Should the insurance industry fear the rise of insurtech startups?
October 18, 2018
There are dozens of shiny new insurtech start-ups snapping at the heels of incumbent insurers right now. While not representing an immediate threat to revenue, PWC are reporting that at least 86% of insurers think their revenues will be at risk from future technological disruption.
And it’s easy to see why.
In many cases, the solutions offered by these pioneers are focused on exploiting the perceived inflexibility of existing insurers and their traditional products.
The Rise of New Business Models
For consumers, the benefits of dealing with these new companies are obvious. Around the world, the ‘on-demand’ generation are finally getting insurance deals that are tailored to them and their lifestyles. Some of the start-ups gaining traction in these areas include ‘pay-as-you-go’ specialists such as Cuvva, as well as ‘peer- to-peer’ insurers like Lemonade and BoughtByMany.
At the same time, parametric micro-insurers working in developing countries are opening up whole new markets and pioneering different models of business insurance.
These new challengers are finding new ways of working. They are taking new approaches to underwriting and forging new kinds of customer relationships, often through nascent digital channels.
Insurtech Could Change Everything
At the same time, disruptive IoT capabilities is a growing threat to existing insurance companies, notably in the automotive sector.
Stefan Heck, CEO of Autonomous Vehicle tech company Nauto predicts that on-board technology capable of controlling vehicles will result in a 70% reduction of insurance ‘loss events’ in the next 10 years.
But while the benefits of safer driving are obvious, an unintended consequence of the telematics revolution could be the ultimate destruction of the motor insurance business model.
The rise of smart devices is likely to have a similar impact in the home. Technology capable of monitoring everything from home security to the contents of our lavatory pans, could erode the element of unpredictability that has till now been fundamental to insurance as a proposition.
Incumbent insurers in the future they may have to rethink their entire reason for being.
As Andrew Rose, CEO of US insurance comparison website Compare.com, puts it:“Insurers of the future will play more of a risk avoidance role and less of a risk mitigation one.”
Lessons Learnt From Past Disruption
The good news is that incumbent insurers, having learnt lessons from previous eras of technological disruption, are now working more collaboratively with upstart innovators and embracing their ideas. They are not only acquiring companies who are building disruptive solutions but are committed to hiring the right people and developing this kind of technology themselves.
Many are convinced the future for insurance will not be a race to the bottom in terms of price, but a race to the top in terms of flexibility and customer experience.
Aviva’s Garage; A Race to the Top for Customer Experience
Aviva’s Garage is an innovation hub based near East London’s famous Silicon Roundabout. The Garage is tasked with producing business solutions that solve customer pain points through technology, maximizing customer opportunities to access and control their product in just the way they want.
Developers working there are often drawn from gaming backgrounds, bringing a new perspective to problem-solving and UX design which is clearly paying dividends.
The Garage has already created its online “Ask Me Never” service, that gives customers automated and pre-approved quotes without them having to answer the kind of seemingly impossible questions typical of traditional insurers. It has also released a dashcam offering which can be used by customers to push through claims in the event of an accident.
The Threat of Insurtech: Adopt, adapt, survive
Incumbent insurers are increasingly aware of and responding to the insurtech threat. They know the nature of these challenges only too well –from telematics to peer-to-peer technology, gamification to Blockchain. In many cases, they are gaining a foothold in the right areas, through acquisition, collaboration or in-house innovation.
The Blockchain Blindspot
Even so, Blockchain is one hugely important area where investment is apparently still required. PWC reported last year that even though incumbent insurers realized they needed to spend money developing this technology, only 8% were actually doing so.
In cases like Blockchain, the battle for control of the technology is likely to decide who will win out in the industry in the long run. Insurers like Aviva, working on several projects with the start-up Luther, may be betting that the technology will enhance the profitability of their existing model by facilitating smart contracts, delivering cost savings and eliminating fraud.
But upstart innovators like Dynamis believe that their approach could eventually cut the major insurers out of the loop altogether, through Blockchain-powered peer-to-peer offerings, plugged into social media.
Be Not Afraid
So does the insurance industry need to fear the rise of insurtech start-ups?
For the moment, incumbent insurers have the advantage in terms of their ownership of customer data and the size and reach of their operations.
And many are taking the threat of the innovators very seriously. Incumbents are increasingly evolving their thinking around customer experience. They are becoming more agile, tech-savvy and focused on personalization, feeding the ‘on-demand’ economy.
The work many are doing in AI and data analytics may also bring huge cost benefits to their businesses. If they can integrate properly with IoT technology to understand their customers more and improve their predictive capabilities, they could even protect themselves from the threat of hyperscale competitors like Apple.
Fortune favours the brave
But some technological developments represent a more existential threat. Ownership of disruptive technology like Blockchain might be essential to the survival of the traditional insurers. In some cases, this will require a wholesale change of mindset and business model, and much more investment than is currently happening.
In the end, fortune will favour the brave. Those who can move quickly and decisively, absorbing new technology and adapting to changing customer needs, are likely to be the winners.
Written by Viktor Ivanov
Viktor Ivanov is Head of AI Development Department at Fadata, where he leads a research and development team working at the intersection of artificial intelligence and insurance. He has more than 10 years of industry and academic experience in information technology, banking and insurance. Viktor obtained his MSc from Delft University of Technology.