Social inflation has become somewhat of a buzzword in insurance circles in recent years, especially over the past year. The phenomenon is responsible for driving up risk and the cost of claims across a range of lines, ultimately affecting insurer profitability. 

But for all it is talked about, very little is being done about it. Insurers know it is there – they can see it in their results – but, as an industry, we are struggling to define it, measure it and come up with a credible response.

This matters because the plaintiffs’ bar is doing quite the opposite: committing significant resources to understand and exploit litigation opportunities. The insurance industry is steadily losing a battle it hasn’t really begun to even engage in.

Before we get into what needs to be done, let’s take a quick look at what social inflation is and why it is a growing problem today.

At its core, social inflation is an industry-wide rise in claims costs over and above normal economic inflation. More specifically, it is added inflation caused by shifts in societal views toward litigation and plaintiff-friendly legal decisions. 

U.S. litigation has risen for seven consecutive years, topping 8.9% growth for the last year data was available, compared with an average of 3% for the previous two decades. And the level of compensation awarded has also increased, especially in large cases. The number of verdicts of $20 million-plus was 300% more than the annual average between 2001 and 2010. 

The impact of societal trends goes well beyond just high-profile, nuclear verdicts. Social inflation pushes up the cost of claims to such an extent that pricing now does not accurately reflect risk. If this persists, it could ultimately affect capacity and even availability across whole lines of business.  

There are two important drivers of social inflation today: The first is rooted in societal shifts that stem back to the 2008 financial crisis, which left a deep sense of anger and distrust toward large businesses. This has contributed to a tendency among juries and judges to sympathize with plaintiffs’ framing of issues. This is especially visible among the millennial generation who now occupy positions of influence in the legal system and sit on juries.

The second: Law firms and related third parties are deploying sophisticated tactics to monetize the societal trends for higher payouts. For example, some legal entities are investing in powerful data, analytics and technology to identify and exploit liability opportunities. They are also increasing marketing spending; funding liability activities for potential plaintiffs; conducting social media tracking; and adopting behavioral science to influence juries. 

Indeed, a whole sub-industry of consultants and lawyers has evolved to cultivate a claims culture and improve trial outcomes.

Where does this leave the insurance industry? We should be supportive of valid claims and work to resolve claims as efficiently as possible. But, to put it bluntly, we are playing catch-up on the issue of social inflation. As an industry, we are masters in understanding most claims trends, but, when it comes to broad, litigation-related trends, we rely on high-level data and guesswork. 

This imbalance between the insurance and legal entities must be addressed. We as an industry must become experts in social and legal trends, just as we are in other types of claims trends. 

See also: Growing Risks of Social Inflation

Societal shifts need to be respected and managed sensitively. But losing the analytics arms race against the legal system only serves to undermine a healthy functioning insurance market that is vital for society. 

The thoughtful application of the right data and analytics in the insurance industry can move us forward. 

First, we must recognize that social inflation is a human risk. Human behavior can be analyzed and even predicted in much the same way as traditional perils such as natural catastrophes. It requires a different set of tools and data, specifically non-traditional data. Unlike traditional data, it is not based on records but gathered from “live” activities such as internet activity, social media trends and smart technology. These data points provide clues about human behavior, which, with the support of advanced analytics, can be analyzed at scale to create a powerful predictive model. 

By analyzing claims and policy experience together with behavioral data and other non-traditional data, insurers can build a detailed understanding of the link between behavioral indicators and liability. In doing so, we can build predictive social inflation models that can measure levels of social inflation and price risk appropriately – and then take action where necessary. 

Liability insurance has a critical societal function. It exists to protect individuals and businesses from risks such as potentially crippling legal fees. It underpins an innovative and vibrant economy. To leave social inflation unchecked is hazardous not only for the insurance industry but also for the business community it serves and the wider economy. 

The industry and individual insurers should hasten to start paying more attention to this issue – and begin taking action to mitigate and counter the trend. That journey starts with intelligent application of non-traditional data and advanced risk models.

Economists get a bad rap. Economics is sometimes called "the dismal science." It is the subject of jokes such as, "If you laid all the economists in the world end to end, you still wouldn't reach a conclusion." President Truman once said he wanted a one-handed economist because all the economists he knew said, "On the one hand... but on the other hand...."

But in economically confusing times such as we're living in now, economists are our best hope for sorting out some pressing issues, including a key one for insurance: the trajectory of inflation and its likely effect on insurers' returns on investment portfolios, on economic growth in general, on growth in insurance premiums in particular, on costs for repairs, etc. So, I recently sat down with my favorite, "one-handed" economist, Michel Leonard, the head of the Data and Analytics Department at the Insurance Information Institute. 

The short version of his analysis is: The Fed is likely being too optimistic when it projects that annualized Inflation will drop to 4% in the U.S. by the end of the year, but inflation will head back toward the historic norm of 2% by the end of next year.

The longer answer follows. 

We started on an optimistic note, talking about growth in the U.S. economy, which clocked in at a whopping 6.5% on an annual basis in the first quarter. While that figure will clearly trend down toward the historic average of 1.5% to 2.5% and while Michel said a recession is even possible in the next few quarters, he said the insurance industry is positioned for significant growth in the next six months.

The industry's performance tends to mirror that of the overall economy, but some months behind, so its growth should stay strong even as the rest of the economy sees growth rates slow. 

The inflation picture is less rosy. We talked when the latest consumer price index published by the Labor Department showed an 8.5% annual increase for March. (The figure dropped slightly in April, to 8.3%.) And Michel said replacement costs for insurers have been rising some 16% annually, or almost twice as fast. He said price increases will slow for insurers by the end of the year, along with overall inflation, but will still far outpace most costs. He expects annual inflation for replacement costs will still be 12% to 14% at the end of the year.

Some costs may never quite return to historic levels. Given that the pandemic has caused so many to reevaluate their work lives, Michel says many may not want to return to jobs in home construction or auto repair shops. 

"Those are tough jobs," Michel said. "People underestimate how hard it is to work those 12-hour shifts in the body shop." 

There's still loads of uncertainty out there, but I hope Michel's thoughts clarify the situation at least a bit. Assuming they do -- and he's typically right -- I promise to swear off economist jokes (for a while).

Cheers,

Paul

P.S. If you want to dig into his thoughts more deeply, here is a summary from the Triple-I about his latest report. 

Many date the beginnings of the insurance industry’s digital transformation to the emergence of cloud computing some 15 years ago. Others go back further, to the arrival of the commercial version of the internet in the mid-1990s. Some would trace the origins all the way back to the debut of personal desktop computers in the early 1980s or even to the introduction of digital calculators in the 1970s.

Whatever date is correct, it’s clear that digital transformation in insurance has been underway for a very long time. So, why haven’t we moved on? Why are we still focused on digital transformation?

In fact, it’s time we wind down the digital transformation phase and move to the next stage of digital strategy, which we call digital evolution, and then to the third stage: digital intelligence. The ill-defined transformation process is just one part of a digital strategy. To get the full benefits of digital technology, you need to understand and define all the steps that will get you there.

There’s a big bet being laid down in the insurance industry, and it seems like a sure thing: using real-time data and sophisticated analytics to better predict risk and tailor policies to specific customer profiles. It’s hard to argue against the logic that granular, up-to-the-minute risk data reveals better business insight and more actionable information than a single cell in a loss triangle spreadsheet.  

After all, insurers have access to terabytes of data to describe where insurance customers are, where they have been and all sorts of details on a user’s journey that may eventually inform what potentially lies ahead. So, of course, it seems logical that, as analytical capabilities make their biggest strides in decades, the industry should just leap forward and adopt this more algorithmic approach to actuarial science.

There’s just one problem: Most insurers are still spreadsheet-bound and, as a result, hard-pressed to make any progress outside of their spreadsheet environment.

Undoubtedly, more information in the form of data should ultimately lead to better decisions on the part of insurers—even within the confines of a basic spreadsheet. But, even if insurers can recall every detail of an individual customer journey now, the information has an inherently short shelf life. What’s more, it often lacks context to what specifically contributed any net changes during a period-over-period basis.

For example, used-vehicle prices have dramatically changed in the last several quarters. Immediately, it should be apparent that, if the value of the subject at risk increases, then perhaps the premiums for an indemnity contract might go up correspondingly. What gets in the way of progress is manifold---the aggregate costs are steadily increasing, but the prices of each used vehicle in the pool are different. 

Even worse, the capability to understand the subject at risk is traditionally poor. One cannot get an accurate vehicle replacement price with just make, model, year and sales price when new. Salient details, such as specific equipment and configuration, current condition, odometer reading and other features specific to sensors and capabilities, are not captured or available inside the data streams at most insurers.

See also: The New Mandate: 'Video or Vanish'

While pooled for the sake of abstraction, we are all individuals in unique living situations driving distinct vehicles in specific locations with different mobility needs, with discreet topologies, weather and traffic patterns, and surrounded by a variety of other real-world constructs like bridges, downtowns, farms and forests. Local market conditions for prices, labor, parts and services also will vary over time. 

All of these factors are nearly impossible to capture in a single cell of an Excel spreadsheet, the tool of choice for insurance professionals of a bygone era. Existing spreadsheet processes for pricing, rate making, claims estimation and reserving—and even capital modeling—all use historical data at aggregate levels that cannot respond fast enough to the changes that the industry is seeing in the price of used vehicles alone, no less all other factors of risk adjustment. 

In a world seemingly devoid of nuance, it’s easy to fall in line with one camp or another: Team Data vs. Team Spreadsheet. But the reality is that the best way forward is likely a hybrid. Yes, it is vital that companies get a better handle on their forecasting by using real customer data. But analytics can only get better when we admit they have limitations, and we seek to improve them in the quest of better processes and, ultimately, customer satisfaction.

This is a time for breakneck changes and overnight evolution for the insurance industry. For insurers looking to keep pace, they’ll have to honor the past, deal in the present and keep a keen eye on the future

After placing 18th for business application growth in 2020, the insurance industry jumped 24% in 2021 to fourth place among major industries.

This data comes from the 2021 State of Swyft Industry Report. Consisting of compiled information from Swyft Filings’ new business applications across the U.S., the report shows a significant increase in insurance industry applications submitted.

The reasons for this increase in business formations are varied, with many fueled by technological and operational improvements in response to the pandemic. Insurance companies became more agile compared with previous years. This resulted in adopting systems that enabled companies to conduct business virtually—in some cases through AI and automation.

Technology Fuels Growth

In a Deloitte survey of senior U.S. insurance executives covering insurance companies’ current state of affairs, 52% of respondents trimmed discretionary spending in 2021 and earmarked savings for digitizing. 96% of respondents reported prioritizing digital transformation efforts and projects. The surveyed companies said prioritizing was necessary to support financial and operational stability, enhance efficiency and improve customer service.

Given the increased business made possible with the implementation of digitization, more entrepreneurs are choosing to enter the insurance field. Since early 2020, the industry has become digitized and entirely virtual in a way that would have taken several years to accomplish had there not been the pandemic. This nearly overnight transformation has made the field especially attractive to ambitious entrepreneurs.

Tech Trends Shaping the Insurance Landscape

Various tech trends are transforming the insurance industry, and their use will continue to fuel growth. These include applied artificial intelligence, automation and enhanced customer service.

Applied Artificial Intelligence

Applied artificial intelligence promises to transform the insurance business landscape as we know it. AI can discover solutions to complex insurance industry issues. The answers artificial intelligence gathers can be used to enhance operations and strengthen the industry as a whole. Those insurance companies implementing AI will become more diverse and understand what fuels customer needs and actions.

Businesses are also using AI for predictive analysis, which is helping in the development of insurance products. Companies with these enhanced products set themselves up to thrive.

Process Automation

Process automation is another tool increasingly being used by insurance companies. Automation technology improved significantly in many areas, including claims. Automated claims processing cut down associated costs in an industry segment that historically loses insurance companies money, saving substantial amounts in payroll and human error.

The use of pre-populated claim forms, for instance, is just one example of how automation improves the customer experience while saving the company money. Additionally, agents can now text customers updates, and electronic payments are the norm.

See also: Underwriting Small Business Post-COVID

Transforming the Face of Customer Service

Automation and AI have led to more than increased productivity and higher profit margins. These advanced tools are transforming the face of customer service. This occurred by allowing for more and higher-quality customer touchpoints.

Insurance carriers can respond to customer inquiries and concerns immediately and in real time. With chatbots and automated responses, customers can start a conversation until an agent or representative takes over. Technology fulfills a vital role in the customer service journey by providing quick answers to common questions.

AI also enables insurance personnel to access claims histories and distributions and respond to claims. While this is all occurring, the AI technology gathers data to help companies assist customers in the future.

New insurance business owners have an advantage over established company leaders. They can open their companies with all these digital and automated capabilities to set themselves up for success.

New Insurance Companies Primed for Growth in 2022

The increase in new business formations will likely continue in 2022 and beyond. With AI and automated technology now an integral part of the insurance industry, and customer expectations at an all-time high, we predict many new insurance companies will form over the coming months and years. 

Providing companies remain focused on forwarding growth in the digital landscape; business formations are likely to continue to increase in future years.

Growth is also expected to continue in insurance business formations as companies balance AI and automation and human customer service. 

While innovative technology like automated claims forms and chatbots are integral to ensuring that customers are quickly, efficiently and effectively attended to, it’s equally essential that human interaction occurs at strategic times throughout the process. New insurance companies that understand this have a good chance of thriving.

New data sources and technologies applied throughout the insurance process are connecting companies in new and unanticipated ways within evolving ecosystems. In underwriting, particularly facultative underwriting, we have seen industry dynamics completely redefined. Insurers are taking a thorough look at how underwriting works within their businesses, determining areas that could benefit from greater support and identifying the best partners to provide it – including reinsurers. 

For the insurer-reinsurer relationship, these four guiding principles can help forge a path forward in this new ecosystem environment:

1. Connection matters. 

Established insurers, new insurtech entrants, reinsurers and other players are sharing underwriting data, insights and capabilities to fast-track innovation, adapt to change and deliver more personalized customer care. Yet many insurers are held back by issues with capacity, legacy systems and processing speed. Reinsurers have an opportunity to go beyond perceived roles as underwriting “experts” or “consultants” and to become even more engaged as doers, active participants with a stake in shaping the forces remaking the industry. This will require providing more comprehensive underwriting services, including new and reinvented technologies as well as supplementary support programs, that respond to these insurer pain points. 

2. Expertise matters. 

Underwriting’s continuing transformation has not lessened the importance of the expert facultative review. Though resource-intensive to maintain, the facultative yield extends well beyond “just” the individual case. Ill-considered underwriting process changes and poorly developed or neglected guidelines can lead to noticeably lower placement rates and margins, which can inflict real damage on the bottom line. For this reason, insurers are understandably reluctant to relax the rigor of facultative review or otherwise constrict the facultative market. Yet the pressure to produce the most time- and cost-efficient outcomes is mounting. For some carriers, turning to ecosystem support from reinsurers may provide solutions.

See also: Industry Demands an Open Ecosystem

3. Innovation is more than either/or.

When it comes to the question of innovation, the answer is not either/or; it is both. Facultative underwriters must be capable of both technical excellence and experimentation, of both providing rigorous case review and challenging the status quo. It is time to break away from labels that can constrict the industry artificially and to redefine what “facultative” means. Traditionally, after insurer review, reinsurers provide a competitive second opinion. Why not provide that same level of consultation, not solely at the end of the process when all other reviews have been exhausted, but anywhere across the value chain when underwriting expertise is needed?  Applying facultative insights throughout the entire insurance process can create products and services that deliver greater value to consumers.  

4. Partnership cannot become a platitude.

When partners look out for each other’s best interests, everybody wins. That is why it is important to embrace a vendor-agnostic approach, allowing partners to find the right tool within the broader ecosystem to meet their specific needs. It is vitally important to establish clear guardrails within each partnership that keep consumer-centricity paramount. This necessitates a deep understanding of the data tools landscape and best-in-class capabilities and a willingness to make shared success the primary goal. 

In the years ahead, insurance industry winners will be those willing to reimagine the familiar, rethink data collection methods and refine risk assessment practices – all in the interests of bringing affordable financial protection to more people. The old model demands re-invention. Future success demands a meaningful, scalable and material system of supports – an underwriting ecosystem for the future.

Life insurance applications surged 4% in the U.S. in 2020, the highest year-over-year annual growth since 2001, as the coronavirus pandemic was an unprecedented and unfortunate catalyst for consumers to buy life insurance. A less-commonly reported impact the pandemic had pertains to disability insurance.

My employer, Breeze, found that the average monthly benefit jumped 23% to $3,151 in 2021 from $2,561 in 2020. With the pandemic still raging full-bore in 2021, consumers were looking for more disability insurance coverage when they ran quotes through our online platform.

A likely explanation for this is the coronavirus pandemic and its impact on the national psyche. For consumers, there was a somber realization that the worst could happen to them. Before, the status quo line of thinking for most was “that could never happen to me.”

In reality, injury or illness has always been a distinct possibility. The Social Security Administration estimates that today’s 20-year-olds have a 25% chance of becoming disabled during their career.

But the coronavirus pandemic heightened the country’s collective understanding that experiencing a disabling event is not a long shot by any means. As a result, people sought financial security and peace of mind through a larger disability insurance monthly benefit much like they did when buying life insurance at the height of the pandemic. 

Disability insurance replaces a portion of a policyholder’s income, often up to 60%, if physical injury, medical illness or mental health issues leave them unable to work. If a policyholder contracted COVID-19 and was unable to work for an extended period, disability insurance could ensure they could keep paying for the mortgage, groceries and random life expenses that come up.

Even now, in mid-2022, don’t expect this increased demand for more disability insurance coverage to subside anytime soon. Since 2020, there has been a seismic and possibly permanent shift in consumer behavior, whether it pertains to online shopping or insurance buying.

See also: Huge Opportunity in Disability Insurance

Insurtechs: The Solution to Disability Insurance

Insurtechs are well-positioned to meet this demand. Despite statistics showing the average consumer is more likely to need disability insurance over life insurance, the latter is far more prevalent than the former. According to LIMRA, 52% of Americans own life insurance, compared with just 14% who own disability insurance.

Why has disability insurance been undersold? It’s traditionally been a long and confusing underwriting process for both consumers and distributors. For a long time, there wasn’t enough data centrally available to accurately and efficiently represent risk for certain occupations, especially for blue-collar or self-employed jobs. 

Insurtechs have built online platforms and application processes that rely on predictive analytics to expedite the underwriting process. An application-to-approval process that once might have taken months can now be completed in days, even just a single day for qualified applicants.

Insurtechs like Breeze have also brought the entire process online, which is in lockstep with consumer preferences. Buyers, especially younger ones, have no interest in going to in-person medical exams or completing mail-in applications. They want to buy everything digitally and quickly, and this is no less true for disability insurance. Perhaps most importantly, insurtechs have made it possible for insurance agents and brokers to take advantage of the innovations. 

Agents and brokers are arguably the most integral component of the insurance industry. They have the relationships and books of business to produce policies. And now they are able to take an insurtech's online platform and application process, like Breeze's, and fully integrate it into their own website so clients can experience the ease of applying for disability insurance digitally.

Insurtechs working together with traditional insurance agents and brokers make for a perfect marriage. The former bring the digital experience and technology to expedite the application and underwriting process, while the latter bring the industry knowledge and relationships that are needed to produce business.

By working together, they can meet the increasing demand for disability insurance

The COVID-19 pandemic continues to disrupt how insurance organizations operate. It has significantly altered the traditional ways in which the industry has done business. While many insurance organizations are slowly returning to pre-pandemic operations, most have permanently adjusted to a “new normal” that blends in-office policies with a distributed workforce and remote operations. This shift is notable, especially considering how, over the last decade, insurance organizations have been slower to adopt digital tools compared with other businesses in the financial services sector. Now, there is no going back, and insurers need to come to terms with an altered baseline of market conditions by embracing solutions with the potential to optimize operations for remote teams and supporting partners serving an increasingly diversified, and shifting, client base with greater expectations for digital service and real-time responses.      

Insurers with established digital underwriting, claims and operational processes will be better-positioned than less digitally savvy competitors. However, most insurance organizations have an opportunity to improve in terms of their digital market approach. With employees working remotely, partially or full-time, there are concerns about whether those individuals are well-connected to organizational culture and corporate priorities and equipped with the necessary tools to succeed, understand protocols and processes and can structure or distribute workload effectively. Insurers investing in flexible ways of working, enabling more digital workflows, and designing new tech-enabled processes will have significant advantages over those that do not.

Becoming Sensitive to Customer Needs

A recent Guidewire survey of 1,000 U.K. insurance customers aged 18 and up provides insights into the deteriorating public sentiment about insurers. According to the report, the COVID-19 pandemic and resulting lockdown added to consumers’ negative impressions about the industry. One in four survey respondents (26%) thought insurers did not do enough to help customers in need during the pandemic, in contrast with the prior year’s result of 17%. In response, many insurers started offering flexible premium payments and waivers for claims processing and reducing the need for documents to help with customer service and satisfaction. In each of those scenarios, digital enablement is a critical element for success. 

Focused Digital Transformation

This new normal is a wake-up call for the insurance sector, forcing many to explore increased adoption of technologies including intelligent, artificial intelligence (AI)-driven automation, low-code/no-code platforms, virtual agents, drones and cloud services, just to name a few. 

• Combined with AI, intelligently automating workflows can help insurance organizations better assess risk, reduce the risk of human error, create more defined user personas, predict buying behaviors, augment the claim adjudication process and be ultra-responsive to create differentiation through customer experience. 
• AI-driven solutions for policy checking help insurers, agents and brokers with an efficient, cost-effective and customer-centric approach to review policies for errors and omissions (E&O) before issuance.
• The use of open-source platforms for catastrophe modeling allows re/insurers and brokers to gain refined and timely visibility into catastrophic risks and enable access to accurate, high-quality data and insights cost-effectively, bolstering risk assessment and decision-making by underwriters.
• Solutions developed on low-code/no-code platforms can be managed by the business, verified and implemented by IT. This empowers them to deliver targeted outcomes rapidly to meet operational, regulatory or any other urgent requirements.
• Powered by machine learning (ML) and natural language processing (NLP), chatbots provide policyholders and insurance brokers with a 24/7 support system. Intelligent chatbots improve engagement and simplify complicated insurance transactions, like filing claims and selecting the right policy, by enhancing self-service capabilities.
• Claims adjusters are increasingly augmenting capabilities by using drones and virtual inspection methods for remote claim verification, which can reduce allocated loss adjustment expense (ALEA).
• Web portals allow an insurer’s executive team, underwriters and actuaries to view, search, approve and endorse contracts and enable staff to view customer and broker information in a single location. Additionally, web-based underwriting workflow management systems can help expedite the creation and modification of submissions.
• Cloud computing permits insurers to improve workflows, optimize cost management and reduce technical debt. The benefits include optimized data management, cost efficiency, rapid deployment, better key performance indicators (KPIs), advanced customer experience and better risk management.

These technological advancements have resulted in the streamlining of operations and personalization of the customer experience, making the insurance enterprise more scalable and agile and improving the efficacy of remote operations.

See also: Good, Bad and Ugly of Going Digital

Reinventing Processes Key to Bolstering Operations

In the new normal, alleviating capacity-related challenges requires insurers to consider new approaches, like right-shoring select operations, including underwriting, claims processing and policy administration, to help ensure business continuity and the optimization of resources. The right-shore approach promotes best fit for insurance-focused services and enables business-critical services from varied locations. The model provides the best combination of cost and efficiency, allowing organizations to adapt to business and market changes. A synergy of onshore and offshore resources can make insurers more adaptable in a constantly shifting environment. 

Right-shoring can complement remote access/work-from-home (WFH) practices. When included as a critical tenet of continuity planning, it can support strategic operations to help mitigate risk and ensure operations continue when a crisis occurs. Instead of relying on a single service provider, insurers are increasingly selecting from an array of specialized technology and domain-focused consulting providers to implement the right-shoring strategy.

Conclusion

There is no sweeping solution as consumers get more sophisticated and insurance systems struggle to keep pace with rapid market changes. The COVID-19 pandemic served as a catalyst for insurance companies to prioritize investments in new technologies and strengthen business continuity plans to maintain organizational productivity and keep employees connected and engaged. Wherever these changes and solutions land on the digital transformation continuum, most insurers can benefit from addressing technology to operate efficiently in the new normal and be better prepared when the next regional or global business interruption occurs.

Interest in insurtech continues to increase along with funding rounds. Many startups are scaling, bringing new opportunities and competition to established insurers.

For some, startups can help insurers bring more innovative practices in-house while providing technology for a fraction of the cost required to build up an internal team of experts. Beyond cost, startups can offer resources that insurers may not be able to find should they go it alone. Most insurers still prefer to work with incumbent technology vendors if given the option, but insurers see startups bringing capabilities to the market that are not available anywhere else. These carriers have adjusted their infrastructure (and procurement) best practices to take advantage of this growing startup ecosystem.

Insurtech Startup Growth During the Pandemic

As in 2020, the pandemic had a significant impact on the insurance industry and insurtech in 2021. While investment slowed initially in the early phases of the pandemic, it rebounded strongly in 2021, with levels during the first half of the year at approximately the investment levels of all of 2020. 

Insurtech companies have matured in meeting the needs of insurance carriers and better explaining their use cases. They have also shifted the emphasis from mostly claims and distribution to include underwriting capabilities as well as becoming MGAs and full carriers.

Business Trends: Maturing Knowledge and Increased Underwriting Focus

Early in the pandemic, the focus was on projects related to digital engagement and claims automation and analytics, but, in 2021, underwriting and risk assessment solutions became more prominent. Part of this shift was due to increased maturity of the insurtech industry in general. 

With more veteran insurance leaders involved in insurtech startups, these companies are better able to understand business use cases for their technology; articulate value for the insurance policy life cycle; and leverage artificial intelligence (AI) and machine learning, digital tools and native cloud capabilities for carrier use cases faster than most insurer development teams.

This maturation has led to some insurtech startups becoming MGAs or full insurance carriers. Additionally, some insurtech carrier startups have pivoted to become providers by offering their technology platform as a solution.

See also: How to Embrace Insurtech Culture

Tech Trends: AI, Data Extraction and Embedded Insurance

Insurtech startups continue to advance the use of technology solutions for important carrier use cases. AI and machine learning capabilities continue to evolve for data extraction for new business and underwriting functionality. Intelligent text ingestion (ITI) tools along with text AI solutions are improving extraction from documents in existing carrier workflows. These solutions are being implemented faster with better learning and analytics for more complex insurance products and processes.

Another trend is the increase in embedded insurance enabled by the use of APIs. The most prominent example is in automotive partnerships—insurtech startups are providing platforms to enable insurance offers and underwriting as part of the auto sales process.

These technology solutions have helped startups better meet needs across the insurance life cycle and improved their ability to quickly deliver high-impact results.

Concluding Thoughts

Not every insurtech startup will interest every insurer; not every insurer will decide to partner with or invest in insurtech startups. However, every insurer should take stock of what is happening in the space and learn the lessons that will make their organization stronger. 

One lesson is that the insurance industry should rethink its consumer experience from every angle, including adopting new communication channels like chatbots and smart home automation, providing new services—whether drones or smartphone apps or a mobilized network of humans—for collecting claims information, leveraging deep data analysis to anticipate client needs and even redesigning insurance products to appeal to niche communities.

There are many opportunities to bring new capabilities into the organization via the startup ecosystem. Even if an insurer identifies 10 different startups that bring differentiated value, most do not have the resources or capacity to work with all of them at once. It’s important to prioritize startup integration projects and focus on the top opportunities to get the most out of the investment.

To learn more about insurtech startups, their lines of business and the parts of the insurance enterprise value chain they support, read Aite-Novarica Group’s report Insuretech Startup Index 300.

Sorry to be a downer. I'm as ready as anybody to put COVID in the rearview mirror. But I've worried for a while that recent declines in cases and deaths have created a false sense of security about a virus that continues to mutate -- then last week saw a truly depressing assessment from a doctor whom I've followed for years and who has been consistently right about a host of public health issues. 

The assessment by Eric Topol not only says that case rates are rising again -- much faster than public metrics are showing -- but that mutations are rendering vaccines significantly less effective. Yet, at a time when precautions should be increasing again, pandemic fatigue both among public officials and among individuals means we are collectively letting our guard down. As a result, Topol sees no end in sight for the pandemic and warns that we will experience new waves of hospitalizations and deaths.

I encourage you to read his whole, depressing post, but here are what I see as his key points:

--"The United States is now in the midst of a new wave related to Omicron variants BA.2 and BA.2.12.1, with over 90,000 confirmed new cases a day and a 20% increase in hospitalizations in the past 2 weeks," Topol says. His post appeared on May 15; confirmed cases now exceed 110,000 per day. "[The surge in case numbers] belies the real toll of the current wave, since most people with symptoms are testing at home or not testing at all; there is essentially no testing for asymptomatic cases. The real number of cases is likely at least 500,000 per day, far greater than any of the U.S. prior waves except Omicron."

--He adds: "The bunk that cases are not important is preposterous. They are infections that beget more cases, they beget Long Covid, they beget sickness, hospitalizations and deaths. They are also the underpinning of new variants."

--The subvariant that is now dominant, BA.2.12.1, is quite different from earlier forms of the virus, meaning that it may circumvent the immunity that comes from contracting COVID or from vaccines.

--The percentage of COVID deaths accounted for by those who have been vaccinated has risen from 23% in September to 40% in February. "We are seeing people with 4 shots who are getting breakthrough infections," Topol writes, "even at 1-2 weeks from their most recent shot, when there should be the maximal level of neutralizing antibodies induced.... Prior to Omicron, we could, with a booster, assume there was well over 90-95% vaccine effectiveness vs. severe disease.... This level of protection has declined to approximately 80%, particularly taking into account the more rapid waning than previously seen."

--He writes: "This family of Omicron variants... indicates more rapid evolution of the virus than what we have seen previously. [Only four] of the thousands of variants since late 2019 have led to significant spikes of cases around the world.... But now multiple Omicron subvariants are outcompeting one another, predominantly because of more immune evasion."

From an insurance industry standpoint, this post may feel like same old, same old. We've been dealing with COVID for more than two years now and have sorted through many of the issues on business interruption, workers' comp, etc. But I cite the Topol piece for two reasons.

One, I hope we'll all be careful. As the saying goes, just because we're done with COVID doesn't mean COVID is done with us.

Two, I think we need to be prepared for people missing work for extended stretches because of the virus for some time to come, need to be prepared for continued consequences on healthcare and mortality, and need to be prepared to continue to wrestle with all the other insurance issues that have arisen since early 2020. I also suspect that many of the plans will to bring people back to the office will prove to be too optimistic. 

I hate to be the bearer of bad news, but I think we need to buckle in for quite a while longer.

Cheers,

Paul