Insurtech at an inflection point

This article by Tom Kussurelis, SVP and chief operating officer of Arrowhead Programs, was published Sept. 11 in Insurance Thought Leadership.

Insurtech investment has fallen from its highs in 2021. CB Insights says global Insurtech funding in 2022 actually dropped below $1 billion for the first time since 2018. Boston Consulting Group reported that funding in the fourth quarter of 2022 was the lowest in 20 quarters.

With the drop in investment, Insurtech is at an inflection point. Will it rebound, continue on a flat path or decline further?

To answer that question, think about the purposes that Insurtech is serving. To me, Insurtech is most relevant when it focuses on creating efficiencies and enabling better customer and distributor experiences. After all, hasn’t Insurtech always been about creating efficiencies and enabling improvements?

I broadly categorize Insurtech in two swaths: the disruptor model and the enabler model.

Disrupter Insurtechs typically must cover the length of the insurance value chain, and they aim to replace it. They usually aspire to hold a balance sheet, underwrite insurance policies and manage capital.

Enabler Insurtechs try to make the experience of buying and selling insurance better. They focus on improving discrete steps in the value chain for greater efficiency.

One way to tell an enabler from a disrupter opportunity is whether it will bring in new capital or create new insurance capacity.

There are hundreds of examples of enabler model approaches, and many have met with success. One early enabler focus was third-party data services. These took an application, verified information on the form, consolidated it and reported it. As another example, in auto insurance, third-party data services sought to read and verify information, check the driver’s data and give the carrier an underwriting score.

Financial reporting has been a rich area for the enabler model — for example, Power BI (business intelligence) as a reporting tool. Robotic process automation, data science capabilities and machine learning tools are other good examples.

Disruptors also have delivered products and services, sometimes with novel approaches. Many have yet to demonstrate profitability or haven’t achieved their goal of disrupting.

Some disrupters have discovered that the insurance business is a really hard business. As Boston Consulting Group says: “Their loss ratios are significantly higher than the industry average.” That’s not to say disrupters won’t reach positive cash flow and earnings and offer a strong alternative to the status quo. Time will tell.

Some venture capital (VC) investors expect a low success rate but a very high payoff, so they’ve funded disrupter models across several industries. Once an investment within that multi-industry strategy pays off, the investor may back away from investments that haven’t yet “hit it” (such as in insurance). That explains some of the cycle we’re seeing in Insurtech funding.

Yet investors are still enamored of disrupting the insurance business because of the sheer number of markets and their business volumes. Even with the current down cycle in funding, I expect VC investors to continue to be drawn to attractive insurance targets.

Right now, for example, the pet insurance market is a popular destination for investors. Globally, the consumer market is set to balloon from $9.5 billion in 2023 to $40 billion in 2033, a 17% compound annual growth rate, according to Future Market Insights. Segments within the property insurance market also are significant in size and scope, as are personal auto and commercial auto, among others.

Segments like these represent multibillion-dollar market opportunities. The companies that figure out effective approaches to these segments could reap significant payoffs.

However, I expect that over time enablers have delivered more value than disruptors. Because of enablers’ relatively strong performance, users and investors have pivoted to them. Carrier-backed VC funds once active on the disruptor side have sought enabler opportunities. The rationale: Carriers can realize returns by investing in capabilities that benefit their own operations.

Enabler Insurtechs play an increasing role in the managing general agent/program administrator segment, including here at Arrowhead Programs. One example, called “Submission Grader,” uses artificial intelligence to screen data and schedules on a property insurance application. The Insurtech tool looks at that data vis a vis underwriting guidelines and gives an initial indication about whether the risk is acceptable.

If the application passes muster, the AI tool assigns a grade for the application using risk, carrier, producer and other variables that indicate underwriting success. The tool then sends an email back to the producer thanking them for the submission, noting the indication and inviting any follow-up that might be needed.

This type of enabler tool gives the producer fast feedback and wins back time for underwriters. The carrier or managing general agency sees their staff freed up.

In the past, an underwriter would’ve needed to receive the submission, open up and check the documents and read the property schedule. They might have reached the last row of the schedule only to realize that a property listed there doesn’t qualify. Instead of the underwriter having to slog through that process, Insurtech screens the application using artificial intelligence.

With enabler approaches like this, market players can gain leverage by attacking a need —creating a solution and testing, improving and implementing it.

Enabler Insurtech might seem less appealing because the needs it can solve do not span the insurance value chain. The potential payoff doesn’t seem as large. But pursuing the enabler model can provide operational and financial leverage. If a firm can pile enabler improvements on top of one another, it’s like interest accruing on top of interest. Ten 1% improvements are as good as one 10% improvement.