EXCLUSIVE: “Disruption & Dilemmas” – Merlin Beyts, ITC DIA Europe in “The Insurtech Magazine”

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

Let’s start 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 insurtechs and incumbents alike. After seeing insurance companies adopt technology at a rate never dreamed of, we have now entered a turbulent year, full of uncertainty. Natural disasters are on the rise, labor shortages remain a serious problem and insurtech investment has slowed, with far fewer deals than in previous years.

So as the world enters another “once-in-a-century crisis,” will the industry double down and accelerate further, or will leaders put down their checkbooks and start consolidating to weather the storm ahead?

STICK OR TWIST?

We saw a wave of technology investment over the pandemic. In fact, we’ve never seen the industry move so quickly. Back in 2020, almost all the conversations were about how to build “ecosystems”, while now “embedded” insurance is arguably the most widespread buzzword. And of course the two are connected. The partnerships forged over the last few years have created an incredible environment for innovation, with the industry now much better equipped to deal with disruption and even benefit from it. However, forces beyond our control have created barriers and challenges that lead to a perfect storm, which will mean businesses either batten down the hatches or rev up the engine and try to outrun it.

DIFFICULT TERRAIN

The big resignation — or big reshuffle, or big re-evaluation, depending on who you talk to — after the pandemic as employees weighed what was important to them and left or moved sent shockwaves across all tech sectors. However, finding digitally skilled employees had been a problem for insurers long before these phrases were first uttered. Many desirable candidates (mainly computer scientists and software developers) were entering the technology sector. In the meantime, large parts of the incumbent workforce retired.

Insurtechs invested huge sums in expanding their workforce. But now, without the financial results to support this outlay, we’ve seen massive layoffs from some very high-profile startups and scaleups. Without the necessary personnel to implement new projects, it is difficult to see where the next big innovations will come from. And major questions remain about the industry’s ability to deliver exceptional customer service at scale. Although the startups improve the customer experience very effectively, they only serve relatively small niches, and incumbents still need to create end-to-end solutions that create more efficiency, improve communication and make the insurer-to-insurer relationship far more enjoyable.

They need technology to enable this, and arguably the need has never been greater. So a question on the lips of many is whether insurance companies will focus on cost at the expense of service. It would certainly be a shame to see the industry take a step backwards in customer experience when it has done so much to enhance it over the years.

INSURTECH’S DEVELOPMENT

However, there may be some good news for consumers. A new trend we are beginning to see is customer-facing insurance companies that are developing their business models on a number of fronts. Some technology-driven MGAs are starting to branch out and sell their solutions to incumbents as an additional revenue stream, giving the larger players more options to enable the experience they’re trying to create. Meanwhile, many insurtechs are starting to be licensed as ‘full-stack’ insurtechs.

The fact that they are able to take full responsibility for the end-to-end insurance lifecycle means that they can begin to scale their highly personalized offerings to customers and can pose a challenge to insurers. Instead of just cooperating with the incumbents, they can start to become real challengers and start taking more market share from them. As a result, the traditional operators must upgrade – and quickly. However, the overall investment landscape for insurtech also looks far less fruitful than in the past. With investors historically pouring cash into the insurtech scene at high rates, many took it for granted that it would continue indefinitely. That’s not to say we haven’t been without some exciting moments, as we saw some gigantic increases in 2022.

Wefox’s Series D reached $400 million, Pie took more than $315 million and Coalition continued its foray into the cyberspace with a $250 million raise. We even saw another LatAm unicorn with Chile’s Betterfly raking in $125 million. Despite the large financing rounds, there were fewer deals overall. It seems that investors are becoming more selective about who they give their money to. The niches these insurance companies operate in make it hard to believe that they will soon begin to monopolize large parts of the market, although this may change with more time and investment. It would be impossible to discuss the investment outlook for the industry without mentioning cyber.

The sector has exploded in recent years with quick responses to immediate problems. Chief Information Security Officers have been thrust into the spotlight as some of the most important members of the boardroom as they fight the cyber war on two fronts. First, they must ensure that their own companies are protected against ever-increasing ransomware attacks. Second, they must develop products to protect commercial customers. With this need linked to increased investment specifically in cyber-oriented insurtech startups, we can expect far more innovation in this area.

FORECAST THE STORM

The most pressing issue facing the insurance industry is without a doubt extreme weather. Extreme weather events are increasing, especially in the US and Australia, and natural disasters are costing the industry billions. Meanwhile, the percentage of people covered for these events is still minimal. The response from all sides has been significant. Insurers are working with sustainability-focused insurers to improve weather modelling, access vulnerable customers and adopt preventative measures that help people take better care of their assets.

While the use of AI across all industries has been polarizing, insurers have been quick to adopt it to analyze disparate data sets across multiple risk pools to improve their understanding of the extreme event exposures customers face. This can be incredibly exciting, because once an industry finds an application for technology that works, they can often find more. I expect this will accelerate innovation, but again I’m an optimist! So overall, there are many reasons for both excitement and concern.

While the challenges ahead pose serious threats to insurers’ ability to care for customers in the short term, the response to these 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 get back on track and take new paths forward. There will also be many more issues arising from the economically turbulent period we are facing, but the technology-enabled response is promising. I began by asking if the insurance industry had hit a tipping point and asked if it was 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 are at full strength yet.

This article was published in The Insurtech Magazine issue 26, pages 18-19