Insurtech and traditional insurers: the changing dynamics of the insurance industry
- The idea that insurtech firms and traditional insurers are in competition might be an outdated one.
- Experts argue the way forward for the industry is a collaborative approach between old and new insurers.
The insurance business is undergoing digitization, and that, in many ways, is fundamentally changing how the business is done.
Insurtech providers are opening up new opportunities for the insurance industry at large. As digital providers look to embed insurance products directly into shoppers' purchasing experience, with more personalized and customizable offerings, incumbents are keen on leveraging their size to stay competitive. Experts argue that the best way forward, keeping customers at the center, is a collaboration between the two. The idea that traditional and digital insurers are in competition with each other may now be outdated.
“If you were to ask me 10 years ago, I’d say yes, the incumbents face a threat from insurtech. But today, we see an opportunity. The opportunity incumbents have today from technology specialists entering the space gives them the chance to work with new partners to address customer pain points and provide more convenient and efficient options for customers to protect themselves," Jim Dwane, CEO of Bolt, told Tearsheet.
Building products with insurtech
To make embedded insurance an effective channel, there are two key considerations. The first is for the provider to really put themselves in the customers' shoes, and build a product that's geared to their needs. Traditionally, insurance products have been built with a one-size-fits-all approach. Customers have been forced to buy fixed and rigid packages, paying extra and acquiring coverages they don’t need, just to get the few they do. With flexible embedded products, insurers seek to offer exactly what the targeted customer actually needs, so there tends to be more configurability built into the design of these products.
The second is to meet the customer at the right place and at the right time, typically when a given risk is top of mind and a consumer is most likely to purchase insurance. The thought behind this is simply that insurance is best sold alongside or behind a complementary product or service that creates a natural point-of-sale for the given product. An example of that is how travel insurance is offered within an airline or booking site’s checkout flow.
“On the distribution side, the seamless experience is king,” Alex Maffeo, CEO and founder of Boost, a digital insurance infrastructure-as-a-service provider, told Tearsheet. “If a customer has to go click through to another site to complete the purchase, or fill out a form just to wait for a response, you’ve lost the convenience that makes embedded insurance so appealing in the first place. You probably also lost that customer for good in this age of instant gratification.”
According to Maffeo, embracing embedded insurance comes with a significant data value proposition for the industry. Simply by having access to a greater variety of data, and an enhanced ability to process it, insurtech could be better equipped to offer some kinds of insurance.
Let's take commercial cyber insurance as an example. Traditionally, most commercial insurance products, including cyber, have been underwritten and priced based on a few basic variables: the industry that the insured operates in, the geographies in which they operate, and their business's general financial profile. While some of that may help determine the probability that a hacker may target a business, it falls short of assessing the overall risk.
“There are numerous insurtechs and embedded insurance platforms that are far better positioned to measure cybersecurity risk than a traditional insurer. These companies provide cybersecurity risk assessment, monitoring, and protection tools at the system level and they capture data that insurers can only dream of through technology,” Maffeo said.
This data is not only valuable in assessing and pricing the risk of a policy, but it may also be considered essential in this particular line of business. What cloud hosting service is the insured using? What payment processor? How are they storing the personal data of their customers? Is there aggregation risk with any of the above?
Simply having more data also enables insurers to offer insurance to the traditionally underserved. An example here is management liability insurance for startups and SMBs. Traditionally, when smaller companies apply to be insured for directors and officers liability, employment practices liability, or fiduciary coverage, insurers have sought to evaluate them on factors like revenue, profitability, or years in operation — which often disqualifies any early-stage startups immediately. If they aren’t declined, they are quoted exorbitant rates. Boost itself faced this problem when it was getting started. Today, the firm has an offering catered to this gap.
What Boost ended up doing with their product was, instead of looking at historical operational/financial data, they looked at the quantifiable track records of the investors that were backing these startups.
Top-tier firms do a huge amount of diligence on the companies they invest in, and have access to way more data about the business than an insurer typically would from an application. Boost leveraged that to model and price applicants. Rather than loosening underwriting arbitrarily, they created a new pricing factor for that specific underserved market.
Even with a direct-to-consumer perspective, insurtech makes insurance offerings more viable, cost-effective, and user-friendly. For easy-to-understand, known-quantity policies like pet or renters insurance, D2C embedded experiences are expected to be a popular way for consumers to connect with insurance. The global embedded insurance industry is expected to grow by 31.9% in 2022, and reach a market cap of around $57 billion by year end. Furthermore, in the US alone, the industry is expected to be worth $70.7 billion by 2025.
“We are seeing a growing trend in customers adopting embedded insurance solutions within
property and casualty insurance, particularly in personal lines. Customers don’t wake up
thinking about buying insurance, so embedded insurance makes it more convenient and
relevant for customers to purchase insurance when they need it,” Dwane said.
Changing industry dynamics with insurtech
Whether it's merely enabling digital distribution for better customer experiences, leveraging alternative data for better underwriting and fair pricing, or worse, leading the charge on actual product innovation, incumbents have been slow to adapt to the modern consumer’s needs.
Traditionally, incumbents have competed for customers through advertising. They dominate TV ads, and invest heavily in physical insurance advertisements at sporting events, for example. With this approach, incumbents try to ensure that their brands are top-of-mind for any consumer who is forced to obtain insurance for one reason or another. However, customer acquisition costs, as a result, go up considerably.
This trend is gradually changing with insurtechs entering the space. These newer firms have a different angle on customer acquisition, relying less on branding and more on speed, and enhancing the customer experience. This has led to a focus on product innovation and underwriting advantages.
There is a developing opinion in the industry that incumbents and new operators can collaborate for their shared interest in delivering value to customers. Finding the right intersection of incumbents’ needs and insurtechs’ capabilities may lead to value-creating partnerships and opportunities for the industry to move forward. While incumbent insurers are perceived as being slow at adopting innovation, this trend is changing through industry partnerships.
An example of such an incumbent is the Australian insurance company Suncorp, which holds over $97 billion in assets. Suncorp partnered with American insurance-tech provider Trōv to launch the latter’s on-demand insurance platform, Trōv Protection, in Australia. The product was initially launched for insuring consumer electronics based on Suncorp’s insurance products. What Trōv brought to the table was that it allowed consumers to selectively turn the insurance on or off using their mobile application.
“We fully believe that collaboration and partnerships are the key to success in the insurance
industry today. With more collaboration and partnerships, the industry can accelerate innovation
to meet customer needs and expectations more quickly. Now more than ever, through value-
creating partnerships, we’re seeing an uptick in incumbents and insurtechs working together, for
example, using data and AI-driven technology to assess risk and streamline insurance functions
like claims and underwriting,” Dwane said.
Insurtechs that have good product concepts and embedded distribution partners that have the modern consumer’s trust and engagement face the same barriers: insurers do not like change, and they are committed to owning the customer, Maffeo says.
Insurtechs often feel traditional carriers are reluctant to work with them. The sentiment at Boost is that the firm could be better suited to promote collaboration between them. The firm works with tech-based providers, as well as traditional providers, like Markel and Renaissance Re.
That’s not the experience across the board. Bolt has partnered with more than 100 insurance providers in the US, including companies like Progressive, USAA, and Liberty Mutual. They offer Insurance providers fast and seamless integration into Bolt’s insurance exchange. Using the firm’s digital tools, insurers can achieve instant scale and access new distribution channels and markets.
It’s worth noting, however, that many of the more forward-thinking insurance and reinsurance
companies are among some of the biggest investors in insurtechs. For example, American Family Insurance partnered with Cambridge Mobile Telematics and launched 'MilesMyWay', an auto insurance program that rewards drivers for driving less. Similarly, incumbent insurer Chubb launched 'Blink by Chubb', a cyber insurance product for millennials. Aviva got in on the act too, launching DigiCare+, an app designed to help customers prevent, detect, and manage common health issues.