Briefing: Are insurtechs sustainable?

By Editor Katie Scott

Everyone is talking about insurtechs.

Amid all the hype, debate and unicorn valuations, there is one train of thought that is questioning the value of insurtechs – I’ve heard on the industry grapevine, for example, that some insurance practitioners feel that insurtechs are seeking to solve market problems that don’t actually exist.

These industry professionals are therefore querying the sustainability of insurtech models and the profit they are able to attract.

This is certainly a perspective that has been discussed by Stuart Reid, chairman of broker Partners& and MGA Pikl.

He told me: “There [has been] criticism in the past that some businesses may have been trying to provide a solution where the demand wasn’t there for it.

“There have been many very clever ideas that have certainly come across my desk about how to rate someone’s insurance by looking at their profile, looking at things on social media. Whilst that’s very clever, is there a demand from customers for such a whizzy idea?

“Some [insurtechs] have very clever ideas about how to solve a problem, but that problem isn’t resonating out with the public.

“The first thing you should do if you come up with a whizzy idea is see whether people want it. And if you haven’t got that consumer demand, ultimately, you are going to fail and there are examples of that.”

Matt Scott, co-founder of market intelligence firm Insurance DataLab, added that although some insurtechs may fail due to the lack of a demand-driven idea, there are other factors that will undoubtedly cause startups to stutter in their growth.

“Not all of them will be a success – that’s the nature of being a startup,” he said. “Some of these companies may fall foul of having an idea that doesn’t solve a particular problem, while others will be victims of circumstance, or simply unlucky.”

For Reid, however, the “catalyst” for these conversations around insurtech sustainability is funding.

In the past, he noted that insurtechs “received very high valuations based upon a promise” that showcased a new idea, rather than plans that identified a defined “path to profitability” or “certain minimum level of business actually written”. These more tangible metrics are now the focus for firms offering funding, Reid explained, over and above cutting-edge ideas.

He continued: “There is absolutely a place out there for insurtechs that can provide a service, but there is this added requirement that there should be some resonance - both in consumer demand and in business written - and some are struggling to do [that].”

Mismatched approaches

Toby Clegg, chief executive of broker Clegg Gifford, believes there is a “misalignment” between insurtechs, brokers and insurers which is impacting insurtechs’ sustainability and the value they could bring to the insurance market.

He told me: “The problem with insurtechs is they come to you with insurance as an afterthought. It’s not the primary driver - the cost is key so they can get growth.

“Insurance is very much the annoying factor in it and that, ultimately, is wrong because we’ve got to price according to the risk [clients] represent and the time it might sit on our books for. But I don’t think there’s recognition of that.

“It’s a misalignment between speed and our own longevity as insurers and brokers.

“[Insurtechs] just have a culture that is move fast, break things, get in there quickly and ultimately exit for lots of money. Are they sustainable? I just think [insurtechs’ and brokers’ models] are not married up.”

Clegg additionally has concerns around insurtechs’ pricing approaches and their affect on the “trench warfare” of claims – for example, he found that he “couldn’t make the maths work” when considering some pay-per-mile insurtech strategies.

He continued: “There has been some unrealistic pricing by some notable insurtechs and the problem there is that they think they can game the system.

“The only way you can genuinely move the dial in terms of bringing business in is by materially undercutting the rates that people are already paying to induce them to move.

“The problem with that is it leads to unsustainable pricing and the problem there is that claims have a tail on them. Unfortunately, I think there is an inherent conflict between insurtech, [which needs] to move fast and break things, and insurers [that] operate that long tail.”

Not all bad news

Kenneth Saldanha, senior managing director and global insurance lead at professional services firm Accenture, takes a different view, however.

For him, it is not essential that insurtechs have a thorough understanding of how their technology may work in an insurance context – slotting insurtech solutions into insurance use cases should be the role of insurers, he told me.

“Incumbents have to take great ideas that have been stormed in an environment very different from traditional insurance and tell [insurtechs] to make [these ideas] relevant and to make them [have] the right use case,” he explained.

“Do we expect innovative insurtech startups or people with the new technology or new idea to come in and say ‘let me spoon feed you an insurance use case’? I would hope not.

“Insurers [have to] participate and contribute to innovation as opposed to sitting back and [waiting] for someone to bring them an idea.

“Insurers, if they want to retain relevance and innovate, need to participate in that process and take good ideas and create insurance use cases out of them.

“To me, anyone in insurance who says ‘well [insurtechs are] just creating answers to problems that don’t exist’ really is missing the point and, more importantly, the opportunity to take a new approach and do the legwork to create something really interesting and valuable in insurance.

“As an industry, [if] we continue to hold that dismissive attitude, we’re going to continue to be the industry that is viewed as lacking innovation.”

Scott agreed that “entrepreneurial brokers [that] are looking to get ahead in what is a highly competitive marketplace should at least be exploring the potential advantage insurtechs can offer a broking firm”.

However, he warned that not “every insurtech – or indeed any insurtech – is necessarily going to be the right fit for any one given brokerage and broker bosses need to make sure they are exploring opportunities carefully and thoughtfully before diving in headfirst and throwing lots of money at a solution that may not solve the problem they are looking to solve”.

Reid also concurred that insurtechs do bring benefits to the insurance market – as long as these businesses focus on being specialists, like MGAs.

He said: “There are many different ways in which this sometimes old fashioned industry can be shaken up by those [that] can do [things] smarter, quicker, more efficiently.

“There’s definitely a place for insurtech, but it has to be specialist and it has to have resonance and it has to have capacity – and those are three big hurdles for some of the businesses out there at the moment.”

Changing perceptions

All these opinions aside, it is evident that insurtech firms are not going anywhere.

Although the thinking behind funding offers has changed, according to Reid, investment is still available and being offered to insurtech startups – by firms operating in and outside of the insurance market.

For example, figures from Gallagher Re published in April 2022 found that global insurtech funding for the first quarter of 2022 reached an impressive $2.2bn (£1.75bn) – the growth of this part of the market is, therefore, undeniable and startups are destined to continue to come into fruition.

The crux of the matter comes to the creation of a successful insurance ecosystem.

Yes, some insurance professionals may feel that insurtechs are not seeking to answer current industry problems, but are propositions being shoehorned into spaces where they don’t quite fit, or do incumbents need to embrace more creative thinking to explore new use case scenarios?

The solution may lie not in looking at the actual products, but at the marriage and relationships between firms.

However, the fact that the majority of industry experts I have spoken to strongly believe insurtechs are not addressing industry problems should act as a big, neon warning sign for these fledging businesses.

If insurtech startups want to be profitable, they are going to have to change this perception – and change it quickly.