2015 – the year that insurers woke up to high tech disruption

Nick Martin

Year-end earnings calls were full of a new piece of jargon over the last few weeks. "InsurTech" describes a rapidly evolving group of technology startups that are trying (and succeeding) to disrupt various parts of the insurance industry. Incumbent insurers and reinsurers are increasingly interested in these companies as they look for new ways to grow.

Nick Martin is the Manager of the Polar Capital Global Insurance Fund which currently invests in excess of USD 500m in insurance equities.

earlystageinsurance161As the fourth quarter earnings season draws to a close the good results of many non-life insurers companies have helped them outperform the difficult equity market conditions we have seen in 2016. Industry bellwethers Chubb (previously ACE) and Travelers both comfortably exceeded analyst expectations. On his first conference call as the new CEO of Travelers, Alan Schnitzer commented, “Broadly speaking, the market dynamics in the commercial insurance marketplace continue to be remarkably stable.” 

Although US commercial rate rates are moderating from the levels seen in recent years most companies expect to sustain underwriting margins at around the current high levels for 2016. Importantly the amount of business that companies are renewing from existing customers continues to be at historically high levels suggesting continued good discipline in the market. This positive environment could be further helped by a number of the larger companies pulling back in parts of the market. In late January AIG announced as part of its Strategy Update an initiative to improve profitability in its commercial book which included exiting or remediating its underperforming portfolios. This follows Zurich’s review of its General Insurance operations last year that cited North America as a region where it is working to improve underwriting results. Dowling & Partners estimate that AIG and Zurich combined account for c.10% of the US commercial market (the largest and fifth largest insurers respectively).


A growing theme discussed by managements in their earnings calls and presentations is how they are leveraging technology and digital innovations to improve their competitive position and provide a better offering to their customers. The scope for technology to impact insurance is significant. According to CB Insights investing into insurance related technology companies was $2.65bn in 2015, 3.5x what was raised the year before. Whilst still insignificant versus the sums committed to financial technology and payments companies (“fintech”) interest in insurance technology early stage companies ("InsurTech" or "InsTech") is beginning to accelerate. Whilst the initial focus of many tech start-ups has been focused on using telematics to better price auto risks or using more personalised marketing techniques to enhance customer engagement we are set for a much broader range of innovation.

In personal lines insurance, driverless cars are arguably already here and are likely to meaningfully shrink the overall auto insurance premium pot whilst shifting liability from individual consumers to commercial manufacturers. The use of sensors in a "Connected Home" should enhance loss prevention and again lead to falling premiums, this time for home insurance. Industry leaders are well placed to enhance their competitive position versus slower moving incumbents but headwinds to growth are beginning to appear on the horizon.

Technology provides a great opportunity for commercial insurers to further improve their understanding of risk and to better leverage and learn from their vast data sets. Over time insurance specialists should be able to widen their moats versus competitors and increase barriers to entry. Technologies like drones will increasingly be used. Drone applications include assessing roof damage following a major hurricane and the monitoring of crops to improve harvest yields.

Whilst the insurance industry should never be complacent it is very unlikely that its core business model of transferring risk gets compromised in the way that the likes of Amazon, Google and Uber have completely changed some other industries. As long as risk remains in the world the insurance industry will be there to price it, take that risk onto their balance sheets and be there to pay claims to their clients when required. This stability of business model and the non-discretionary nature of the insurance purchase itself are just some of the reasons that make the industry an attractive long term proposition for investors. Warren Buffett has just published his annual letter to the shareholders of Berkshire Hathaway. Readers were reminded again how big a contribution insurance has made to the company’s success for what is now more than five decades.

More information on the Global Insurance Fund and other Polar Capital Funds can be found at www.polarcapital.co.uk

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Posted: Monday, March 14th, 2016