What is InsurTech? For the tech entrepreneur, it’s the dreaded and perennial question: what does your company do exactly? The answer only gets tougher when it comes to insurance – often seen as a slow-moving and stale industry that lacks innovation. Yet InsurTech, when made geeky-cool, is “property value hedging technology”. Now, the advancements that InsurTech is bringing to the insurance industry are what Airbnb and Uber have brought to the housing and transportation industries – even as hedging risk and value recovery remain key insurance foundations. InsurTech is any company, or product, that leverages technology to provide value in the insurance value chain.

The Insurance Value Chain

A customer’s relationship with an insurance company has three – sometimes four – stages: policy purchase, premium payment, claim filing, and recovery. An insurer maintains many processes and operations, out of the customer’s view, to sustain this relationship and keep its profits growing. The first stage of the relationship typically consists of exposure, education, discovery, decision, qualification, approval, and purchase. The second stage entails interactions with the customer to collect payments, deepen the relationship, and cross-sell. In the third and final stage: if damage is incurred, the insured submits a claim – via an agent, customer service, or online – which is then reviewed, checked for fraud, adjusted, approved, and potentially paid out to cover the loss. Each of these functions – the links of the insurance value chain – carries frictions and thus opportunities for improvement via technology. Such opportunities can be seized via ad-hoc technological add-ons or smart exploitation of the latest technology trends.

Technology Trends

Five key technology trends are shaping insurance (and other industries):

1. Big data and modelling
2. Automation
3. Connectivity and mobility
4. IT infrastructure
5. Telematics and Internet of Things (and drones).

These trends are the basis of much of the innovation by insurance companies in the strategic dimensions of customer engagement, marketing and distribution, insights, productivity, and risk. Currently, insurance companies mainly compete with each other in the marketing and distribution dimensions, with the goal of increasing market share, or up-selling, via customer engagement. This approach is straightforward. When successful, it yields growth. But is it enough? Or should insurers be doing more technological innovation within their businesses?

If they did, incumbents could pick low-hanging fruit by adapting existing technologies to their systems and processes. They might, for example, harness big data to enable commercial underwriters to better assess risk; let claims adjusters use pictures, captured by drones, to help process claims; or allow body shops to bid automatically on claims and agents to manage their business from their mobile devices. However, in the long term, the landscape of the industry will change. The incumbents need to decide if they are going to determine the direction of this change actively, as they have done in the past, or if they will be forced to adjust passively to it.

Opportunities for InsurTech

Historically, insurance companies’ competitive advantage has always been strong brand, distribution channel, and vendor management. Recently, insurance companies, brokerages, and agencies have recognized the advancement in technology and the emerging need for an on-demand, on-the-move, tailor-made coverage with a modern user experience. Alas, they are not technology companies and technology is not part of their DNA. To make things worse, in the past they identified IT as cost and outsourced the majority of their operations and know-how, making themselves heavily dependent on offshore service providers. This conservative culture left the insurance companies vulnerable and without a technological competitive advantage. Now, because the playing field is shifting towards technology and the insurance companies are not equipped with the right gear, mindset, and expertise, there is an opportunity for entrepreneurs to found InsurTech startups as:

1. Facilitators
2. Enablers
3. New kinds of insurers.

Each of these three buckets can be categorized with one or more of the following attributes: policy aggregator, coverage compare engine, Platform-as-a-Service (PaaS), data aggregator, data modelling, IoT, customer engagement, risk management, productivity tools, office management, digital insurer, digital broker, and digital agency. Facilitators primarily offer or develop customer-facing applications that simplify the search for an insurance policy. They started servicing customers prior to the 2015 surge in InsurTech startups. A common example is a policy-price compare engine. Most facilitators monetize on affiliate or brokerage fees, and they have become a major source of customer acquisition flow in the digital age. Enablers are companies that develop technology to help insurers offer new lines of business (LoB) or improve operations. Importantly, they do not provide coverage. Instead, they work with other companies – either incumbents or new entrants – whose existence is made possible by the enablers’ technology. Some enablers, for example, permit insurers to offer usage-based insurance (UBI). Others collect data and assist with fraud detection. Enabler entrepreneurs have the largest pool of opportunities in the insurance value chain. One caveat: only startups able to endure a long procurement process will be able to enjoy those opportunities.

Finally, the new insurers. They provide coverage and offer new lines of business or familiar insurance products with better user experiences and cheaper and scalable infrastructure. It will take years before, say, mobile-first P&C insurers threaten the market share of incumbents. But, in the short term, they will likely be bellwethers for the industry, providing proof of concept for new means of customer engagement and claims processing and new sorts of insurance products.

The main investors in InsurTech startups are venture capital (VC) firms and angel investors with reinsurers and insurer corporate venturing arms. The InsurTech entrepreneurs together with the VCs and the angels will have several possible exits to gain a return on their investment. They may take a company public, sell it, or grow it to a substantial size. The motivation behind the reinsurer and insurer venture arms is similar to the VC’s return on investment (ROI) goals and usually their investment portfolio serves the strategic need of the sole limited partner, the reinsurer. The expectation is that the portfolio startup will have a guided opportunity to be acquired for a market segment, or get acquired for a technology stack. When planning the long-term goal and possible exit of an InsurTech startup it is important to consider the different opportunities and challenges that a core system, for example, a policy system, and an auxiliary system, for example, an AI-powered insurance agent chatbot, bring to the table. Furthermore, peripheral product relies on the assumption that insurers can integrate new product with their legacy system. In many cases, replacing an old core system is probably easier than just reforming it, though recognizing this and making such a change is likely to be a large cultural obstacle for many companies. So, will insurance companies disappear? No! They will just be better.

Insurance as “Property Value Hedging Technology”

Insurance is an important financial tool. It is an economy enabler that lets people make larger bets on the risks they want by hedging away the risks they don’t want. When we take a step back and look at the evolution of P&C insurance, we see that insurance enables transportation of people and goods; it guards trade, exploration, and discovery. It hedges the risk for construction of homes, commercial buildings, and infrastructure. In other words, it empowers individuals and businesses. Innovative ideas can be adopted from other industries and business models.

Software-as-a-Service (SaaS) changed the way that businesses procure and utilize software. The next step in evolution, PaaS, reshaped how businesses develop software. PaaS reduces cost of entry, reduces operational costs, shifts maintenance responsibility, and is scalable and available on demand. The same way PaaS powers companies to build and deliver better products, Insurance-as-a-Service (IaaS) powers insurance companies to develop new products.

IaaS Will Propel the “Property Value Hedging Technology” Story

When applying the general concept of SaaS to the insurance industry, one can imagine various insurance processes being turned into services, including underwriting, claims, and even the overall insurance process itself. By making these processes generally available in an easy manner, these services are likely to spur innovation by reducing the barriers to entry for new and more creative firms.

Ideally, a company will be able to recognize a demand for a coverage, or risk hedging, and supply a new insurance product within a short period. Say, for example, that an insurer notices that newly-married couples would like to hedge their risk of having their honeymoon ruined by bad weather. A nimble startup might be able to go to market quickly with a server-less technology stack that integrates IaaS and SaaS components.

IaaS is not Limited to the First Movers

Companies that define themselves as fast followers should harness IaaS to secure InsurTech as a factor in the Strength and the Opportunity quadrants of their SWOT analysis instead of the Weakness and the Threat quadrants. InsurTech has the potential to radically improve the insurance industry’s failure to innovate. Collaboration between large insurance providers and InsurTech startups will benefit both sides. The former will bring the customers and brands, and the latter will bring the innovative energy, new ideas, and culture.