When we think about technology and change, the first examples are often the “Kodak moments”, where a longstanding household name was pretty much put out of business by technological developments and new competitors (in this case smart phones) coming from left field. Similarly, both taxis and limo services have been considerably impacted by Uber and similar ride sharing companies, although in this case limo drivers are now driving Uber Black (the executive category) and some taxis have joined these platforms. Retail has been even more heavily impacted by online shopping in general and Amazon in particular, to the extent that most high streets have many empty shops.
In the fintech space, newcomers, in some cases unregulated or less regulated, came into the payments, lending and banking ecosystem, particularly in areas where costs were very high and customer service was poor, such as remittances. In some cases, these challengers have now been acquired by larger groups, or are partnering to make use of the incumbents’ balance sheets.
In insurtech, which has developed later than some of the other fintech verticals, I believe both the incumbents and the start-ups have learned some lessons from all this. This suggests a different relationship between the newcomers and the incumbents. First, insurance really is quite heavily regulated due to the long-term nature of some of the products and the relatively large sums that may be involved in the event of a claim. It’s pretty much impossible to hold insurance risk without a license and this has led to new relationships being formed, which are shaking up the industry but in a different way from the examples discussed earlier. Second, whereas most people already had a bank account, a camera or went shopping, there is a huge protection gap. Over the last 10 years, according to Swiss Re, there were $1.3trn natural disaster risks not covered by insurance. There is also a huge gap in life and health insurance. This is the case in mature markets and even more so in emerging markets and this means that insurtech can help increase insurance penetration, without just leading to a market share battle between the incumbents.
To highlight some of these trends:
- MGAs – from a model that caused a lot of problems in the 1980s and 90s, the Managing General Agent (MGA or MGU in the US) has seen a resurgence. This model allows a carrier to give underwriting authority within certain limits to the MGA, who can use the insurance company’s balance sheet and license. This is ideally suited to trying out new models without the start-up being swamped by the culture of the incumbent and reducing problems of channel conflict as the MGA has a separate brand. Unfortunately, many emerging markets do not recognize the MGA in their legislation, which is shame as they are often a good way of launching new solutions and sometimes companies start as MGAs and later become full stack insurance companies.
- A new role for reinsurers – the traditional reinsurance model has been under pressure for many years now due to an abundance of capital, including from new sources, and consolidation amongst the primary companies leading to higher retentions. We are now seeing reinsurers, who are searching for growth and to remain relevant to their clients, playing a leading roll in backing insurtechs. In some cases, this may be by investments but increasingly reinsurers are providing capital in the form of reinsurance capacity and expertise behind the scenes. In some cases, a local insurer may still be involved in the value chain but where the insurtech is a licensed carrier like Next Insurance, Lemonade or Hellas Direct, there is no need for this.
- Service providers – these companies take one part of the value chain and improve it. The beauty of this model is that they can work with a large number of insurers as they are either facilitating part of the process, like Snapsheet in the claims area, or they can provide a product that insurers can white-label and offer to their customers as Amodo has done for a telematics solution. The challenge here for the start-ups has been to get to a MVP without entering into exclusive arrangements. On the other hand, they may be able to develop a better solution more quickly and cheaply by working with a number of insurers, so the carrier may not be opposed to doing business with a company which also works with their competitors. We’ve also seen this in the blockchain space, where, for nearly the first time, erstwhile competitors are working together to develop industry wide solutions.
So, in conclusion, insurtech is not really about incumbents vs start-ups, but rather about which insurers can evolve and partner to take advantage of new technologies and there will certainly be winners and losers. Reinsurers may have found a new role as capital providers and mentors to start-ups, where they may be both helping or competing with primary insurers depending on the circumstances. The traditional value chain is being broken up with insurtechs providing solutions in areas such as customer service, claims and IoT. It seems like we are all “frenemies” now!
Susan is part of the financial institutions group at IFC. She invests in insurance, both mature companies and earlier stage technology related to insurance, in developing countries. She has 30 years experience in insurance in a variety of different roles