InsurTech investment surge poised to accelerate life insurance modernization

March 4, 2020

An article by Michelle Canaan, insurance research leader, Deloitte Center for Financial Services, Deloitte Services LP, and Prachi Ashani, insurance senior analyst, Deloitte Center for Financial Services, Deloitte Services LP

Global financing

Global financing of InsurTechs continued to surge with a record $5 billion invested during 2019, which is only five percent shy of the prior two years combined (figure 1).¹ However, while $19.2 billion has poured into the sector over the past decade, investments have almost exclusively been devoted to the property-casualty side of the business.²

More recently, a subtle yet possibly meaningful shift has emerged, with an uptick of funds flowing into life and annuity (L&A)-focused InsurTechs over the past two years (figure 2). Between 2017 and 2019, this funding reached over $450 million.³

Indeed, more life-focused InsurTechs are emerging that can help drive innovation in business processes and models, and potentially jump start an industry that has often struggled to grow its top and bottom lines. The legacy industry could use a strong dose of innovation, given that the number of households holding life insurance is at a 50-year low,⁶ and that there is an estimated gap of $25 trillion between current life coverage for Americans versus what they most likely need to cover family expenses in case of a death in the family.⁷

Modernization counters stagnant growth

While there are some startups looking to compete with legacy carriers and underwrite life insurance policies on their own (entities that received over $200 million in funding since 2016),⁸ many are being launched to support modernization of incumbents and jump start the sector’s stagnant growth.

By examining the types of life InsurTechs being funded, the depth and breadth of insurer/InsurTech alignment, and the entities financing them, the sector is potentially being galvanized for transformation. Life insurers appear to be aligning with InsurTechs to reshape the industry’s value proposition, from product design, to underwriting, distribution, and client engagement.

For example, new InsurTechs are helping some life insurers reinvent a historically onerous and lengthy application process, utilizing third party data, advanced analytics, and predictive modeling to accelerate underwriting and policy issuance. InsurTechs that tap into alternative data sources to fast-track this process and make it more user-friendly by eliminating the need for invasive medical tests and examinations may help minimize ‘dropouts’ who get frustrated and don’t follow through once they begin the purchase process. Indeed, 52 percent of potential life insurance buyers said they would be more likely to buy a policy if they could skip physical exams.⁹ In 2019, such InsurTechs accounted for the largest portion of life-focused startup funding (figure 3).

Figure 3. Top lifetech funding in $ Mn: 2009 – 2019 ¹⁰

Tapping new opportunities
Building on fast issuance capabilities, many insurers are collaborating with InsurTech entities to create opportunities to cost effectively tap into the huge uninsured and underinsured life insurance market with less complicated and more agile offerings. One example is Ethos, whose policies are issued by either Banner Life Insurance Company (A Legal & General America Company) or Assurity Life Insurance.¹¹ Launched in 2018, Ethos uses alternative data sources such as motor vehicle and prescription drug records to support an online accelerated application for a life policy that can be completed in 10 minutes (compared to weeks for many traditional policies) and doesn’t require medical exams for most applicants.¹²

Meanwhile, InsurTechs such as Fabric, whose policies are issued by Vantis Life (a Penn Mutual company)¹³ are developing products on digital channels that are both cost-effective to distribute and designed to appeal to the underserved market. Fabric targets the 25- to 44-year-old demographic with a product that can be purchased online in minutes to insure against accidents, which pose the single highest risk of death for people in this age group. The app also gives customers the option to upgrade the policy according to health and lifestyle.¹⁴

Stronger customer relations
InsurTechs may also serve as a conduit to improving the client experience and strengthening customer relationships in an industry with negligible insurer/client interaction once a policy is purchased. They can provide insurers with the capabilities to leverage premium payments as a subscription, offering clients a suite of services and benefits rather than just a one-off insurance product.

For example, InsurTechs that can harness IoT connectivity may be able to offer insurers the ability to insert themselves into the everyday lives of policyholders and offer ongoing services beyond merely a death benefit. This may include rewards for reaching fitness or healthy consumption goals, real-time recommendations for lifestyle choices, as well as personally focused advertising and marketing, all thanks to connected devices provided along with the life policy.

For example, John Hancock is building an ecosystem of providers to fuel client connections that includes IoT apps and devices, including Vitality One, which tracks health and wellness, and the Apple Watch^®* wearable device. Policyholders that maintain a top health rating for three years are typically rewarded with free Amazon Prime subscriptions. This initiative has reportedly increased policyholder interactions from once or twice a year, to an average of 40 proactive engagements per month.¹⁵ The insurer is also aligned with Human API, so customers can share their health records and accelerate the purchase process.¹⁶

Supporting existing channels
While consumer experience has become a top priority for many carriers, it can also be important to collaborate with InsurTechs that support life insurance distributors, who often remain critical to client acquisition and service even in an increasingly digital economy. For example, Insquik offers agents a white label solution to agents to create their own online stores, while Hearsay Systems helps advisors improve their digital capabilities rather than be displaced by virtual outlets.

However, some life carriers are leveraging InsurTechs to shift from traditional agent-driven distribution to multi-channels or even agentless solutions. LINK allows consumers to buy policies directly from Prudential via the LINK website, while offering the option to interact with a live insurance professional if necessary.

As life insurers increasingly come to terms with the impact of technology and the speed at which it is changing the rules and even the playing field, they will likely need to embrace a combination of some or even all of these InsurTech-driven capabilities, as well as technology not specifically focused on the insurance industry to create a holistic support system and reinvent their operating models.

For example, Northwestern Mutual (NWM) invested in Ladder, a life insurance company focused on InsurTech. The company collaborates with a broader group of fintechs to create an ecosystem of value-added services, including financial planning, student loan refinancing, mobile banking, social media, cloud, a healthcare database, and digital marketing platforms. While correlation may not necessarily equate to causality, it is interesting to note NWM was ranked highest in J.D. Power’s 2019 US Life Insurance Study for Individual Life Insurance.¹⁷

Going beyond financial investments

Life-focused InsurTechs are being funded by both incumbents and non-insurance investors, such as private equity, angel investors, and venture capital funds. While non-industry investors fueled much of the uptick over the last several years, legacy carriers were the largest source of investment in 2019 (figure 4), which indicates insurers are starting to recognize the potential of InsurTechs to spur transformation and are willing to put skin in the game.

New life added to the industry

One way or the other—whether via investments, acquisitions, or co-development partnerships—life insurers are increasingly becoming players rather than spectators in the world of InsurTech. Solution-driven startups are helping many legacy carriers identify and mitigate the frictions and gaps that may be discouraging prospects, while striving to provide an enhanced experience for both internal and external stakeholders. InsurTechs could also hold the potential to refresh and upgrade the industry’s aging talent pool with more innovative skill sets, as well as change life insurance culture to one that is more agile, proactive, innovative, and open to change.