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Perspectives

InsurTechs are disrupting the insurance industry

If incumbents can’t beat them, they should join them

The insurance industry may be ripe for disruption by game-changing technologies, but most current carriers are likely to end up financing, buying, or collaborating with fintech startups rather than being displaced by them, thanks to the inherent advantages incumbents enjoy.

July 5, 2017

A blog post by Sam Friedman, Insurance Research leader, Deloitte Services LP

That doesn’t mean insurers can afford to rest on their laurels, as major changes in business models, operating procedures, and corporate culture may be necessary to develop and integrate InsurTech before the competition—legacy and emerging—beats them to the punch.

Those were among the key takeaways from a recent InsurTech symposium hosted by the Peter J. Tobin College of Business at St. John’s University, which brought together insurers, technology pioneers, and financiers seeking to raise capital and facilitate deals between the legacy industry and entrepreneurial upstarts.

The InsurTech movement encompasses startups looking to leverage cutting-edge systems such as blockchain, cognitive technologies, robotic process automation, and virtual assistants to disrupt the status quo. Yet speakers from both incumbent carriers and InsurTech newcomers emphasized the considerable barriers facing those breaking into the insurance business.

Insurers are highly regulated and capital-intensive. They have brand recognition, an established customer base, and a longstanding distribution system. The complexity of many of their products, especially in high-end commercial insurance and annuities, can make selling difficult even for legacy carriers, let alone newcomers looking to bypass agents and brokers and market directly to consumers in three minutes over a mobile app.

This should preclude widespread displacement, but it still isn’t likely to prevent significant disruption. It certainly isn’t an argument for insurers to assume a “don’t just do something, stand there” mentality as the InsurTech revolution plays out. Insurers need to keep upgrading tech capabilities while reinventing standard operating procedures, and not just to keep an upstart from eating into their market share or undermining profitability. They also must keep up with legacy competitors—many of which are launching innovation labs, venture capital arms, and other proactive initiatives to become players in the emerging fintech space.

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Show me the money: InsurTech investments soaring

Consider the insurance industry’s projected investment curve when it comes to just one rapidly developing field—cognitive technology, which actually learns from experience and adapts accordingly, just like a live underwriter, claims investigator, or insurance agent.

International Data Corporation reports that on a compound annual growth basis, between 2015 and 2020 insurers are expected to increase spending on cognitive computing by 40 percent in automated claims processing, 36 percent in threat intelligence and prevention systems, 47 percent for program advisors and recommendation systems, and 49 percent in fraud analysis and investigation.1

But it will take more than just money to make it in the fintech world. Incumbent insurers will need innovators who think beyond the insurance industry’s traditional parameters and are accustomed to operating on a much faster track to get inventions to market. At the same time, disruptors looking to break into the esoteric world of insurance may find an easier path working with established, well-capitalized brands providing platforms that spare them the time and trouble of laying the required groundwork.

Partnering with an InsurTech outfit rather than trying to reinvent the wheel on their own can check a lot of boxes for legacy and startup companies alike. We should, therefore, expect much greater collaboration between the new- and old-world orders, with incumbents and innovators developing increasingly symbiotic relationships.

A good example for insurers to follow is taking place in the banking sector, where fintech-driven marketplace lenders and major banks are already becoming tightly integrated, as described in a recent Deloitte Center for Financial Services report on the topic.2

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Culture clash threatens to undermine collaboration

Unfortunately, one potential obstacle casting a shadow over InsurTech collaboration is culture clash. This is not uncommon across the fintech space as old ways of doing things are suddenly upended by newer, hungrier disruptors. So, how might a traditionally slow-moving, conservative insurer incorporate an entrepreneurial startup mentality? For those looking to import innovation by financing or acquiring an InsurTech company, how can they avoid draining the startup’s energy and hamstringing progress with Internal speed bumps designed for an earlier, less volatile age?

Most insurers have traditionally been more comfortable seeing someone else step onto the bleeding edge. Yet when it comes to InsurTech, he who hesitates may indeed be lost if more aggressive competitors get a leg up, upgrading their systems and business models by purchasing or partnering with InsurTech innovators.

To encourage experimentation, symposium attendees were urged to put a little method into their madness by creating an innovation architecture that fast-tracks InsurTech development outside of an insurer’s standard operating procedures.

For example, speakers at the event observed that while insurers usually delay releasing new systems until they are perfected, in the tech culture dealing with imperfection is often a critical part of the innovation process, with user input incorporated to fix flaws on the fly as hiccups emerge. Think of it as InsurTech 2.0, 3.0, and beyond as new and improved versions are rolled out over time.

One approach might be to think like a disruptor, brainstorming what you would do if you were looking to start an insurance company, product, or distribution system from scratch. That could be easier and more effective than trying to shoehorn an existing system into a new, high-tech, mobile, sharing economy.

In other words, don’t just settle for cutting costs by automating how an existing homeowners policy is sold, underwritten, and serviced. Consider innovating an entirely new type of coverage leveraging a disruptive innovation—telematic data from sensor-equipped smart-homes—to create a transformative customer experience.

This won’t be easy, if only because while insurers are in the business of assuming risk, they are paradoxically very risk-averse. But at some point, insurers will need to take a leap of faith into a more risk-friendly environment. Such bold, even audacious confidence in an exciting but uncertain future is one of the defining features of the InsurTech culture.

Think like a disruptor, brainstorming what you would do if you were looking to start an insurance company, product, or distribution system from scratch. That could be easier and more effective than trying to shoehorn an existing system into a new, high-tech, mobile, sharing economy.

– Sam Friedman

IDC Worldwide Semiannual Cognitive Artificial Intelligence Systems Spending Guide, April 2017
Stephen Fromhart, Deloitte Center for Financial Services, “Marketplace lending 2.0: Bringing on the next stage in lending,” March 5, 2017

QuickLook is a weekly blog from the Deloitte Center for Financial Services about technology, innovation, growth, regulation, and other challenges facing the industry. The opinions expressed in QuickLook are those of the authors and do not necessarily reflect the views of Deloitte.

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