InsurTech – show me the money

12 months ago, a surge of interest in 'InsurTech' prompted a serious case of the FoMOs in many (re)insurance CEOs. This year, that Fear of Missing Out has been replaced by a fear of becoming distracted by unproven, niche technologies that are unlikely to move the dial. Oxbow Partners has helped many of its clients remain at the pragmatic end of the technological changes in the industry. In this article (first published in their Impact 25 report) they discuss the challenges and opportunities for carriers looking for material benefits from new technology.

Another astute observer of the impact of new technology is Adrian Jones, the Head of Strategy and Development at SCOR Global P&C. In this analysis with Matteo Carbone he looks at the hard numbers being filed by some of the most hyped insurtechs. They reveal that companies like Lemonade still have a long way to go before they can be sure about their business models.

InsurTech - hype to impact

The key to understanding InsurTech is to remember that the term covers two fundamentally different types of business.

Distribution InsurTechs: These companies are trying to acquire customers through distribution and proposition innovation. They need (re)insurers as capacity providers.

Supplier InsurTechs: These companies are developing technology which could help insurers, reinsurers or brokers do business more effectively. They operate in three main areas, shown in our illustration below.  They require insurers, reinsurers and brokers as customers.

The following picture shows the InsurTech Impact 25 along the value chain.

Figure 1: The InsurTech Impact 25 across the value chain

When InsurTech emerged as a category, most InsurTechs were focusing on distribution. However, consumers and SMEs (the groups Distribution InsurTechs target) have been harder to acquire than companies perhaps expected.  As a result, the mix of InsurTechs is now shifting quickly to Supplier InsurTechs.

2018: A transition year from hype to impact

We believe that 2018 is a transition year for InsurTech.

Over the last two years, executives have been excited by ideas and opportunities. They have, in many cases, been satisfied with innovation activity and not demanded to see results.  They understood that innovative ideas take time to mature, and that you can’t have results without activity.

We anticipate that things will change in 2018 in two ways:

Shift to execution and results

First, we think that the emphasis will shift from ideas and opportunities to execution and results. Boards have heard much about the power of InsurTech to ‘disrupt’ the industry since 2015, but seen little evidence that this is happening.  We expect the management horizon to shift from the long-term to 12-24 month P&L impact.

This means that corporates will focus on back office functions: expect engagement with data & analytics innovators, process automators and digital administration and claims platforms.

Some insurers will continue to focus on distribution and proposition innovation but we expect this to be in the form of capacity provision to InsurTechs rather than in-house innovation.  An illustration of Allianz X, which announced in November 2017 that it was repositioning from ‘company builder’ to ‘strategic digital investment firm’.

Greater focus on strategic themes

Second, we think that innovation activity will focus on strategic themes. Since 2015, some companies have built sprawling innovation teams, for example corporate venture funds, ‘startup studios’ and in-house innovation teams.  These units have generally worked independently and focused on those opportunities they perceived to have most value.  These opportunities were often inconsequential to the multinational groups within with they operated.

In 2018, we think there will be greater top-down management of innovation to align it to group objectives. Allianz X again serves as a good example: its investment activities will focus on five ‘ecosystems’.  Similarly, AXA recently announced that it is bringing several of its innovation units (e.g. AXA Strategic Ventures, the venture capital business, and Kamet, the ‘startup studio’) into a single innovation reporting line.  In this way, these groups hope to build differentiated capability in areas that are material to the group.

Clustering – and the need for careful diligence

An interesting feature of InsurTech at the moment is the clustering around certain themes. For example, Carpe Data, Cytora and Digital Fineprint all provide services around the provision and analysis of data; 360Globalnet, Cognotekt and RightIndem support the delivery of digital claims experiences.

Clustering is a natural progression in the lifecycle of InsurTech: it is natural that companies should cluster around ideas that are gaining traction when the industry is moving from hype to impact. For insurance executives, it means that careful diligence of each InsurTech is required to understand identify the Fords and avoid the Tinchers.

 

Increased participation by incumbents

The comments above presuppose that companies have been involved in InsurTech and innovation at all. It is important to note that activity has been skewed to a number of large insurers and reinsurers so far.  The chart below shows which insurers have been most active. It is important to note that this chart is not comprehensive because it covers only companies whose engagement has been disclosed, and only pertains to partnerships with Impact 25 Members.

Figure 2: Insurers and reinsurers involved in Impact 25 companies, split by investment and capacity partnerships

We expect more companies to become more active in 2018. This is facilitated by the trends above: no longer is an investment in InsurTech or innovation a ‘hype’ investment but it is an opportunity to make a real impact either to customer engagement or operational efficiency.

 

Headwinds for InsurTech

A notable characteristic of InsurTech is the wide dispersion of revenue growth rates. The range for Impact 25 Members (where disclosed) is from 5% to 9,900%.

Figure 3: 2016-2017 revenue growth of InsurTech Impact 25 Members where disclosed

There is no correlation between our assessment of an InsurTech’s traction or potential and its current revenue growth rate. There are two main reasons for this.

  1. We think the quality of earnings of Distribution InsurTechs is high because customers have selected a differentiated proposition and are likely to be relatively sticky. InsurTechs can create significant value without necessarily being in ‘hypergrowth’.
  2. Supplier InsurTechs are subject to the sales cycles of corporates. Revenue is therefore likely to be both lumpy and exponential due to the ‘herd mentality’. Recent historic performance is not necessarily a good predictor of future impact.

InsurTech headwinds are discussed in more detail below.

Distribution InsurTechs: Not scratching major customer itches?

For Distribution InsurTechs, there are multiple challenges:

  1. Companies are always reliant on corporates in some form or other. Insurance is unique in the sense that the cost of the product is almost always unpredictable – either through unexpected frequency or severity of losses. As a result, every Distribution InsurTech needs to persuade an institution to back its approach; we have described the challenges of partnerships in various points in this report.
  2. Companies typically only have one opportunity per year to acquire customers (i.e. at their renewal date) unless they are trying to acquire customers new to insurance (which has its own challenges). This creates major challenges for InsurTechs: if you don’t get the renewal in one year, most (if not all) of your ‘pre-sales education’ is wasted and you have to start from scratch the following year.
  3. If InsurTechs do not convert opportunities, this could be because they are not scratching a sufficiently major customer itch. Customers famously don’t love their insurers, but are they willing to engage with potentially superior alternatives? The bar is set high for InsurTechs, and it is perhaps not surprising that the Distribution / Product InsurTechs we see performing well are those which are either offering high-emotion products (e.g. pet insurance from Bought By Many) or niche products (e.g. Deliveroo rider insurance from Zego).
  4. Finally, aggregators (price comparison websites) are either established or growing their influence as the ‘gatekeepers’ of insurance purchasing in many markets. There are two conditions for the aggregator model to work: first, there needs to be a set of similar products so that price comparison is meaningful; and second products need to be time-limited so that they can support switching. InsurTechs focusing on product innovation often satisfy neither of these criteria meaning that they are shut out of major digital routes to market.
  5. Standing against these challenges is the experience of our Distribution InsurTech Members. These companies are attracting and retaining customers and generating value for their partners and investors.

Supplier InsurTechs: The challenges of the corporate sales cycle

For Supplier InsurTechs sales cycles are slow and lumpy. Complaints we hear regularly are that companies are slow to act (e.g. decision-making processes), overwhelm with bureaucracy (e.g. long NDAs, complex procurement processes) and are inconsistent (e.g. quickly changing priorities). In fact, these are very similar themes to those we heard in 2016 when we published our first study on the space. But Some insurers are now also getting better at engaging with InsurTechs (see sidebars) and we expect more to invest in their capabilities in 2018.

 

The failure to engage: Collaboration back to competition?

Insurers may speculate that the high marketing costs, driven partly by customer inertia, will keep Distribution InsurTech competitors at bay. They might feel that their current underwriting performance makes Supplier InsurTech partnerships optional.

They may be right – but we doubt it.

We think that a failure to engage could just move InsurTechs away from trying to collaborate with insurers and back to competing against them. The opportunity to ‘disrupt’ is too large for entrepreneurs and investors to ignore.

In fact, this trend has arguably already started. A number of ‘full stack’ InsurTechs have launched in the last two years.  These are digitally-led, legacy-free startup insurance companies.  The most well-known example is Lemonade in the US, although several businesses emerged in Europe in 2017: Coya, Ottonova, One, Element (Germany) and Alan (France) for example.  These companies are setting themselves up so that their reliance on the traditional insurance market is minimal; they are competing with them head-on.

What we have not yet seen is Supplier InsurTechs taking on more elements of the value chain to compete against insurers, but there is no reason why this could not happen. The scenario here would be that a company offering, for example, enhanced pricing capabilities to insurers does not get sufficient traction as a supplier to incumbents.  Instead, they evolve into being an MGA, possibly using reinsurance or non-standard capacity, and use their technology to select against incumbents.

Figure 4: InsurTech could go ‘full circle’ back to competition against insurers

 

 

Posted: Monday, June 18th, 2018