Reinsurance News

Challenges and opportunities for insurtech start-ups: A.M. Best

20th January 2017 - Author: Luke Gallin

After witnessing the fintech revolution transform the finance world, re/insurers are moving quickly to invest in insurtech start-ups – a technological revolution pushed by tough market conditions and pulled forwards by massive possibilities.

The huge influx of capital means carriers are coming under increasing pressure to find more efficient, cost-effective ways of delivering services to maintain profitability and investors see opportunity in the disconnect between the current business model, that has not yet significantly evolved with the times, and the service that customers need.

Yann Ranchere, partner at Anthemis Group, told A.M. Best in an interview in the rating agencies latest Best’s Review magazine; “The product that insurers provide is not matching the market anymore. There is clearly a disconnect here that begs for a solution.”

And the re/insurance industries’ long-awaited customer experience overhaul is well underway; “the whole market is looked at very thoroughly, and we will see innovation in every visible space,” Ranchere added.

Spencer Lazar, partner at venture capital firm General Catalyst spoke of the opportunity for technological innovation to change the customer’s view and experience of the industry; “Insurance has been a business about dread and disappointment, mostly. What we’re excited about is the opposite of that,” A.M. Best reported.

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The aftermath of New York’s Hurricane Sandy where three years after disaster struck, hundreds of claimants had yet to receive their insurance payments, is just one such example of the complex processes and lengthy waits for payouts customers have grown wary of.

The massive market size is another factor driving insurtech innovation; investors know that while not every insurtech start-up will transform the industry, some will, and those that do will have struck gold.

Big-risk, big-return investors know the opportunities for re-envisioning the insurance and reinsurance space being explored will likely spread across the globe as the next uber or fintech revolution.

According to Lazar, cyber insurance could “explode anywhere from five to 10 times in size over the next decade,” he added that enabling technologies “that remove humans from parts of the process of the insurance business,” were another focal point of interest, A.M. Best reported. 

Quilt co-founder and chief-executive Blair Baldwin, who launched a traditional renters’ insurance product that promised to change the entire way policies are constructed and paid out said; “On the funding side, there’s a lot of venture money available to high-caliber teams given the potential for outsized returns.

“On the incumbent side, traditional carriers and reinsurers are worried about the oncoming wave of innovation and disruption. They’re more willing than ever to try new experiments, fund different business models and work with new teams.”

Rating agency A.M. Best stated that according to Matthew Wong, senior research analyst for CB Insights, insurance technology is now the hottest segment of financial technology, with insurers, reinsurers and traditional venture capital honing in on the promises of insurtech startups; “Insurers have gotten involved relatively early. They realize that it’s smart to get ahead of coming change in the industry.

“Given what they’ve already seen happen in financial services innovation, there’s an awareness that change may happen quickly in the insurance sector,” Wong said.

The industry experts featured in A.M. Best’s January report, cited finding the right partnership, understanding the regulatory environment, and keeping up with technological changes as key challenges to success with insurtech start-up investment.

Ranchers told the rating agency complications could come in with historic claims data, and managing system integration.

While Pradip Patiath, senior partner in McKinsey’s insurance practice, stated the number one challenge his company faces is partnership; “which means devoting time to picking the right partners, investing in and developing the partnership, and becoming aligned on mission and vision.

“Entrepreneurs also need “a true understanding” of the complicated insurance market,” Patiath said.

“Without it, you’re likely to get burnt,” he added.

Senior research analyst for CB Insights Wong commented that start-ups can struggle when they try to “solve too many, too large problems early on,” and pointed to the harsh facts of the innovation game – there will be many venture capital failures.

“Very few startups that take venture capital as a funnel make it to successful IPOs, mergers, acquisitions or later-stage funding,” Wong said.

The senior analyst added that this year would be “one of continued startup developments, especially in how consumers react to the host of digital startups entering the market distributing insurance across small commercial, renters, life and other lines.”

Rashmi Melgiri, co-founder of CoverWallet—a New York City-based online insurance management platform start-up commented that the re/insurance market is going to see “more complete thinking…along with transformation on what the customer experience looks like from a buying perspective in insurance.

“Lemonade is an exciting example…look at what they’re doing with the customer experience of buying renters insurance—they’ve really reimagined it.”

Reinsurers have been realigning their place in the industry to match the increased market volatility – jumping aboard the technological bandwagon – bypassing insurers through offering their balance sheets to insurtech start-ups.

Munich Re has underwritten start-up Trov and Slice Labs, Hannover Re backed life insurer Ladder Financial in its first start-up investment last October, and SwissRe has a stake in data aggregator and Biovotion.

Reinsurance giant Swiss Re is also a global partner of the MassChallenge accelerator, Daniel Ryan, managing director of digital analytics catalysts for Swiss Re told A.M. Best; “With MassChallenge, we look for companies with ideas that resonate strongly with parts of our business.

“Capital is often a secondary interest…often they would like to learn how their ideas can be useful within the insurance industry. And we want to learn from them how their technology is potentially transforming a risk we have.

“We quite like the idea of having an investment where we can learn and we can influence,” Ryan said.

“We have a seat on the board, but we won’t be saying, ‘It has to be done this way.’ We like that they have an agility and a speed of movement and thought that addresses problems more effectively than perhaps a large organisation might achieve,” he added.

Ryan said the main two things he believed start-ups provided Swiss Re were a different perspective on risks and a new perspective on the effective solution and speed of solution implementation; “That combination of energy and different thinking provides a clear insight and value to us.”

The insurtech revolution may still be in its relative fledging stages, but throughout the re/insurance market transformation of the traditional business model is well underway and industry experts say over the next five years some companies will emerge as very successful, and in the coming ten years these start-ups will likely have transformed the structure of insurance.

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