FinTech 101: A Guide to InsurTech
Updated: Dec 21, 2020
Mo Safayat presents a brief overview on Insurance Technology (InsurTech), exploring definitions, key players in the industry, recent news and future developments.
At a glance
Inspired by the term FinTech, Insurtech is a combination of the words “insurance” and “technology”. Like FinTech firms, insurtech companies focus less on developing new products and more on leveraging technologies to reach new customers and reduce costs. However, unlike fintechs, insurtech companies have better opportunities to target customers as insurance policies are often connected to major life events and they get renewed every year.
The insurance industry is one of the oldest and most traditional industries. Until recently, it has proved fairly resistant to change. However, in the last few years, a growing number of tech startups have emerged, posing a challenge to the incumbent firms.
This rise of insurtech firms, as dominant players in the insurance industry, has been driven by changing consumer behaviours. With the advent of internet and mobile technology, customer expectations have risen. Customers increasingly demand better digital channels and bespoke experience. Insurtechs have also been very successful due to the ability of making insurance related processes faster, more reliable and easier for the consumer.
So far, insurtech companies have mainly focused on providing insurance policies to individual clients rather than commercial clients. This is highlighted by the fact that between 1998 and 2018, almost half of all investments in insurtech have gone towards providing personal insurance. In terms of coverage, insurtechs have focused on property and casualty (P&C), which is also where most of the immediate opportunity lies.
Insurance is a financial product sold by insurance and insurtech companies to safeguard people’s property against the risk of loss, damage and theft.
In order to buy an insurance policy, the customer has to pay a premium to the insurer. The premium is calculated by the insurance or insurtech company based on the level of risk. If the customer’s property is damaged or lost then they can make a claim and the insurer will pay out the loss that is covered under the policy.
Insurance and insurtech companies make money in two main ways. The first method involves the firm collecting more money from premiums than it pays out on claims and business operation costs. This is also called underwriting revenue.
Another way insurance and insurtech companies make money is by investing part of the money collected through premiums in the financial markets.
Insurtech is a relatively new sector and therefore it is dominated mainly by startups. Most insurtech startups are located in the USA followed by the UK. According to a list of top 100 insurtech companies in the world compiled by Fintech Global, 39 companies were based in the USA . These include small business insurance broker Bunker, and Pie Insurance, 2 which uses data analytics to provide workers’ compensation.
The UK, second in the list, has seen the establishment of 20 high-growth startups: Pay-per-mile car insurance by Miles, end-to-end insurance chatbot Spixii, and subscription-based pet insurance Waggel were some of those named.
France, India, Singapore and Germany, make up another 17 companies to feature in the report, with the remaining list compiled of solutions based in Brazil, Sweden, South Africa, Netherlands, Australia and Hong Kong.
The number of new entrants in the industry is increasing as investment reached an all-time high in 2019. Approximately $6.4 billion have been invested which has increased from just $347 million in 2012. This rise in investment reflects the growing amount of partnerships 3 between insurance and insurtech firms as incumbents look to purchase new technology solutions or alternatively build products together by combining research efforts from both.
According to a Deloitte report, Venture Capitals (VC) funds are the largest source of Insurtech financing, accounting for 91% of investments in the first half of 2018.
Insurtech company Lemonade debuted on the stock market and saw its shares spike by 139%
Although funding in insurtech has increased over the last decade, the recent coronavirus pandemic has impacted insurtech funding. Crunchbase data shows that only 36 investment events are loosely grouped under the "insurtech" umbrella which compares with the same time last year when the number was 81. The number of funding rounds under $10 million dipped less precipitously from 21 to 15. This indicates that bets are being placed on "proven" companies with good track records and high success rates amid the economic uncertainty roiling the globe.
However, experts predict that investments won’t come to a complete halt. In fact, at the start of July 2020, insurtech company Lemonade debuted on the stock market and saw its shares spike by 139%. Lemonade’s success is a direct result of the company using its AI technology to reduce the time involved in buying an insurance policy and paying out claims.
More recently, the Tech Nation Insurance Board and Insurtech UK have shown their support to the insurtech sector by encouraging innovation in the sector and requesting that the insurance sector in the UK should actively explore strategic partnerships with insurtechs, invest into initiatives and communicate between firms . Whether traditional insurance companies follow this advice remains to be seen but one thing is certain, the pandemic has shown that processes that have been traditionally manual can be done online, including insurance transactions.
Future of Insurtech
The future of insurtech looks bright as investments in the industry have seen a rapid increase in the last few years. This is expected to continue despite the effects of the pandemic.
So far, Insurtechs have made significant contributions in property and casualty coverage
and along personal lines. In the future, we might see more insurtechs focusing on the
commercial and life markets.
With new technology developing, insurtechs are expected to make use of more AI,
machine learning and analytics technology to create even more opportunities to simplify
insurance. They are also aiming to make better use of data to speed up internal
processes, identify holes in their books of business and map out where customers need
Lemonade’s IPO is a great example of demand for insurtech products. If anything, the
coronavirus pandemic has shown the need for insurance companies to prioritise
collaborations with insurtech and focus on AI driven processes that increase efficiency and
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