Perspectives

Why insurers have embraced start-ups

In our last InsurTech blog we covered the flat pack insurer – the way that new entrants to the insurance market can create an insurance firm from crowdsourcing and outsourcing different components, which can all be bought ‘off the shelf’ and put together, just like a flat pack wardrobe. We noted that a large contributing factor for this is the sector’s long-standing use of outsourcing.

In recent years, insurance incumbents have also become more confident in embracing InsurTech start-ups, collaborating and combining their strengths to create new ways of doing business to meet the rapidly evolving needs of their customer base. Instead of viewing InsurTech start-ups as disruptive threats, incumbents are beginning to see them as a vehicle for sustaining innovation.

In this blog, we’ll examine the reasons why insurers are embracing these start-ups.

With the nature of insurance being low touch and intangible, it has historically been a hard sector in which to innovate. With innovation part of start-ups’ life from conception, they’ve been able to develop new ideas to better meet the changing needs of their customers. Incumbents have therefore sought to collaborate closely with them in the past couple of years in order to share these ideas and maintain a competitive edge.

Current sweeping technological change has left incumbent insurers answering difficult questions about their current business models and the future of the industry. However, whilst technological disruption is a pressing issue, some insurers are looking to start-ups who can help them. For example, insurance is incredibly data intensive and start-ups are often very good at using digital tech with data (i.e. coding), to produce more effective results. Start-ups have been a powerful asset to help deliver innovation and optimised digital development for insurers.

Legacy IT systems and sheer corporation size have rendered the insurance industry slow-moving and lacking in agility; whilst legacy infrastructure has proven to be reliable and stable, it cannot keep up with customer expectations of agile service and communication. Most insurance companies have not prioritised the innovation agenda, preferring to concentrate on maximising premium income from existing operations. Start-ups, on the other hand, are nimbler and are free of the legacy systems that hold incumbents back. Through working together, start-ups have helped incumbents become more agile and bring ideas to market faster. We mentioned Allianz partnering with Flock, a drone insurance company, in our previous blog as an example of this.

Despite several steps forward in innovation, e.g. Aviva’s Digital Garage, the insurance industry is still not known to create an environment of innovation and collaboration, and this is often mirrored in the talent it attracts. Deloitte’s recent report on making insurance careers more attractive to graduates explores the critical issue of talent for insurers. Insurers are facing pressure from tech-enabled start-ups who notoriously attract innovative millennial talent. As more incumbents look to partner with start-ups, innovative ideas will be shared, and incumbents will naturally become more attractive to talent.

There are huge opportunities for incumbents to collaborate with outsiders due to their ability to disaggregate the insurance value chain. The insurance industry views start-ups as collaborators, as opposed to simply being disruptors. Incumbent insurers have long been comfortable with outsourcing product design, claims handling, underwriting and even regulatory compliance. Their existing level of comfort with outsourcing partnerships has meant that as ‘disruptive’ start-ups have entered the scene, incumbents have formed partnerships with them, using their niche and innovative ideas as an add-on to their own offering. As a result, the industry is becoming a natural home for nimble, scalable new business models, allowing them to become enmeshed in the insurance distribution chain.

So, what does this mean for the nature of opportunity and threat offered by start-ups for the insurance industry in the long-term?

Innovation will flourish in the insurance industry, and incumbents can flourish with it, if they choose to embrace innovation. Doing so will mean new ideas will come to fruition much faster than they would otherwise have done. This will encourage other start-ups to follow suit, and so a culture of innovation will be created. In addition, incumbents will reap commercial benefits from these new and disruptive ideas as the overall insurance market grows.

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