As the insurance industry races to catch up with the rapidly-digitising world around it, billions of dollars has been poured into tech investment. Can this usher in a brave new era for the market, or is insurtech over-promising and under-delivering? Eleanor Wragg reports.
Once the technological laggard of the financial services industry, the insurance sector is quietly undergoing something of a revolution as insurers and investors alike awaken to the potential of digitisation.
According to the Q3 briefing from advisory and broking firm Willis Towers Watson, a total of US$4.36bn in worldwide funding commitments has been deployed to insurtech companies across 239 transactions – a 5% increase on the total amount invested in the whole of 2018.
“Insurtech’s greatest achievement to date has been to act like a deﬁbrillator on the heart of the insurance industry,” says Andrew Johnston, global head of insurtech at Willis Re. “People across the sector now talk more positively about the use of technology. Some see it as the potential saviour of a broken system.”
Finance players have heard effusive language like this before. Is insurtech really the panacea for insurance’s many woes, or does this flurry of investment simply indicate an overload of hype?
A multitude of new, promising examples of the application of technology to insurance delivery has many enthused. “There are incremental changes within the sector, with some companies emerging as accretive to and supportive of the current insurance value chain,” Parul Kaul-Green, head of insurer AXA’s innovation arm, AXA Next, tells GTR.
One such example is tech firm Previse. Earlier this year, it partnered with Beat Syndicate 4242 of Lloyd’s to launch a new technology-driven insurance offering to insure supply chain finance providers against losses should a corporate buyer decide not to approve an invoice.
“It is a new insurance product that hasn’t existed before,” Rob McLendon, principal at Beat Capital Partners, which owns Beat Syndicate, told GTR at the time of the launch. “From an insurance perspective and a Lloyd’s perspective, this gives us access to an emerging class where we look at new risk and provide solutions. It’s a class of risk that gives us significant growth potential.”
Another solution is that provided by artificial intelligence (AI) company Qlarium. It has linked up with South African insurance company Hollard, launching a new product that insures importers against non-delivery from China.
“In trade with China, it’s very rare to get credit, so most of the importing companies are paying deposits,” says Yaron Shapira, CEO of Qlarium, adding that this leaves importers at risk of non-delivery, even more so in light of intensifying geopolitical tensions. “With the changes in tariffs from the US on China, the riskiness of the Chinese suppliers is becoming more serious than it was in the past.”
Hollard’s new, tech-enabled insurance product targets importers and their financiers, as opposed to traditional trade credit insurance, which is taken up by the exporter to cover the risk of non-payment. This solution is made possible with Qlarium’s AI tool, which automatically collects, scans and structures data on a Chinese supplier from a large number of web-based sources: anything from information on shareholders and capital to legal cases, media coverage and certificates. Furthermore, the algorithm has been trained to predict the probability that the supplier will fail to deliver.
“With insurtech innovations, insurers are able to achieve a complex, bespoke information technology solution that fits their businesses by abandoning one-size-fits-all systems in favour of a mix-and-match approach,” says Jason Rodriguez, data science lead at Willis Towers Watson’s insurance consulting and technology Americas. “This allows them to shop for value in one functional area while investing in a best-in-class solution in another.”
Out with the old?
Perhaps taking lessons from other areas of finance, where digital-first upstarts have moved into the industry to disrupt it from the ground up, in many cases taking business out from under the noses of bankers, insurers are increasingly seeking out ways to protect their business by bringing in new technology.
“In underwriting, datasets are being used in dynamic pricing, with a lot of machine learning being embedded,” says Kaul-Green. “There is a whole host of changes that incumbents are putting in, and they are not just waiting for insurtechs to destroy them. They are making big investments into newer technologies, in order to keep customers.”
However, she cautions that not all insurers have the capacity – or willingness – to venture boldly into the brave new world of digitisation.
“The full stack IT budget of a typical insurer is around 3 to 4% of the revenue that gets spent. Compare this to the banking sector, where this figure is 7 to 8%,” says Kaul-Green. “Most of the money that the insurance sector is spending on the technology stack is to prop up the legacy IT structures. In terms of actual cost, there is a very entrenched stinginess towards spending money on technology within the sector. There will be a great deal of spend which goes on in admin costs and other decision-making, but not much gets allocated towards changing the architecture of the insurance, and the way it does business. And that’s problematic, because clearly the technology around us has changed a great deal.”
Keeping insurance relevant
As trade becomes more platform-based, with new paradigms such as blockchain, which facilitates increased open account trade, and 3D printing, which shortens the supply chain, the traditional model of trade insurance risks becoming obsolete. A critical aspect of, say, online B2B marketplaces, is to help businesses find and connect easily with new – and therefore unknown – trading partners, which means taking on new risk. But the usual approach in the world of trade credit insurance, where companies typically have to sign up for a one-year overarching policy and make a lump sum investment at the beginning of the year, simply doesn’t mesh with the fast-moving, always-on, platform-based model.
“Most insurers are not very good at real-time decisions and real-time connections with systems. They are very good at meetings, writing policies and processing risks as a batch – basically calculating the profits and losses of entire portfolios and seeing what they need to pay out. A platform with machine-to-machine logic is frightening for them because it is new, and quite technically challenging too. They have not done it before, and they don’t have the culture of having systems and operations that are up all the time,” says Christophe Spoerry. Former co-founder of the Euler Hermes Digital Agency, he is now head of financial services at Marjory, a tech startup backed by Belgian export credit agency Credendo, which enables service providers such as insurers and fintechs to integrate into marketplace operator systems. Unsurprisingly, he is a big proponent of the insurance-as-a-platform model.
“The idea of putting some things to insure on a platform, opening this platform to a number of players, seeing who wants to do what with those things and trying to match those multiple sides is very powerful. Applying this logic to credit insurance and to trade risks in general is very interesting. It’s the logic of connecting the multiple sides, not really the technology you use, that is the most transformative,” says Spoerry. Platforms also offer the promise of greater reach. Logically, if a platform can automate insurance delivery to large corporates, it can also take on the task of getting products to their smaller counterparts. This could open up the market to much bigger volumes, albeit on a much smaller per-transaction basis, and go some way to addressing the issue of under-penetration in the credit insurance industry, which still only covers 15% of global B2B transactions.
However, not everyone in the industry is open to the concept. “On the insurance side, straightaway there has been some success, but the credit insurers who look at platforms tend to be concerned that this approach will result in commoditising the product entirely,” says Spoerry. “A platform can become excellent at underwriting things, as it has a broader view on the risk, while the insurer has a much narrower view of what risk they are actually taking.”
New ways of pricing risk
Data has become the new global currency. At least 2.5 quintillion bytes of data are produced around the world, every single day, with datapoints across trade ranging from transactional triggers to RFID tag signals and chatbots. Harnessing this data through insurtech not only grants access by insurers to a much wider range of risks on the market, but also to all the information that is required to understand them. “We are heading to a world driven by, on one side, marketplaces of risks, and on the other side, marketplaces of data about those risks, and the models to underwrite them – all of that unbundled,” says Spoerry.
He believes that this will, naturally, impact on pricing. “On some risks that are currently under-priced, insurtech will bring transparency on how bad those risks actually are, and will also qualify those risks much better. As a result, those risks will progressively be priced higher and everybody will agree because of the data evidence,” says Spoerry. “On the other hand, on very low – albeit non-zero – risks, work will have to be done on defining the actual price and to foster liquidity for their transfer.” He expects to see the emergence of solutions similar to algorithmic trading which can leverage the future data intensity around those risks. “This automatic risk underwriting and transfer will open up new capacity providers and new model designers, which will be beneficial for the bearers of those risks,” he says.
Who is in the driving seat?
Given the potential for platforms to connect multiple parties to the right type of insurance for them, leveraging data to carry out decision-making automatically, you’d be forgiven for thinking that the traditional broking model might be on borrowed time. However, most onlookers are convinced that there is room for everyone in this new, tech-enabled world.
“Are those platforms going to be brokers? Do they want to take technical fees for creating liquidity? Do they want to take subscription fees, or do they want to take a cut of the volume that is going on? If they do that, will it have an impact on the traditional brokerage market?” asks Spoerry. “The private financial advisory industry is undergoing a revolution: fintech platforms are redefining the user experience, and yet they are realising that they cannot entirely cut themselves off from the huge workforce that has the connections with the private finance customers. They are now extending that technology to them so that these advisors can do their job and leverage their relationships with these individuals, except that the volumes are now funnelled through those fintech platforms. I think that there is a chance that the platforms around trade risks will want to do the same. They will want to leverage whatever existing networks are already there in order to have as much mass as possible as quickly as possible.”
However, it remains to be seen who should sit in the driver’s seat of insurance platforms. While it would seem an obvious choice for tech-aware brokers to take the reins, essentially digitising their current offering, there is resistance from insurers to hand over this amount of control. “Private credit insurers have a tendency to think that the broker is a necessary evil, so they wouldn’t want to offer them the chance to be immediately part of this technological change,” says Spoerry.
The most challenging aspect of insurers’ strategy regarding platforms is to continue to make sense of what they define as the core of their business model: the capacity to underwrite risk. “The insurers want to differentiate themselves with the best possible sources of data, but of course, the platforms already have a slight advantage on the data front. So might the platforms be the next insurers? I think that is becoming a fascinating possibility. Especially given that they are starting from scratch, with no technical legacy, and they don’t have the bias that only credit, cargo, performance or dispute would be the right risk to insure,” says Spoerry.
Good for the industry
Far from hurting the insurance industry, the proliferation of technology-based solutions seems to be a shot in its arm. In its Q3 UK industry report, commercial data and analytics firm Dun and Bradstreet found that, although most sectors in the UK had witnessed a decline in recent years, the number of insurance firms in the UK has increased by 11% between 2016 and 2019. Commenting on the analysis, Markus Kuger, chief economist at Dun & Bradstreet says that this “could be driven by the emergence of start-up insurtech firms that are harnessing technology to deliver innovation in the market to drive digital transformation and meet the changing needs of customers”.
There is wide acknowledgement of the need for efficiency in an industry which is producing very little profitability, but which plays a critical risk absorption role in trade. Whether this comes about through a complete overhaul of the sector, or incremental changes in partnership with tech players remains to be seen. But, as AXA Next’s Kaul-Green points out: “There is a lot happening, but I don’t know if it is happening fast enough.”