Disruption dilemmas &

Merlin Beyts, Head of Content for ITC DIA Europe, asks if 2023 is the year for insurance businesses to accelerate or consolidate

Let’s begin with a question. Has digital insurance hit a tipping point?

There are many reasons to suggest that 2023 will be, if nothing else, a fascinating year for both insurtechs and incumbents alike. Having seen insurers adopt technology at a rate we’d never dreamed of, we have now entered into a tumultuous year, fraught with uncertainty.

Natural catastrophes are on the rise, workforce shortages remain a serious issue and insurtech investment has slowed, with far fewer deals than in previous years. So, as the world enters yet another ‘once-in-a-century crisis’, will the industry double down and accelerate further or will leaders put away the cheque book and start to consolidate to weather the storm ahead?

STICK OR TWIST?

We saw a wave of technology investment over the pandemic. Indeed, we’ve never seen the industry move so quickly. Back in 2020, almost all the conversations were about how to build ‘ecosystems’, whereas now ‘embedded’ insurance is arguably the most prevalent buzzword. And, of course, the two are intertwined.

The partnerships forged over the last few years have created an incredible environment for innovation, with the industry now much better-placed to manage disruption and even take advantage of it. However, forces beyond our control have created barriers and challenges leading to a perfect storm, which will mean businesses either battening down the hatches or turning on the motor and trying to outrun it.

Difficult Terrain

The great resignation – or great reshuffle, or great re-evaluation, depending on who you talk to – following the pandemic as employees weighed up what was important to them and left or relocated, sent shockwaves across all tech sectors. However, finding digitally skilled staff had been an issue for insurers long before those phrases were first uttered.

Many desirable candidates (predominantly data scientists and software developers) were heading into the tech sector. Meanwhile, large chunks of the incumbent workforce were retiring. Insurtechs invested huge sums of money in expanding their workforces. But now, without the financial results to back up that outlay, we have seen huge layoffs from some very high-profile startups and scaleups. Without the necessary staff to execute new projects, it’s difficult to see where the next big innovations are going to come from. And big questions still remain about the industry’s ability to provide exceptional customer service at scale. While the startups are very effectively improving the customer experience, they only serve relatively small niches, and incumbents still need to create end-to-end solutions that create more efficiency, improved communication and make the relationship between insurer and insured far more enjoyable. They need tech to enable this and, arguably, the need has never been higher.

So, a question on the lips of many is whether insurers will focus on cost at the expense of service. It would certainly be a shame to see the industry take a backward step in the customer experience when it has done so much to augment it over the years.

Insurtechs Evolving

There could be some good news for consumers, though. An emerging trend we’re starting to see is customer-facing insurtechs developing their business models on a number of fronts. Some tech-powered MGAs are starting to branch out and sell their solutions to incumbents as an extra revenue stream, which gives the larger players more options to enable the experience they’re trying to create.

Meanwhile, many insurtechs are starting to become licensed as ‘full-stack’ insurtechs. The fact that they are able to take full responsibility for the end-to-end insurance lifecycle means they can start to scale their highly personalised offerings to customers and may pose a challenge to insurers.

Rather than just partnering up with the incumbents, they may start to become real challengers and begin to take more significant market share from them. As

The partnerships forged over the last few years have created an incredible environment for innovation, with the industry now much better-placed to manage disruption and even take advantage of it a result, the traditional carriers will need to upgrade – and quickly. The overall insurtech investment landscape, however, also looks far less fruitful than previously. With investors having historically funnelled cash into the insurtech scene at head-spinning rates, many took it for granted that it would continue ad infinitum. That’s not to say we’ve not been without exciting moments, as we saw some mammoth raises in 2022. Wefox’s Series D hit the $400million mark, Pie grabbed more than

$315million and Coalition continued its foray into the cyber space with a $250million raise. We even saw a new LatAm unicorn with Chile’s Betterfly raking in $125million. Despite those big funding rounds, though, there were fewer deals overall. It seems that investors are starting to be more selective about who they give their cash to. The niches these insurtechs operate in make it hard to believe that they’ll start to monopolise vast swathes of the market soon, although with more time and investment, this could well change.

It would be impossible to discuss the investment outlook for the industry without mentioning cyber. The sector has exploded over the last few years with speedy responses to immediate issues.

Chief information security officers have been thrust into the limelight as some of the most important members of the board room as they fight the cyber war on two fronts. Firstly, they have to make sure their own companies are protected from ever-increasing ransomware attacks. Secondly, they have to develop products to protect commercial customers. With that need tied to increased investment specifically in cyber-orientated insurtech startups, we can expect far more innovation in this space.

Weathering The Storm

Arguably, the most pressing issue for the insurance industry is extreme weather. Extreme weather events are on the rise, especially in the US and Australia, and natural catastrophes are costing the industry billions. Meanwhile, the percentage of people covered for these events remains minimal.

The response on all sides has been significant. Insurers are partnering with sustainability-focussed insurtechs to improve weather modelling, gain access to at-risk customers and employ preventative measures that help people take better care of their assets. While across all industries the use case for AI has been polarising, insurers have been quick to adopt it to analyse disparate data sets across multiple risk pools to improve their understanding of the exposure to extreme events that customers face. This could be incredibly exciting because once an industry finds a use case for technology that works, they are often able to find more. I’d expect this to accelerate innovation but, then again, I’m an optimist!

So, overall, there are plenty of reasons for both excitement and concern. While the challenges that lie ahead pose serious threats to insurers’ ability to care for customers in the short term, the response to those challenges creates a more positive outlook in the medium and long term.

The industry’s response to the pandemic gives me great hope that we can again step up to the plate and forge new paths ahead. There will be plenty more issues as well that arise from the economically turbulent period we’re facing but the tech-enabled reaction is promising.

I began by asking if the insurance industry had hit a tipping point and questioning whether it’s time to accelerate or consolidate. I would say it has already accelerated. While there has been some effort to consolidate in some areas, overall I don’t think we’re at full power yet.

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