InsurTech: Driving digitalisation and transformation within the insurance sector
InsurTech has become a hot topic for the insurance industry. Three or four years ago, firms were swatting away InsurTechs, dismissing them as a disruptive nuisance. However, over the last few years insurers have started to recognise the benefits InsurTech can bring. News is being released daily reporting the acquisition of InsurTechs by established insurers eager to enhance aspects of the insurance value chain.
InsurTechs are taking advantage of new technologies to provide solutions to more digitally savvy customers. Instead of being regarded as the enemy and a competitive threat to insurers, they are now viewed as a potentially valuable partner. Customers now expect instant digital transactions and the speed at which insurers can adopt to this market demand will determine their market share in the next generation insurance industry.
Online and mobile channels alongside digital technologies can offer quick wins for retail insurance, as more youthful tech savvy users take over from a traditional customer base. They tend to be less loyal to traditional suppliers and treat financial products and services, including insurance policies, as interchangeable. They value convenience and prefer to carry out transactions remotely if possible, without the need to interact formally with an institution.
Although the focus of InsurTechs thus far has been directed mainly at private customers, they have also started to focus attention on the commercial sector. As with personal lines, InsurTechs are bringing innovation to corporate products, often targeting small and medium-sized insurers. However, commercial line InsurTechs has also focussed upon loss prevention and efficiency technology such as drone inspections for underwriting and claims.
Technologies such as telematics and the Internet of Things have enabled new product development in motor, home and health insurance that encourage customer engagement and retention. InsurTechs have attracted consumers with discounting based on the intersection of smart devices and risk-minimizing behaviours such as meters for car mileage, smart watches monitoring activity and in-home flood and fire detectors that autonomously signal emergency services.
InsurTechs are also driving distribution and pricing. There is a large focus on enabling distribution by making products available to customers at their convenience and simplifying the purchasing process. These activities build on the successes of online comparison sites such as comparethemarket.com.
InsurTechs are able to go to market in fundamentally different ways to traditional insurers. One advantage InsurTechs have is their freedom from legacy products, processes, and old, antiquated IT systems. They are able to design digital processes, products, and systems from greenfield sites, harnessing the latest technologies. They target specific market segments, rather than seek to provide end-to-end solutions. Simpler IT and simpler operations result in less investment and quicker returns.
InsurTechs build their business models by addressing pain point’s customers experience in their relationships with their current insurance providers. They heighten customer interest and seek to improve interaction. Founders are generally tech innovators. InsurTech aren’t hampered by legacy operations and high investment requirements and are able to take risks to see what works and what doesn’t. They operate with a lean digital start-up culture, in which companies start, fail, and often reappear in modified form. They tend to adopt a flat organisational structure, attracting employees who strongly identify with the company and its mission. With an agile approach, InsurTechs can more easily make adjustments and react to the latest developments.
The news isn’t all bad for traditional insurers though. A large percentage of InsurTechs focus on providing services to insurers, with only a small proportion aiming to replace them. Traditional firms are beginning pay attention to InsurTechs, looking at how they operate and what technologies they are using. They then use this as a blue print to develop their own innovations and digital initiatives.
Incumbents can adopt different approaches in respect of InsurTech. They can internally develop the technology-enabled business model they are inspired by or acquire the company directly. A common approach seems to be a hybrid option including developing a digital lab, collaborating with an InsurTech or partnering with a venture capital fund. There is no universal solution, and every strategy depends on the specific context, company ambition and pain point being addressed.
The risks InsurTechs present to traditional business models are real. Traditional insurers must adapt or risk losing market share. They must address the much higher level of customer engagement that the InsurTechs are attaining. Adaptation can lead to benefits in many operational areas too, leading to cost reduction, better capital allocation and increased revenue generation.
Insurers need to analyse the InsurTech industry, compare their in-house technology capabilities and consider options such as digitising operations or acquiring or partnering with InsurTechs. The leading digitisers among insurers will not only be more profitable than their less-digital peers but also grow faster.