The insurance industry once faced the possibility of a takeover by Silicon Valley startups. Now, such a development appears unlikely to come to fruition.
In recent years, tech-powered entrants to the insurance marketplace have been the bogeymen of the insurance industry; as brand new digital insurance services continued to crop up, traditional insurers feared that their customers would flee for these greener, app-centric pastures. However, insurtech startups may not have the wildly disruptive impact on the traditional insurance model that experts predicted in early 2016, at least according to a recent report from Standard and Poor’s.
“We do not expect traditional insurance business to be fully replaced by insurtech companies, as the insurance sector is highly regulated and capital-intensive, with barriers to entry,” S&P noted. “Instead, we are seeing larger established insurers actively invest in setting up insurtech joint ventures through which they can take advantage of their proprietary data, rather than outsourcing to pure technology-based entrants.”
So, what can account for this change in marketplace predictions?
2016 saw a number of insurtech startups find relative success, which may have been at the root of experts’ lofty projections. For instance, Daniel Schreiber and Shai Wininger founded America’s first peer-to-peer insurance company, Lemonade. This unconventional home and renters insurer allows clients with similar philanthropic goals to pool together in order to donate their underwriting profits to charitable organizations of their preference. Lemonade reported strong numbers in their first 48 hours, generating $14,302 in gross written premium.
Pay-per-mile auto insurer Metromile Inc. is another new insurer which offers its clients an alternative to traditional car insurance. Instead of a flat monthly rate, Metromile charges customers per mile driven in a month. The company is licensed to sell coverage in all 50 states, though its service is currently only available in seven states with prominent urban demographics (its targeted policyholders, who drive fewer miles per month).
The goals of these two companies — and other insurtech startups around the world — are to cut out the middleman and simplify the process of buying a policy, making a claim, and securing reimbursement after the claim is made.
Though these startups have carved out their own corner in the insurance world, they have not been the earthshakers that industry experts once predicted. This is due in part to a simple truth: while the internet has changed the way some consumers initiate their insurance shopping experience, most people still prefer interacting with a flesh-and-blood agent about the policy they are purchasing — a service that many of these insurtech companies can’t afford.
“Compared with established insurers, we regard many insurtech companies as very small, with weak business positions, relatively limited data-sets, and relatively scarce financial resources,” the Standard & Poor’s report states. “Moreover, insurance industry expertise is required to exploit big data analytics to produce more accurate risk classifications.”
If You Can’t Beat Them
While insurtech startups may not fully replace traditional insurers, it’s clear that many policyholders — especially millennials — are interested in new insurance models. So, the market impact of insurtech comes not from the ability of insurtech startups to poach customers from traditional insurers, but rather from their long-term potential to motivate long-standing companies to explore new ways of serving their clients.
Standard & Poor’s report suggests that these young companies, in turn, have benefited from the traditional model because insurers are “increasingly starting to collaborate and engage by acquiring or partnering with insurtech companies, setting up internal venture capital funds to invest, or establishing startup incubators to attract and support young entrepreneurs to insurance.”
For example, Allianz — a 125-year-old company — started Allianz X, a division that develops new insurtech concepts and companies. Two established companies with a combined 198 years of insurance experience, Liberty Mutual and USAA, are among the backers for Snapsheet, a virtual auto claim service with $20 million in new financing.
Insurtech will continue to revolutionize the way in which coverage is provided for policyholders. In the end, the insurance industry will be shaped by a growing demand for technology-centered solutions, and the combined power of insurtech startups and traditional insurers will hopefully be able to accommodate that demand.