According to CB Insights, VC investments in insurance fintech (insurtech, or insurance tech) firms quadrupled compared to 2014. NYC health insurance startup Oscar became the poster child for customer engagement, the proof that insurance can be made sexy. AXA launched AXA Strategic Ventures, a €200m corporate venture arm for emerging strategic innovations relevant to insurance, as did Allianz, MetLife and PingAn (among others).
Mark Wilson, Aviva CEO, said ‘the industry is in the stone age’ and started hiring staff from Google and Amazon to update Aviva’s technology, Startupbootcamp announced its first insurance accelerator program in London, backed by Allianz, Admiral and Lloyds. In our view, 2015 was just the start. We expect insurtech to really take off in 2016 and see four key challenges that insurance carriers are facing. Each challenge drives a sense of urgency at insurance firms to accelerate digital transformation, and each invites new entrants to move into the insurance space.
Current cost levels are much too high
To be frank, an insurance – the transfer of risk from a consumer to an insurer – is quite expensive. Insurers spend between 20 and 40 cents of each euro of premium on costs of operations and customer acquisition costs, marketing and distribution – not on what the insurance is actually for. We’ve come across health insurers that actually spend 15 cents on every premium euro on recurring broker commissions (and are afraid to change this to more responsible levels simply because they don’t want to damage the relationship with their most important distribution channel).
Operational excellence and cost efficiency will remain priorities. Insurers are looking for ways to operate more efficiently in every major part of the costs column: in claims expenses, costs of operations and customer acquisition costs. Short-term focus therefore includes sophisticated underwriting, risk reduction, improved claims management and cost-efficient service.
We expect technology purchases and investments by insurance carriers in these areas to further explode, as will the number of fintech solution providers that want to cater to that need.
Customer engagement leaves much to be desired
Most insurers still have low Net Promoter Score ratings. In spite of all the efforts and investments in the last few years, customers still experience friction throughout the customer journey. Rising consumer expectations are more and more difficult to meet. The frame of reference is set, not by the service offered by other insurers, but by what customers experience when they reach out to other brands, for instance using their smartphone. Furthermore, insurance is still about averages, products, one-size-fits-all, paper, brokers – which isn’t always in sync with changing customer preferences and what technology is able to achieve.
Insurance firms are turning to digital technologies and what fintech companies can offer to improve ways of engaging with customers, yet this friction also stimulates new entrants to introduce more relevant concepts. To explain the ‘why’ of launching the company, new entrant health insurer Oscar admits:
We didn’t start this company because we love health insurance. Quite the opposite in fact.
Technology has eroded the barriers to entry. Many more new, provocative concepts will be launched in the years to come. Let’s not forget that insurance is an extremely attractive market. The global insurance industry alone is a $4tn market (12 zeros) according to McKinsey. A market that size, with so many imperfections and latent and manifest needs, obviously attracts investors and entrepreneurs, as well as blue chips outside the insurance industry.
Internet of things just entered the radar screen
Connected cars, connected homes and e-health are about to become mainstream. All these connected devices generate an avalanche of data that can be used to improve risk assessment, but also to offer new products and services, and to create new revenue streams and growth opportunities. However, a Roland Berger/Emfa survey among 23 European insurers revealed a hesitant attitude.
About 60% of participating insurers have started initiatives in connected cars, but mostly limited to using telematics data for more sophisticated underwriting and claims management, and hardly ever exploring the development of entirely new products and revenue streams from all the contextual information that becomes available. In connected home and connected health, there’s even less activity. This has invited all sorts of new entrants that see the commercial potential of data produced by drivers, homeowners and health device users. Numerous tech startups that are devoted to creating innovative products and services based on the internet of things, for example, but also big names in consumer technology such as Amazon, Apple, Google, Microsoft, Philips, Samsung and Siemens. These companies have designated the Internet of Things as a focal point in their strategy.
What helps them is that, according to the Edelman Trust Barometer, ‘Technology’ and ‘Consumer electronics’ are the most trusted sectors among consumers. Car manufacturers looking for new revenue streams have also woken up to and are increasingly moving into the insurance space, becoming more active in sales, distribution, and claims, just like they have become key players in financing new vehicle sales over the past few decades.
MS&AD, a leading Japanese insurance group with strong links with Toyota, acquired a 75% stake in innovative British telematics insurers Insurethebox and Drive Like a Girl. John Deere, producer of farm equipment, acknowledges the increasing importance of data too. In its view, the software in each vehicle is the core of the product and a John Deere tractor is a software package encased in thousands of kilos of mechanical parts. By trying to copyright-protect the software, the company would gain exclusive access to all the data generated by the vehicle. GM is moving there as well.
Speed of innovation has been limited thus far
The appetite for innovation in the insurance industry has always been limited compared to other consumer industries. This is remarkable in view of the impact of Google Search and insurance comparison engines such as MoneySupermarket, Comparis and Independer that fundamentally changed market dynamics.
Past profitability resulted in a lack of sense of urgency. Obsolete conventions and vested interests (broker sales) killed any innovative ideas. Insurance carriers are now making the leap into the 21st century. They have little choice. If they fail to deliver against the ever-increasing demands and expectations of customers, they will lose share to traditional rivals that succeed in striking the right chord, and to new entrants that have the advantage of digital DNA to leverage technology to provide lower costs and better service.
Which insurtech companies will be successful?
So, what do we expect for 2016? Which insurtechs will be successful? We distinguish seven different flavors of winner in fintech insurance; ‘winners’ because they bring specific flavors of added value to insurance companies and to customers. In the coming weeks, we will publish articles that take a closer look at each flavor, including ample examples of fintechs, so stay tuned. For now, here’s a sneak peek at the seven flavors:
1. Superb customer engagement. Solutions that help insurers to make a leap in customer engagement, to become much more effective in every step of the customer journey. Plus, new entrants that are attacking specific frictions, complex processes, and product and pricing imperfections customers have to deal with when working with insurance companies.
2. Dramatic cost savings. Fintechs that provide innovative solutions that impact the key cost drivers. Think of solutions for improved claims management, fraud detection, more cost-effective customer acquisition, and cost-efficient service.
3. Sophisticated underwriting and risk reduction. The core competence of insurance is ready for a makeover thanks to all sorts of new technologies, such as machine learning and cloud computing.
4. Disruptive business models. Also in 2016, we will continue to see the emergence of new digital-first carriers. They have one thing in common: they attack with a new business model that’s clear about how it creates value for its customers.
5. New roles in the value chain. Traditional agents and brokers are becoming an endangered species in many mature markets because of a lack of added value in view of excessive commissions and online alternatives. A whole new breed of intermediaries now enters the insurance arena.
6. Innovation acceleration enablers. The systems of most insurance carriers are older than the customers they serve. Obviously, this is a major hurdle to innovation. Several fintechs are offering powerful solutions that align IT with the business demands for speed, flexibility, agility and cost-efficiency.
7. Contextual data propositions. Connected objects will generate loads of new information, not only directly related to the insurance but also about the context. This will spawn much deeper customer insights, and in turn these should lead to fascinating new directions for product and service innovation.DIA Barcelona 2016