The flat pack insurer

How hard is it to enter the insurance market? These days, not hard at all.

The barriers to entry for the insurance industry are now lower than ever.

A new entrant with a unique idea is now able to build an insurance firm from separate components, bringing it all together just like you would a flat pack wardrobe. In no time at all, and hopefully not too many spare parts left over at the end!

A large contributing factor for this is the sector’s long-standing history of an outsourcing culture. Insurance companies have long been comfortable with outsourcing even key elements of business including underwriting, claims handling, product design and even regulatory compliance. For instance, a number of FTSE 100 insurers outsource internal audit and compliance monitoring to Deloitte. Comfort with outsourcing means new ideas can be brought to market quickly, and without the need to build significant operational capacity from scratch.

Coupled with technological developments that have eased the process of finding customers and sourcing technical expertise, this has resulted in the insurance industry becoming a natural home for InsurTech start-ups.

As a result, we are seeing an increased number of new entrants in the market, each bringing their final products together from multiple parts. New entrants can create an insurance firm from crowdsourcing and outsourcing different components, which can all be bought ‘off the shelf’.

So, let’s take a look at the flat-pack insurer.

Allowing for some nuance, there are six component parts of an insurance product:

1. Customer identification
   Any insurance product needs customers to know the product exists. The emergence of Fintech platforms such as Bud Financial, a curated market place for FinTechs, alongside the expansion of price comparison sites into new areas like commercial insurance, have made it easier for new entrants to be discovered by customers with niche requests.
2. The risk you’re covering
   All insurance products start with risk. New risks emerge all the time as new products and services come to market.
3. How you sell
   Once you have risk and customers, an insurance product needs a way to interact with those customers, to capture details, take payments, manage claims and ultimately sell. Customer relationships are increasingly managed by chatbots, apps and websites with minimal need for marginal costs.
4. Pricing
   Any insurance product will need a method of pricing the individual risk of each policy. That usually means an algorithm needs to be produced which can calculate all the variables in play. Insurers are increasingly exploring new methods of pricing, including crowdsourcing actuarial knowledge on platforms like Kaggle.
5. Capital
   Every insurance product need capital behind it. This is where the incumbent insurers come into play. New entrants can approach a large insurer for a partnership, where the insurer provides capital (“capacity”), expertise and on some occasions up-front commission. The historical confidence in outsourcing in the industry means that large insurers are happy to partner with third parties to gain access to markets they aren’t experts in or don’t have access to.
6. Regulation
   Insurance is a heavily regulated industry. Whilst this could erect a significant barrier to entry, the large insurer providing the capital for a new product will can also allow a new entrant to trade under the insurer’s regulatory permissions as an “Appointed Representative”, suspending the need to obtain regulatory permissions.

Through these component parts an insurance product can be built quickly and efficiently

Already we are seeing examples of new insurance products quickly being brought to the market. Flock, for example, a drone insurance company, recently partnered with Allianz, meaning their policies are underwritten by one of the world’s leading insurers who understand speciality risk better than many. Further to this, they are trading under the permissions of InsurTech broker Worry+Peace, continuing the partnerships trend.

It is important to note that these new entrants are not entering the market as insurers themselves. The financial barriers to becoming an insurer are still high due to regulatory and capital requirements. A small InsurTech firm or an entrepreneur looking to enter the sector is unlikely to have this kind of capital. Their route in is through the industry’s unique open attitude towards outsourcing. New entrants with a unique proposition and a solid customer acquisition model can enter the market with much lower barriers to entry than previously possible.

So, what does this all mean for the industry?

Incumbents will still play an important role, providing financial backing and regulatory permissions. Without them the barriers to entry would be incredibly high.

Innovation will flourish. As more entrants come to the market, more ideas and products can be easily created. This will encourage others to follow suit, taking advantage of this agility

With the opportunity to build new insurance products from component parts, much like flat-pack furniture, we will find new ways and new covers for customers to meet previously unmet needs.