By Sanjay Mathew, Senior Director, Financial Services Industry, Oracle
Insurance is now another industry that’s worried about a seismic shake-up by digital disrupters.
Annual investment in insurtech start-ups rocketed 500% over three years, with cumulative funding reaching $3.4 billion since 2010, reports PwC. As of October 2016, 91 deals raised a total of $1.5 billion in insurtech investment this year alone.
Not surprisingly, traditional insurers are fretting. Almost half are worried they could lose up to a fifth of their business to stand-alone insurtech companies in the next five years.
How did they let this happen?
PwC was pretty blunt in its assessment of how traditional insurance providers are disadvantaged by outdated infrastructure. Insurtech start-up companies are accessing and analyzing data in “new ways and in record time,” says PwC, “not hindered by legacy technology systems as their incumbent competitors are.”
Indeed, many insurance companies are handcuffing their ability to innovate by relying on inefficient systems. It’s a reasonable estimate that some businesses allocate more than 80% of their IT budgets just to keeping the lights blinking. And that’s mostly for back-end processes related to finance, procurement, and HR; all important, but not the stuff that generates competitive advantage.
“Insurance is an industry that has been lagging behind every other industry—it has been paralyzed,” said Mario Greco, former CEO of GeneraliGroup and current CEO of Zurich Insurance. “Either you understand it and you move towards the forefront of change…or this industry will disappear.”
While some traditional insurers remain “paralyzed,” insurtech companies are bringing to market highly sophisticated offerings built on the foundation of modern cloud and data management technology.
At the 2016 InsureTech Connect Conference, Insurance Journal reported that the attendees talked about “disrupting every link in the insurance value chain, digging deep to extract costs, improving the customer experience, maximizing transparency, simplifying all processes, lessening friction, empowering and delighting customers, minimizing moral hazard and fraud, employing big data, and even making the claims process pleasurable.”
Any traditional insurance company thinking they can achieve that with legacy systems is likely to be disappointed. And even those that think they can acquire their way to insurtech excellence will likely discover they don’t have the infrastructure to effectively integrate their old systems with the new.
The products and services that insurtech companies are bringing to market are generally dependent on the availability of robust and reliable database and cloud-enabled, connected systems.
For example, one start-up offers an innovative digital insurance manager that provides users with an easy-to-understand overview and analysis of existing insurance policies, tariffs and services in an app. Another company is rolling out a new service in the U.S. that offers price comparison shopping—one that might make agents obsolete.
Telematics technology will continue to create new opportunities for commercial and personal auto insurers. For example, when various sources of data are accessed, insurers and their clients can know more than just how a vehicle was driven at a particular time. They can also get insight into weather conditions and geography, factor in frequency of driving, understand patterns of distance between vehicles, and more.
With all of this information, carriers can do more than calculate risk to offer an appropriate rate. The data can be used to identify bad driving behaviors, encourage appropriate training, and drive losses out of the system.
Meanwhile in the UK, a start-up is trying to drive down the cost of car insurance by offering coverage for a period of time as short as one hour for infrequent drivers.
IoT innovations are already having a significant impact on the insurance industry, helping companies to rate and mitigate risk, and determine rates.
For example, one digital platform offers proactive management for all electronic devices within a home, including the heating control system. Wearable technology is providing insurers with new sources of data to better underwrite risk and help clients make healthy lifestyle choices.
The agricultural insurance market is looking at how new technology can help manage weather-related risk. A platform offered by one company aggregates weather data from decades of climate history, current readings from satellites, sensors gauges, and other global weather data sources, to better understand the nature of weather risks. With this information, insurance providers can better understand the risks for their agricultural clients, offering products and services tailored to their particular location.
Traditional insurers do report that they are taking steps to address the competition and take advantage of any insurtech opportunities they identify. According to PwC, more than two-thirds reported taking action to address insurtech challenges and opportunities.
For many of them, the first step was taking a close look at their current technology infrastructure. For example, the insurance industry is trailing many other industries in using digital applications. Only 4 to 5 percent of insurance underwriting is done digitally. The rest is managed using traditional channels—the kind many industries stopped using a decade ago.
According to a recent KMPG report, insurance leaders recognize that legacy IT systems are making them less agile. Some point to flat IT budgets as the reason for not having the technology needed to support new business models.
Other companies are realizing that smart investment in new systems can help to transform their businesses in ways that won’t break the budget in the near-term, and will free up cash for innovation down the road.
For insurance companies to compete and grow effectively, they must be able to embrace the wave of innovations that are coming from creative insuretech startups—who are unencumbered by legacy thinking and age-old systems. A recent report from CB Insights depicted a landscape of insurtech digital offerings from more than 200 firms, spanning life & annuity, property & casualty, health insurance, and reinsurance. Almost any service you can imagine provided by an insurance firm is now delivered via customer friendly, cloud-based mobile applications that allow users to procure services on the fly—without manual, high friction processes. Many of these insurtech firms seek collaboration with insurance companies to bring their solutions to market faster.
We witnessed the banking landscape being similarly transformed by a flood of “banking-as-a-service” offerings from fintechs that collaborated with banks—bringing to market innovative offerings using the bank’s infrastructure and customer base. Insurers can also digitize and expose their legacy services to insurtech companies to create rapid innovative offerings.
In order to do this, insurance companies must digitize their processes, and API-enable their legacy, on-premises systems for faster integration with insurtech firms. A cloud API catalog of back-end services enables insurance companies to bring forward next-generative digital offerings that appeal to the new, evolving customer base of millennials and digital natives.
Just how much share of market insurtech companies will syphon away from traditional providers is debatable. Only a few insurtech companies, such as Lemonade, are “full stack” start-ups—businesses that not only sell policies but also underwrite the risk.
Indeed, many of the new kids on the block are companies that rely on traditional insurers to bear risk. Or, they are creating powerful tools that legacy insurers can use to grow their businesses—assuming they have the digital capabilities to take advantage of them.
More than anything, insurtech companies are creating fresh ideas that address the swiftly changing needs of commercial and personal insurance consumers.