The insurance industry barely featured in the first cycle of Fintech-led disruption that swept the banking and capital market segments. But just as the broader Fintech market shows signs of maturity, Insurtech is emerging as the next potential candidate for large-scale disruption. In fact, some observers believe that the insurance industry may be positioned to see the most benefit and the greatest levels of disruption.
The growth of Insurtech
Global investments in Insurtech are definitely on track for a record-breaking 2018. Investments during the first six months of the year are already at 85 percent of total 2017 funding, with a one-third drop in number of deals being offset by a larger average deal size. The startup ecosystem has also expanded beyond the US to EMEA, which together account for 86 percent of Insurtech companies, with Asia-Pacific expected to be the fastest growing region in the coming years. And finally, the focus of these startups is distributed across the entire value chain, including personal and commercial lines and different product and business segments.
The first wave: IoT and Analytics
Insurance has always been a data and analytics business. It is therefore only appropriate that IoT and advanced analytics technologies have been behind some of the most significant Insurtech innovations till date. In 2016, these two technology segments accounted for roughly 36 percent of the total Insurtech pie, and a significant number of insurers have already moved to capitalize on the IoT opportunity. Today, real-time structured and unstructured data from a range of devices including vehicle telematics systems, activity trackers and smart home devices are enabling Insurtechs and insurers to more finely delineate risk groupings and develop more usage-based pricing models like usage-based insurance (UBI), pay-as-you-drive (PAYD), and pay-how-you-drive (PHYD).
Simultaneously, insurance companies have also embraced the value of big data, investing in advanced analytical tools to extract more value from their expanding data sets. Industry investments in big data technologies are expected to touch $2.4 billion by the end of this year and grow at a CAGR of 14 percent over the next three years. Today IoT and advanced analytics power a a range of applications across customer service & experience, risk management, policy and claims management and fraud detection prevention, to name a few.
The second wave: Machine Learning and Artificial Intelligence
If IoT and analytics created the foundation for innovation in insurance, then machine learning and artificial intelligence are plugging into existing transformations within the insurance industry to drive a second wave of innovation and disruption. These technologies allow insurers to scale analytics across data types, volumes and business functions and bring automated decision-making to increasingly complex scenarios.
A 2018 Everest Group report based on the AI-focused investments of 100 global insurers determined that insurers are focused on embedding intelligence across the value chain. The study also found that AI adoption was highest in sales & distribution and underwriting, followed by policy administration and claims management, with product development coming bottom of the scale.
At the same time, Insurtech startups have also been deploying a range of innovative applications at the intersection of AI and insurance: from an AI claims assistant that can reconstruct accidents and expedite claims, to a smart home insurance product linked to IoT home safety devices, a comprehensive AI solution for insurers to harness the power of alternative data sources, and an AI-driven property intelligence solution for insurers, to name just a few.
Investing in partnerships
All these technological factors are putting the insurance industry on an evolutionary trajectory that will propel it from its current state of detect & repair’ to a predict & prevent’ future. A significant majority of insurance executives not only believe that technologies like AI can completely transform the industry over the next three years but are also proactively investing in these capabilities. When it comes to AI, one study found, more than half of insurers were investing in in-house capabilities through internal hiring, hackathons and Insurtech acquisitions and partnerships.
Acquisitions and partnerships, in particular, seem to be a priority for a majority of insurance executives, with the focus decidedly on complete organizational transformation rather than mere augmentation of existing processes and models In 2017, private technology investments by insurers and reinsurers are estimated to be the highest recorded in any year to date.
The integration challenge
As much as investments, acquisitions and partnerships will empower incumbents to disrupt rather than be disrupted, there are still some significant challenges that need to be addressed. Primary among them, according to the insurers themselves, is the challenge of integrating new technologies to existing infrastructure and the accompanying issues such as data quality, privacy and infrastructure compatibility.
Many insurers are still saddled with legacy platforms that inhibit integration, innovation and true customer centricity. The imperative to innovate, therefore, has compelled most insurers to undertake radical core transformation programs to create the foundations for a digital insurance business. Then there is the task of digital transformation, which poses a real strategic dilemma for insurers. On the one hand, there can be no meaningful and sustainable digitization without core transformation. On the other, delaying digitization to replace core systems could result in missed opportunities in performance improvements and innovation. As the insurance business evolves into a digital ecosystem model, it is also critical that the infrastructure is primed to integrate core business functions with third parties and their platforms.
Traditional insurers need to find insurance-specific integration solutions that have been designed to smoothly transition the business to the Insurtech generation of technologies. Carriers must be able to adopt a phased approach to simplify, standardize and modernize their technology infrastructure, with minimal business disruption, and align it with a shared and intelligent digital ecosystem.
The future of insurance incumbents
The impact that technologies like AI and IoT will have on the insurance business in the very near future is not lost on legacy players. They are also fully aware of the transformative effect that Insurtechs will have on the industry. More importantly, the prevalent if not extensive view that Insurtechs can enhance incumbent insurers’ capabilities has helped create a culture of collaboration, either through investments, acquisitions or partnerships. Now, traditional insurance companies have to ensure that their legacy systems and technologies have the digital capabilities to work together with the dependencies and architectures of new technologies. The strategies they deploy to manage this integration will ultimately determine their success in harnessing the full potential of ML and AI.
