Insurtech 2.0? How trends are influencing development

August 3, 2022 6:35 AM

A pedestrian views a smartphone while passing in front of the CN Tower in Toronto, Ontario, Canada. — A pedestrian views a smartphone while passing in front of the CN Tower in Toronto, Ontario, Canada on May 19, 2017.

The insurtech industry has seemingly reached a new chapter of innovation – companies emerging from this new era, referred to as "insurtech 2.0," are leveraging their industry experience and advanced technologies to focus more heavily on their underwriting capabilities. Insurtechs riding this new wave of digital transformation can expect the next few years to be absolutely pivotal for their success, and leaders must be prepared to adapt.

Digital Insurance met with industry experts for their insights, and trend predictions, on what the industry can expect from insurtechs and insurers in the second half of 2022.

Specialization

Now equipped with market experience and credibility, insurtechs are seeking to create their own niche within the insurance industry. These next few years will be pivotal for insurtech MGAs, as they must focus more heavily on their technologies, service solutions and underwriting capabilities to keep up with insurtech 2.0.

Madhu Tadikonda, president at Corvus Insurance, explains, "I believe that we'll see cyber insurtech MGAs diverge quite a bit in the next few years, and each of the main global players will start to develop their own personalities as they go beyond the 'startup' phase. I expect some insurtech players will stay focused on underwriting and tech enablement, while others will focus less on the insurance product and more on monetizing data."

Insurtech 2.0 is the next chapter for insurtechs, and companies will stand out to insurers by targeting specific areas of friction. Those with exceptional service and technology solutions will emerge during this time, Tadikonda predicts.

"And 2.0 companies are focusing on areas, including emerging risk categories like cyber, where incumbents don't have the data or tech capabilities to fill the customers' needs," says Tadikonda. "Insurtech 2.0 is focused on scaling by leveraging technology and underwriting capabilities in an effort to carve their own niche in the market."

Digital focus on data

It's no secret that insurance is a data-driven industry. Underwriting and risk pricing models rely solely on data information, and in an industry overwhelmed with data, insurtechs have the opportunity to provide insurers with more efficient tech-enabled data solutions. Data aggregation, analyses and predictive risk assessments from technologies like AI and machine learning have become increasingly valuable to insurers. According to Arun Prasad, the principal global technologies leader at Deloitte, the industry can expect to see digital transformation continue.

"Those insurtechs that address the data needs of insurers, at any point in the life cycle processes, are able to present an improvement. Any of the appropriate KPIs will be of value," explains Prasad. "Whether that's using AI technologies, the aggregation of multiple data sets or other techniques that are of value, whether it be in the rating and quoting on the distribution side and or on the claims side – I think all of the insurtechs that touch any one of those spaces will continue to be of interest to your primary insurers."

Brian McLoughlin, partner and co-founder of MTech Capital, also believes that the digital focus on data and AI technologies are trends the industry can expect to see over the next few years.

"Insurance, you could argue, is entirely a data business, and certainly the pricing of risk is all about what data you have," says McLoughlin. "With more and more of insurance companies' data moving into the cloud, they will be able to leverage AI-driven tools for data analytics."

McLoughlin finds, however, that not many insurers are using AI directly for pricing, but that there is "lots of experimentation going on." He also sees activity in application intake, including augmenting the information for these submissions and using AI to select which applications best fit an insurer's appetite.

"AI will change the plumbing of insurance: it's focused on underwriting, it's focused on which submissions to work on, how to price those submissions – and that's a forward trend," McLoughlin notes. "In fact, we have a portfolio company, focused on applying AI to pricing and their sales momentum has increased dramatically as carriers are more interested in using AI right in their pricing. So, this is becoming an exciting area."

Partnerships and acquisitions

One major ongoing trend expected to continue is the rise in insurtech mergers and acquisitions. Insurtechs have certainly secured credibility in the industry as significant disruptors and as "a critical component of the insurance ecosystem," says Prasad.

Carriers' continued investment in insurtechs is likely to continue into the second half of this year; large organizations like HUB International, for example, have started to acquire a number of different insurtechs to double-down on digital strategies and broaden technological capabilities.

According to Prasad, insurtechs also attract "top tier talent from the technology domain and technology experience" to the insurance industry, and finds that attracting talent to solve some of those problems is of great benefit to the broader industry.

Prasad adds, "I expect a greater number of acquisitions, and at least discussions, between the primary carriers and the insurtechs. We saw a few acquisitions being made, but I believe that that will continue because it is a very good way to inject that talent, as well as solve a problem."

Tadikonda also anticipates an increase in this adoption from carriers. "I expect to see more partnerships between traditional insurers and insurtechs as both bring something valuable to the table. The model of insurance has already changed quite a bit in the last five years, and that pattern is likely to continue," he says.

Globalization

Though the focus of the insurtech industry is traditionally quite U.S.-centric, and often Silicon- Valley-based, Prasad believes that there will continue to be an element of globalization emerging as the industry grows. A number of insurtechs are based in Israel, Europe and Asia-Pacific.

"I think there's friction in the insurance life cycle, regardless of whether you're an insurer in Europe or in the U.S.," states Prasad. The United States may have been early to insurtech due to "the complexities of the U.S. market, plus the availability of capital in the U.S. market," notes Prasad, but, "the private equity and venture capital communities in Asia-Pacific and in other geographies are now seeing this as an opportunity, as well...those regions have different dynamics because of both their regulatory nature, as well as the propensity for different types of products."

Challenges

There exists a number of obstacles that the insurtech industry will continue to face in the latter half of this year. According to Tadikonda, the availability of risk capital is a major point of concern for cyber insurtechs, specifically.

"The rise in losses due to ransomware attacks has made it more challenging to attract sources of capital. Along these lines, there is ongoing speculation about what the 'next ransomware' will be — the next big type of cyber attack," explains Tadikonda. "From a preparation standpoint, the insurance market is paying just as much attention to this next big costly threat (as are cybersecurity researchers), exploring how to get ahead of it."

The insurance industry must also battle with the talent challenge and Great Resignation that many other industries are also facing; as the market is "expected to double in the next five years," according to Tadikonda, talent attraction and retention are essential for success.

"Insurtechs still attracting great talent are often those [that] have found insurance experts who feel stymied by the bias against innovation at big incumbents, or data [scientists] and engineers who want to use their skills to create a better world," states Tadikonda. "That mission-driven aspect of the industry is a natural draw for talent."