January 19, 2017
Understanding Insurtech: the ABCs
The term "insurtech" is not very useful for coming to an understanding of the many startups in the sector. So here is a framework.
Billions of dollars of investment are flowing into startups focusing on insurtech. From the viewpoint of investors, anything that has to do with using technology in the insurance industry can be labeled insurtech. For incumbent insurers, however, this broad term is unfortunately not very useful for coming to an understanding of the many start-ups focused on the sector. Novarica has proposed a framework called the “ABCs of InsurTech” to help insurers differentiate between Analytics Arms Dealers, Beneficial Bots, Creative Carriers and Digital Distributors.
The first two categories, which are focused on helping insurers transform and compete, are likely to have a greater impact on incumbent insurers in the short term than the direct competitors to existing carriers and distributors. But the latter two categories will offer useful examples of how to operate a digital insurer that will be copied by successful incumbents as they transform themselves.
See also: Top 10 Insurtech Trends for 2017
Analytics Arms Dealers include start-ups like Carpe Data, Praedicat, and Tyche, focused on selling data and analytical capabilities to insurers to help them compete more effectively. These companies are not participating in the marketplace directly, but selling tools to those who do. The dramatic growth in the accessibility and sheer volume of third-party data, combined with the increased power of analytical tools and big data technologies, is changing the way insurers operate. The combination of predictive modeling combined with straight-through processing is making the business of insurance more effective and efficient in areas ranging from pricing, to underwriting, to claims. Analytics Arms Dealers represent an opportunity and a threat to incumbent insurers: an opportunity if an insurer is able to leverage new capabilities effectively before their peers, and a threat if they are not able to.
“Beneficial Bots” is a generic term that covers emerging technologies like drones, the Internet of Things, and blockchain, which have the potential to disrupt many industries, or at least transform operations within them. The term encompasses not only the technologies themselves, but the companies bringing them to the insurance industry, like Human Condition Safety, Meshify, and PrecisionHawk. Like Analytics Arms Dealers, Beneficial Bot providers are primarily selling tools to incumbent insurers, as opposed to competing with them directly. These emerging technologies have the potential to bring about dramatic changes in costs and capabilities, in the process forcing re-evaluation of business models and opening new potentials. Also like with Analytics Arms Dealers, insurers need to understand the potential value of these new capabilities better and leverage them faster and more effectively than their competitors.
Creative Carriers are start-ups that believe that by leveraging massive amounts of third-party data, powerful analytics, and digital communications, they can create a new way to create and sell insurance. In many cases, they are taking an “Outside In” approach by starting with the desired customer experience and building their operation backwards from there. Some Creative Carriers, like Trov and Slice Lab, are focused on offering innovative products. Others, like Lemonade or Oscar, are selling a traditional product through a more customer-centric sales and service experience. These companies, while unlikely to pose a direct threat to most incumbent insurers (due to a lack of resources and what will likely be an eventual realization that the business of insurance is more complicated than they imagine), can serve as useful examples for incumbents to follow in how they approach the customer experience. Some may be acquired by incumbent insurers, but even the ones that ultimately are unsuccessful may still provide the industry with valuable lessons on how to serve customers more effectively with new capabilities.
Digital Distributors are agencies, brokerages, or aggregators, with a good user interface and a digital-focused customer experience model. From the incumbent insurer point of view, Digital Distributors are hardly disruptive at all. They get the most press and a disproportionate amount of investment because they are the easiest to understand. Digital Distributors like CoverHound, PolicyGenius, and Zenefits may compete with existing channels, and may require insurers to streamline operations in order to access the markets they’ve aggregated. But they, like any other intermediary, are selling insurance underwritten by carriers. Working with a Digital Distributor is not really all that different from working with a traditional distributor. Over time, expect distributors to learn lessosn from Digital Distributors about customer convenience, digital marketing, and service, and those lessons will reshape the way most distributors operate. In that sense, Digital Distributors are similar to Creative Carriers. And while some may reach critical mass or thrive as independent concerns, most will either be acquired by traditional players or fail.
Insurers need to sift through the hype over InsureTech in order to make an informed decision about how, or whether, to engage with start-ups. Digital Distributors and Creative Carriers mostly offer distractions and confuse the market. Analytics Arms Dealers, on the other hand, can advance pricing, underwriting, and claims, while Beneficial Bots bring entirely new possibilities to the insurance business. Insurers looking to thrive in the future should consider what engaging with the right kind of InsureTech startups can do for them.
See also: Which Rules Should Insurtech Break?
Of course, there will always be some risk involved when engaging with start-ups, most of which eventually fail. But if insurers apply an underwriting mindset to engaging with this world—in other words, realize that a small number of hits may pay for the losses—it may become a more attractive proposition. In any case, there are great opportunities to learn, and potentially even greater risks to remaining ignorant of new approaches and capabilities.