Technology Startups Herald Possible Disruption of Insurance Industry
December 13, 2016
The insurtech boom—insurance sales and marketing enabled by digital technology—is changing the competitive profile of property & casualty coverage, especially in the U.S.
(Pleasanton, CA) December 13, 2016—Insurance is joining the growing list of industries being disrupted by advances in digital tech. According to CB Insights, a host of venture capital-backed startups has propelled property and casualty insurance tech investment deals to a new high in 2016, with total funding topping $1 billion in the first half of the year alone, more than 63% of it in the U.S. Specifically for property & casualty insurance, startups that distribute policies and/or provide software and services across the P&C insurance value chain rose 50% in the first half of this year compared to all of 2015.1
One example of an insurtech-based innovation is usage-based insurance, wherein insurance carriers monitor customer driving habits through a device installed in the insured motorist’s car. Consumers who take part are given an accumulating discount at each renewal, normally between 5% and 30% off their premium.2 A similar idea has been popping up in health insurance plans, where the policyholder wears a fitness monitoring device that reports on his or her exercise, weight and dietetic habits.3
We can now add insurance to the growing list of industries being affected by such advances digital tech, according to Michael Macauley, CEO of Quadrant Information Services, a leading supplier of pricing analytics services to property and casualty insurance carriers.
“Changes in the ways in which business is done in the FIRE sector of the economy—finance, insurance and real estate—started with new approaches to financial services, known as “fintech,” a couple of years ago,” said Macauley. “Startup companies began entering the field with sales mechanisms and user interfaces that are more intuitive to younger, tech-savvy customers—and a lot faster and easier—than traditional financial services models. Insurtech branched out from fintech earlier this year, following reports of significant capital entering the market from insurers and managing general agents to technology providers.”
A major result of these innovations will be price pressure on rates, particularly for easily commoditized products such as auto insurance. Traditionally, broad actuarial tables are used to assign policy seekers to a risk category. The group is then adjusted to be large enough to ensure that, overall, policies are profitable for the insurer—which, statistically, causes some customers to overpay for the risk they represent. By moving from actuarial analysis to direct data sampling, insurtech companies are building more finely delineated groupings of risk, allowing products to be priced more competitively.
However, there are limitations—at least in the short term—on how much effect these startups can or will have on the industry as a whole. The U.S. insurance industry’s net written premiums, i.e., the amount of money it took in, totaled $1.1 trillion in 2014; premiums recorded by P&C insurers amounted to 44% of that, or $502.6 billion.4 When viewed alongside these numbers, Macauley observed, a billion dollars in venture-based startup activity—especially considering that tech startups have an average 90% failure rate5—does not exactly mean the barbarians are at the gate.
Perhaps more significantly, insurance is a highly regulated industry with many layers of jurisdictional legal issues to contend with. In such an environment, the major players tend to be understandably cautious about working with startup companies. Meanwhile, many insurtech startups need the help of traditional insurers to handle underwriting and manage catastrophic risk. Rather than “disruption” or “replacement,” what seems likely to come out of the insurtech movement is a series of gradually closer associations, whether as strategic partnerships or outright acquisitions of startup firms by traditional insurers.
And, in fact, a new study from BI Intelligence reports that this is exactly what’s taking place. Among the top findings:
Most insurtechs act as enablers. They offer products and services that help insurers and reinsurers improve their processes and better serve consumers.
Of the main players in the industry, brokers are most at risk of disruption. This is because insurtechs can easily replicate their services.
Legacy players are also innovating. Insurers and reinsurers are investing in startup companies working with relevant technologies. They’re also improving their own direct-to-consumer digital interfaces, increasing the disruptive threat to brokers.6
“In other words,” said Macauley, “while the industry isn’t going to be wiped out and replaced by something else, it is going to be more and more price-competitive. It’s also going to require quicker decision-making. To help senior insurance executives manage that environment, we created Periscope, a business intelligence technology for the P&C industry.” Working with major national insurance carriers, Quadrant has developed a tool that takes in hundreds of thousands of data points and provides, in plain English, a written, qualitative summary. It quickly and clearly tells what the competition is doing and what the user can do better. These insurtech tools are designed to allow consumers to cross-shop. An insurer’s best line of defense is to stay ahead of the game, and that’s exactly what Periscope is designed to let you do.
About Quadrant Information Services:
Quadrant Information Services, headquartered in Pleasanton, CA, provides pricing analytics solutions for property and casualty insurance companies. Quadrant gives actuary, product development, pricing, sales and marketing personnel at its client companies—which include all the major insurance carriers in the United States— the data they need to make accurate, data-driven decisions. An industry innovator since its founding in 1991, Quadrant has provided the P&C insurance field with a long series of technological advances, including
InsureWatch, the industry’s first cloud-based pricing tool, which allows the user to produce unlimited combinations of reports with the click of a mouse. For more information, and to learn why Quadrant is for insurance companies that are tired of losing the right customers and winning the wrong ones, please visit www.quadinfo.com.
1. Garth, Denise, “InsurTech: One more sign of the Insurance Renaissance,” Propertycasualty360.com, November 4, 2016.
2. “Usage-based insurance and telematics,” Nielsen, March 4, 2016.
3. Olson, Parmy, “Wearable Tech Is Plugging Into Health Insurance,” Forbes, June 19, 2014.
4. “Industry Overview,” Insurance Information Institute, February 2016.
5. Carroll, Rory, “Silicon Valley’s culture of failure . . . and ‘the walking dead’ it leaves behind.” The Guardian, June 28, 2014.
6. Kocianski, Sarah, “THE INSURTECH REPORT: How financial technology firms are helping—and disrupting—the nearly $5 trillion insurance industry,” Business Insider, September 28, 2016.
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Karla Jo Helms