Insurance technology (insurtech) is an exciting area of finance which offers faster, cheaper, more accessible and more secure solutions to a wider customer base compared to traditional insurance models. In this report, we explore the latest insurtech landscape including key players, new entrants, trends, opportunities and risks for investors – together with some implications for early-stage investors.
Market overview: insurtech
In 2022 the insurtech market was estimated at $5.45bn globally – with an expected compound annual growth rate (CAGR) of 52.7% between 2023 to 2030. Today, the most common insurance claims are for auto, life and home insurance. The world’s biggest insurers are fairly well-known and have head offices in various countries. They include Allianz (Germany), UnitedHealth Group (US), AXA Group (Paris), China Life (China) and Zurich Insurance (Switzerland).
Around 59% of insurance companies increased their investment in digital infrastructure in 2021 due to desire to reduce costs, enable faster payments and enhance security. Yet the large players are often cumbersome and slow to react to changing customer demands and technology – hence the rise in insurtech. In the UK alone, there are now over 136 insurtechs (the most insurtechs in Europe) – with 63 unicorns in the space, globally.
The huge rise in forecasted CAGR for insurtech is fuelled by rising insurance claims worldwide. As certain countries and regions get richer, their middle classes tend to expand – i.e. people who are more able to afford insurance for their vehicle, income and property. Indonesia, for instance, is projected to have the world’s fourth-largest middle class by 2030 (overtaking Russia and Japan). Insurtech is ideally positioned to serve many of these emerging economies. As a typically cheaper model compared to traditional providers, insurtech providers are more within the financial grasp of middle classes in non-Western countries.
Traditional insurance has also been hit by inflation, which has risen globally since 2021. Many insurers invest their funds into lower-risk assets such as government bonds, which experience lower “real returns” when costs rise across the economy. This problem is compounded by higher interest rates from central banks (which tend to raise the former to “cool down” rising prices) – leading to tighter margins. When this dynamic is combined with rising insurance claims and a growing willingness for customers to “policy hop” (e.g. when renewing car insurance), it is hardly surprising that traditional players are looking to technology for cost savings.
Yet insurtechs have the advantage here. Rather than using the older insurance business models with their higher overheads (and traditional reluctance to “dabble” in technology), these companies are built on the digital transformations that have been taking place in Web3, blockchain, machine learning, big data and artificial intelligence (AI) over the last 10 years. The benefits of insurtech are numerous, including:
- Operational cost savings for agencies. In particular, underwriting and fraud detection are improved through data analytics and task automation.
- Improvements to claims processes. Old manual processes (e.g. due diligence to prevent claim fraud) are replaced with automated claims submissions – with better data for evaluating and monitoring claims.
- Higher customer satisfaction. More automation reduces human error and keeps the claims process moving smoothly, making everything simpler and less frustrating for the consumer – helping to enhance loyalty and retention.
- Better risk assessment. Traditionally, insurers have used broad demographics (e.g. young males = higher risk for car insurers) and claims histories to determine premiums. Insurtechs, however, can open up a wealth of new data to improve predictive modelling.
- Product development. With more data comes more insights, helping insurtechs to identify specific customer needs and behaviour which could be served by new products which are currently neglected by big, established players.
New entrants, startups & the road ahead
Insurtech startups are not solely in competition with traditional insurers. Indeed, many are entering into partnerships to provide blockchain-based solutions. The latter can benefit from the new technology; the former can benefit via more direct access to the big player’s customer base. Amodo’s partnership with Galileo Platforms in December 2020 is a case in point, enabling the second to develop their new telematics offering (pay-as-you-drive and pay-how-you-drive insurance covers for vehicles).
Increasingly, traditional insurers are more prepared to accept crypto-based payments from customers. Auto insurance provider Metromile took this step in December 2021, expanding its reach to key demographics such as the 18-35 age group. Yet many insurtechs are doing very well in their own right. London-based Ki, for instance, collaborates with the University College London to offer the first “algorithmic underwriting approach” for speciality insurance – with the ability to underwrite 36 classes of business. YuLife is a new UK insurtech focusing on group life insurance, gamifying coverage to inspire policyholders to live healthy lifestyles.
Insurtech does face some challenges looking ahead. Partnerships can be few and stark, making it difficult for startups to command the unit economics of the policies they sell. Moreover, changes to the regulatory framework continue to loom over insurers of all shades, sometimes catching well-meaning startups off-guard with penalties. Finally, the digital credentials of insurtechs lend themselves to younger generations – i.e. people who are generally less likely to value insurance compared to their parents or elders. Insurtech investors should consider probing founders for their strategies to address such problems as part of their due diligence.
If you are interested in expanding your portfolio into these kinds of exciting spheres of investing, then we invite you to get in touch with us here at Bure Valley and to consider joining our exclusive investor network:
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