November 17, 2017
Global Trend Map No. 2: Insurtech
It is interesting to step back and examine the material impacts being felt by today's insurers: Is disruption all it's cracked up to be?
Following our last post, Insurance Nexus Global Trend Map #1: Industry Challenges, it is now time to address the elephant in the room. Speak to any insurance industry pundit, and he or she will talk about an impending shake–up — a sudden obsolescence of traditional carriers in the face of leaner, nimbler competitors and disruptors under the banner of insurtech. It is interesting to step back and examine the material impacts currently being felt by today’s insurers. So, is disruption all it’s cracked up to be?
As part of our Trend Map, we conducted an extensive international survey (with more than 1,000 responses) and consulted 50-plus industry thought leaders; you can find a breakdown of our survey respondents, details of our methodology and bios of our contributors by downloading the full Trend Map here. Along the way, we asked our insurer respondents whether they were losing market share to new entrants (giving us a disruption score).
In total, 29% indicated losses. While the majority still appear unaffected, this still represents a significant material impact.
Different markets mature at different rates, and our disruption score fell to 23% in Europe and 25% in North America but rose to 47% in Asia-Pacific.
The impact of new entrants is therefore greatest — or, at least, is perceived to be greatest — in the East. This is not a wholly surprising result given that the overall market in this area is expanding so fast because of the rapidly emerging middle class (especially in places like China and India), as well as large uninsured populations coming into focus at the lower end of the market. An expanding market creates more opportunities for new companies, and existing companies must grow at a high rate just to maintain their existing share.
In addition, there may be a psychological factor driving the percentage of respondents, indicating market–share loss in Asia–Pacific. People may perceive the threat from new entrants more keenly here than elsewhere, even if they are not currently losing real market share. In saturated markets, the risk of total disruption is less because traditional insurance is established as the solution to a certain set of problems. In under-penetrated Asia–Pacific, however, many people have never had insurance and, therefore, do not owe any kind of allegiance to established insurance forms. This means that traditional insurance models appear particularly ripe for circumvention by non–traditional players.
“Successful innovations must be closely coordinated with the company’s strategy. They require an innovation process and involvement from all areas of the company. On the one hand, it is important to constantly improve existing products and services. On the other hand, it is essential to think outside of the box: Artificial intelligence, augmented-reality applications and buying a fintech company are examples that fall into this category.” —Monika Schulze, global head of marketing at Zurich Insurance
Just because the European and North American markets produced lower disruption scores does not mean the waters are clear; we need look no further than the fact that more than half of 2016’s insurtech deals took place in the U.S. to see that the situation is much more complex.
We should bear in mind the psychological factor and the hype cycle, whereby technology impacts are often overestimated at first. The wave is always biggest when it breaks but may leave little behind it other than foam. Later, in our regional profiles, we loosely applied this wave model to our three key regions, drawing on stats from our key themes section and input from local commentators. In North America, the disruption wave is still rising; in Asia–Pacific, it is breaking; and in Europe; it has broken.
In this sense, these scores are perhaps more revealing as indicators of each market’s maturity than of the overall extent of disruption. While newcomers will continue to take on market share for the foreseeable future, carriers’ assessment of this threat may, paradoxically, adjust down as they take on a new normal.
“The common denominator that’s sweeping the industry right now is this whole wave of insurtech. It applies to anybody and anywhere in the world.” —Hilario Itriago, CEO at Bullfrog Ventures
This new normal will, by no means, be totally inimical to today’s insurers. While some insurtechs have incumbents in their cross–hairs, many new startups will simply end up replacing the more tired parts of insurers’ stacks with something better. And once the gloss has worn off, many insurtechs’ currently belligerent stance may well soften into something more cooperative — particularly given the mutual benefits that could come from newcomers and incumbents working together, in a marriage of scale and innovation. We further explore insurer–insurtech collaborative models in our regional profiles, which you can access by downloading the full Trend Map here.
Disruption is not just an issue for carriers; it affects every player in the insurance ecosystem and every category of insurance work. The balance of industry chatter suggests that brokers and agencies will be the first part of the insurance value chain to feel the pinch —for example, through disintermediation by new direct plays and robo–advice.
Interestingly, the rest of the industry (everyone apart from carriers) achieves a disruption score of 20%, lower than the 29% we registered for carriers, and this trend is consistent across our three key regions (see above). Again, this may reveal more about sector maturity than material realities. The fact that indirect channels have, for a while, been an obvious target — not just for insurtechs but for incumbents’ own direct offerings — could mean agents and brokers have come to perceive the threat more realistically than carriers, which may currently be in peak panic mode.
Before we move on to our next post, on insurer priorities, let’s quickly review the state of insurtech at present. According to data from CB Insights, total insurtech investment in 2016 totaled $1.7 billion, around double what it had been in 2014. This compares with the $17.4 billion invested in fintech overall in 2016 (according to data from PitchBook). Insurtech has been slightly longer coming than tech disruption in other branches of financial services, but its role in insurance — a data industry par excellence — could be even more transformative.
According to a recent report from Accenture (“The Rise of Insurtech”), approximately half of insurtech investment money is being funneled toward artificial intelligence (AI) and IoT. Currently, personal lines are generating more activity than commercial lines, and life is the quietest of the major branches; this picture is broadly borne out by our more general stats across the Trend Map. This may be a case of people going after the lowest–hanging fruit first rather than anything inherent in these lines — there remain a multitude of untapped opportunities here, from realizing backroom efficiencies, to innovation out in the field (especially anything IoT–related for commercial insurance).
We will be returning to the topic of insurtech — and, in particular, where it fits among the mega-trends at work in the industry — across the remainder of this content series, so stay tuned. If, however, you want to get your fix right away, you can download the full Trend Map for free whenever you like.
In our next installment, we will see where carriers are focusing their time, money and human resources.