Supplemental health industry for small companies: Challenges and opportunities
Small companies in the supplemental health products market need to understand the unique challenges these products present in order to compete effectively.
“InsurTech” is the mash-up term denoting initiatives at the intersection of insurance and technology, which tend to attract large amounts of both money and hype. The money? According to research firm CB Insights, investors poured nearly $1.7 billion into insurance technology startup deals globally in 2016, with the number of funding deals rising from just over two per month in 2011 to nearly 15 per month in 2016. The hype? It’s hard to find an insurance trade magazine without a cover story on InsurTech and headlines posing intriguing questions such as “Will Technology Make Insurance Obsolete?”1 To determine what may be the height of the hype curve for InsurTech, it may be valuable to pause and survey the current landscape.
“InsurTech” or “InsTech” is the insurance-related offshoot of “FinTech,” the term used to describe the combination of financial services, such as banking and investments, and advanced technology. While most commonly used to describe start-up ventures, it can also be applied to initiatives within an established company, such as the recent deployment of artificial intelligence (AI) in claim processing initiated by the Zurich Group. Zurich is using AI to review paperwork, such as medical reports, for personal injury claims and believes its use has significantly sped up claim processing time.
InsurTech startup entities tend to have several key common characteristics:
The current interest in InsurTech is driven by a perfect alignment of four key elements, the “big Ts”—technology, talent, treasure, and a tempting target.
Most InsurTech startup deals to date have focused on P&C insurance within the U.S. market and in particular on non-risk-bearing aspects of the insurance industry such as:
While most InsurTech startups focus on areas that avoid “insurance risk” (the responsibility for paying a claim if an insured event occurs), there are some startups functioning as full insurance companies. Some examples of these exceptions include:
The key obstacles to more InsurTech entities seeking to bear insurance risk are regulation and capital requirements. Insurance is regulated through a system that can be confusing to new entities, which is due to rules and regulations that vary by state. Becoming licensed to sell insurance in each state and keeping up with compliance in this system can be time consuming, expensive, and drain resources.
Insurance regulators also require material amounts of capital or surplus to be held by entities that choose to take on insurance risk as they are selling a promise for potential future payments and need to have adequate funds to do so. Most startups do not have large amounts of capital at their disposal. As startups in any field tend to be risky (they fail more often than they succeed), investors try to avoid concentrating their money in any one startup entity and prefer to diversify across multiple entities, hoping that one will be successful. This funding approach limits the amount of money available to startups for use as surplus.
According to a recent survey by PwC, 90% of insurers fear they will lose business to a tech startup. One of the main advantages of established insurers has always been large amounts of detailed risk data collected over many years that can be used for underwriting and pricing. However, as the type and amount of alternative data relevant to insurance continues to explode, it is possible and likely this advantage will not be sustainable.
Many legacy insurers, however, are now shifting their view of InsurTech entities from competitors to partners. These insurers are teaming up with startups and players outside the insurance sector to speed up digital innovation through in-house incubators, accelerators, and innovation labs. These labs typically provide technical support, guidance, and connections to industry experts. State Farm, for example, fosters innovative research through its “485 Think Lab,” which focuses on “collaborative ideation.”
Other legacy insurers are putting their capital to use by forming corporate venture capital arms to invest in tech startups. Entities such as USAA Ventures, AXA Strategic Investors, and XL Innovate not only invest capital but also provide strategic support to startups. Investing relatively small amounts in multiple startups gives the legacy insurers supporting these funds access to potential breakthroughs in numerous areas of interest to them.
While many legacy insurance companies are jumping into InsurTech investments, many are not. Some companies, such as many small- to mid-size insurers, may not have the funds to invest and may have to wait until the innovations are proven and more widely available. By then, of course, it may be too late for them to gain any advantage. Some larger insurers have been silent as well on their efforts, which may be strategy, skepticism, or inertia. It is difficult to know if they are prudent in their patience or if they are the next Blockbuster Video.
While the number of InsurTech deals may have peaked in the first quarter of 2016 (59 deals for $783 million), the market still appears to be very active (38 deals for $283 million in the first quarter of 2017). There are several existing corporate venture capital funds with investible capital to spare, and new independent funds are currently forming specifically to invest in InsurTech ventures. As a result, it is likely there will be material amounts of funding available for investment in new InsurTech ventures over the course of at least the next three to five years.
In regard to InsurTech entities that have already received funding, each successive wave of new entrants brings potential competitors with newer ideas and potentially “fresher” technology, seeking to address many of the same issues but in different ways. While the insurance space is a large one, there are bound to be more instances of startups bumping into each other as the numbers increase. Who wins the competition among the startups will ultimately be decided by their target markets.
When will we know what success looks like for InsurTech? Some experts project at least a three-year lag between technological innovations and an industry’s ability to properly digest and put that technology to use in a meaningful way. In 2016, S&P Global Ratings wrote that the material effects of InsurTech may only start to emerge in 10 years’ time. The time horizon for determining financial success for InsurTech startups may likely be four to five years—the typical time frame expected for a “liquidity event” such as a strategic sale or initial public offering by venture capital investors. This time frame would be consistent with the time frame for many InsurTech entrepreneurs who, based on their histories, prefer to build, sell, and exit to the next challenge as quickly as possible.
While there is a real fear of potential financial disruption from these startups in many insurer boardrooms, the feeling may be overblown in the short term due to the current small size, limited data sets, and limited financial resources of the startups.
The lasting long-term impact of the InsurTech movement will likely be an overall better, more efficient risk management experience. Greater focus on loss prevention will result in fewer claims along with easier, faster, and cheaper access to any remaining necessary insurance coverage—an overall better policyholder experience.