S&P panelists: Insurance industry is ‘ripe for disruption’

ThinkAdvisor recently published an article by Warren S. Hersch that explores the growth of insurtech and fintech disruption to the insurance industry. Read the full article below.

S&P panelists: Insurance industry is ‘ripe for disruption’

Huge amounts of capital are flowing into insurance-focused technology companies.

The dollars invested are matched by the stakes: opportunities to reap gains—in cost savings, productivity increases, and industry-disrupting changes to business processes—that could displace established incumbents.

This was the common theme during a panel discussion held at the 7th annual Insurance M&A Symposium held recently in New York City. Produced by the Knowledge Center and SNL Financial, divisions of S&P Global Market Intelligence, the session brought together four experts from the insurtech/fintech and M&A worlds.

Most agreed that the pace of activity is quickening.

“We’re looking at about 1,000 companies per year, and perhaps 20 to 45 percent are now insurance-related,” said Drew Aldrich, a senior associate at AXA Strategic Ventures. That’s up from 5 to 10 percent in recent years. There’s a tremendous resurgence in venture capital deal flow across primary lines of insurance — commercial, property and casualty, life and health.”

Just how much is the industry investing in insurtech companies? Mark Purowitz, a principal for financial services strategy, M&A and digital, at Deloitte Consulting LLP, says the 500-plus companies tracked by the company have invested close to $6 billion in the field over the last three years.

Among them are major life insurers including Allstate, American Family, AXA, MassMutual, Nationwide, Transamerica, and USAA. These, plus established venture capital firms, collectively have boosted venture capital under management to $165.3 billion, reversing a three-year decline, according to Yearbook 2016, published by the National Venture Capital Association.

Pointing to American Family, MassMutual and Nationwide, session moderator Cathy Seifert, an industry analyst at S&P Global Market Intelligence, suggested that mutual life insurance companies may be uniquely positioned to play in the insurtech market and broader fintech spaces. That’s because they’re not answerable to shareholders for their investments, only their policyholders.

AXA’s Aldrich disagreed, noting that a carrier’s involvement is less a function of its corporate structure than of how it views insurtech from a strategic perspective.

The big insurtech questions

Major decisions — about which types of insurtech companies to invest in, the extent of their involvement, what the business objectives should be and how great a return is expected — will determine how active a carrier will be in the market. And these decisions, Aldrich said, may or not align with the focus of other venture capital firms looking to invest in a startup company of mutual interest.

“[Some venture capital firms] refuse to deal with strategic investors because they’re more focused on investment returns. The difference between a 2X and 10X exit” — one venture capital firm may expect a 2-fold return on investment, but another 10-fold ROI — “can make or break a VC fund,” he said.

These issues aside, more life insurers are likely to join the insurtech fray in the coming years. And for good reason: survival. Many of the fintech and insure-tech start-ups, the panelists warned, threaten to upset long-established conventions in a conservative, button-down industry. Every aspect of the business — from back-office operations and underwriting to handling policy applications and claims — is up for grabs.

“There are major pockets of stagnation in our industry,” said AXA’s Aldrich. “People who have zero knowledge of insurance are trying to disrupt the industry because they see tremendous areas of unmet needs.”

AXA, which boasts a $250 million venture capital fund, is investing in seed- and early-stage companies that are developing innovative solutions with applications in insurance, asset management, financial technology and health care services.

A particular promising growth market for the VC investors is the so-called “Internet of Things” (IoT). This refers to smart, web-connected devices that will enable insurers to better tailor products, achieve operational efficiencies and boost sales. Two leading reinsurers, Aldrich noted, play in this space: Munich Re and Swiss Re.

In July 2016, Swiss Re launched InsurTech Accelerator, a 16-week intensive program that will mentor and help curate startups aimed at disrupting insurance practices. The program is reportedly the first-ever initiative by a reinsurer to foster technology innovation among India-based insurtech startups.

Munich Re, for its part, teamed up with Alma Mundi Ventures in Spain to kickstart its own seed or startup “accelerator,” MundiLab. Munich Re has also funded several IoT startups including Helium, Waygum and Augury through its corporate venture capital arm, Munich Re/HSB Ventures.

“Munich Re and Swiss Re are taking an extremely aggressive approach to VC investing in start-ups,” said Aldrich. “They’re investing in IT capabilities and infrastructure that will support emerging innovations.”

More broadly, added Michael Dombrowski, a managing director of BDO Consulting, insurers’ tech investments aim to significantly expand the amount and sources of data available to ease and speed business operations. For example, information about policy applicants gleaned from public records could potentially be used in lieu of medical data (such as attending physician statements that can be more time-consuming to secure) for underwriting and risk selection purposes.

Easier-to-do tech initiatives

On the customer-facing side of the business, insurers also are looking to emulate Amazon’s “one-click buying” experience. For much of the industry, however, that could be a longer-term proposition.

Purowitz noted that insurers are prone to making “one-off” technology investments that, on their own, are not likely to transform their businesses. Part of the problem is “operational complexity:” legacy IT systems, many of them dating back decades, that could be challenging to upgrade or replace.

As a result, said Aldrich, insurtech start-ups are largely developing solutions that carry a lower innovation bar. Among them: distribution systems to help agents and advisors in the field work more productively; and automated claims processing software that, as Purowitz noted, could free insurers to devote more call center staff and resources to revenue-generating activities, such as “cross-selling” other products in a carrier portfolio to existing customers.

Also low-hanging fruit: outsourcing basic back-office functions to more tech-savvy companies that can manage the operations more cost-effectively.

This is a space that Radian Group Inc. operates in. A provider of mortgage and real estate services, that company offers solutions that financial institutions, investors and government entities use to evaluate, acquire, securitize, service and monitor loans and asset-backed securities.

“Our value proposition for companies in the insurtech and fintech spaces is this: We can do all of the back-office work for you,” said Radian Group CEO S.A. Ibrahim. “You can focus instead on your competencies — getting customers and solving their problems.”

One-stop tech shops

Of particular interest to carriers are “full-stack startups,” or tech companies that have in-house all the necessary components (e.g., IT infrastructure, user testing and product development capabilities) to bring solutions to market.

One company in the property & casualty market flagged by Aldrich is Snapsheet, a Chicago-based startup that uses proprietary technology to optimize virtual claims operations for auto insurance carriers. The company’s signature tool is a smartphone and web app that lets users receive bids and get auto repair estimates from local auto body shops. The app has already gone through several iterations — a pace of product development that many insurers would be hard-pressed to match.

“The ability to put out a product, do user testing and get feedback, then re-release the product within a calendar year is table-stakes in start-up land,” said Aldrich. “And it’s totally foreign to insurers.”

Though now largely limited to basic tasks like claims processing and distribution activities, he added, emerging insurtech solutions will evolve in coming to handle more complex functions. Especially of interest to carriers is a digital revamp of underwriting, policy administration, finance and other back-office operations.

Purowitz agreed, adding that investments in problem-solving solutions to achieve efficiencies, enhance productivity and boost earnings are a growing focus of insurtech investors. For many insurers, these strategic plays are as important, if not more so, than venture capital dollars intended only as equity investments in start-up companies.

The ultimate prize for those active in the insure tech space — notably digitally savvy companies aiming to take market share from the industry behemoths — is a thorough shake-up of the industry and of long-established ways of doing business.

“Disruption is the great equalizer,” said Purowtiz. “Big carriers compete on market reach, scale, coverage and price. But disrupters don’t care about any of that. What they’re focused on are big opportunities inherent in the insurance value chain — opportunities that are now absolutely ripe for disruption.”

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