Why insurance technology startups are going to Des Moines

Far from the Silicon Valley hub of financial technology, the next great insurance tech idea may be hatched in Des Moines, Iowa.

Since 2015, insurance technology startups from around the world have converged there to learn how to grow their businesses. The Global Insurance Accelerator is a 100 day early-stage startup program backed by major firms including American Equity, Principal and Mutual of Omaha. They’re working on tools make the claims process run better, and new ways to assess risk and detect fraud. The program will graduate its third class this year, and interest among major insurance carriers continues to grow.

“When you look at insurance companies, at the end of the day they’re data companies, and the products they deliver are virtual,” said Brian Hemesath, managing director of the Global Insurance Accelerator, whose fund offers participating startups $40,000 of seed funding in exchange for a 6 percent equity stake. The program is part of a larger trend where insurance carriers are developing their own venture capital arms to support new products from startups.

Hemesath notes that Des Moines, a major hub for the insurance industry, is a good fit to host the program, given that over 60 companies are headquartered there. Cost was not a driving factor, he said, but the low cost of living allows the program to offer free housing to the cohort. In addition to the accelerator program, earlier this year, ManchesterStory Group, a venture capital firm backed by a group of insurance companies from across the country, just began operations in Des Moines.

The startups are developing products for insurance carriers, including those that improve business processes, security and underwriting methods. The 2017 class includes InsuranceMenu, a platform to help small businesses connect with health insurance providers and RE-Sure, a tool that integrates blockchain technology into the insurance sphere.

Roland Chan, a current participant from Toronto said that in addition to workshops on market strategy, underwriting and regulation, what made the program stand out was the networking aspect. Chan is the founder of Find Bob, a machine-learning powered succession and partnership planning platform for insurance agents and financial advisers.

“The first three weeks were speed dating networking,” he said. “We were introduced to over 90 industry stakeholders, carriers, insurtechs and government agencies.”

A demonstration day later this month and presentations to an international conference of over 450 insurance executives will mark the culmination of these efforts.

Hemesath said some key issues are how to develop better underwriting technology (for example, how to assess a customer without a credit score), data sharing including the exchange of APIs, and how the industry can use data from emerging technologies such as wearables.

While early insurance technology innovations were in the consumer space, Chan said the next frontier for them will be to help large companies more easily deliver their services.

“A lot of the early bets have been made on disrupting the consumer experience, but the next wave is going to be about supporting other aspects of the value chain,” he said. “Insurance is one of the oldest segments of financial services that has had the least amount of innovation in the last hundred years — there’s going to be tremendous opportunities.”

Who’s afraid of InsurTech: An overview of the industry

top insurance startups

Q1’16 topped the record for seed and A investments in InsurTech startups by VCs. Investment in insurance tech startups rose from $800m in 2014 to more than $2.6b in 2015, according to the Financial Times.  

With the hype, some pundits are trying to ring the alarm bells, claiming incumbents are threatened by agile newcomers. According to a recent report by PwC, nine in ten insurers fear losing part of their business to technology companies.

Are those fears substantial? Though we might be drawn to the David vs. Goliath narrative, or enticed by the prospect of big corporations facing “death by a thousand papercuts,” neither metaphor is accurate.

CB Insights insuretech ecosystem

Power not shifting anytime soon

Using data from CB Insights, we classified the leading insurtech companies according to their attitude towards current incumbents.

Out of 124 companies, 31.5 percent have positioned themselves as partners to incumbent players. Analyze Re, which provides real-time analytics technology meant to improve pricing and planning of reinsurance contracts, is an example of a partner-friendly insurtech startup

40.3 percent of top insurtech upstarts are considered reformers. Reformers don’t aim to replace the current market participants, but they do provide an analytical and comparison layer for customers to find the right insurance products at the best terms. That being said, reformers do have an effect on margins, as they add transparency and ease-of-use to the ecosystem. PolicyGenius, which offers customers advice, quotes and comparison, and easy online applications for various kinds of insurance is a good example of this category.  

Only 28.2 percent of companies in the dataset are challengers, actively taking on the status quo. This category includes new digital native insurers like Oscar Health.

That means over 70 percent of insurtech startups don’t directly threaten incumbents, giving current leaders in the space plenty of time to develop their own responses to demand for new technologies.

Incumbent-lead innovation

Incumbents aren’t content taking a back seat in the innovation process, though. Many of the world’s largest insurers, including Aviva, Axa, Allianz, AIG, MetLife and XL Catlin have established their own in-house venture capital funds. Startup deal making by insurance firms is on pace for a record high in 2016, according to CB Insights data.

Many insurers have also opened their own incubators and innovation programs to keep pace with the startups. Insurance giant Allianz has a digital accelerator program to tackle the group’s digital challenges. AXA opened up AXA Labs in 2013, and has invested 950 million euros in digital technology since, according to Bloomberg Intelligence.

Even with the investments in innovation, legacy insurers should focus on retaining, servicing, and growing their customer bases. According to a 2015 survey conducted by IBM, only 43 percent of customers trust the insurance industry. To counter this perception, insurers must improve their image to build trust with today’s consumers.

In recent years, technological and social trends are changing the needs of customers and the way insurance companies operate. The rise of the sharing economy, for example, gave birth to pay-as-you-go policies. The consumer’s demand for mobility and transparency puts an emphasis on multi-platform digital experiences for managing policies.

On the operational side, connected devices in homes, cars and on consumers themselves allow insurers to collect and analyze far more data than was ever possible. This, in turn, could allow them to personalize coverage, better tailoring policies to the consumer, while also reducing their underwriting risk.  

“Added together, these digital trends offer insurance companies an opportunity to stretch their businesses beyond the boundaries of traditional insurance,“ states Accenture’s Technology Vision for Insurance 2016 report.

The plethora of technological trends will change the way the insurance industry operates and services its customers. The degree to which insurers react to or embrace these changes can be the key to their success.