Stalwarts
At the start of this year, Insurance Business magazine ranked the leading players in insurtech. At the top of the list was cloud-based payroll company Gusto, which uses its algorithms to tailor-write insurance. Second on the list was challenger health insurer Oscar. It uses data to build proactive models to optimize the patient-doctor relationship and provide suitable health plans.
Among some of the others were: Bright House, an insurtech start-up; Clover Health, a data-science driven, wellness-oriented healthcare insurance start-up; and Lemonade, a homeowners' policy underwriter that has hitched its star to AI.