Insurtech Disruption… Not So Much

President at Independent Market Solutions

Although it has been around for over a decade, I believe my first brush with the word “insurtech” occurred around 2015–16. I was on my annual groveling tour, soliciting insurance companies door-to-door for financial support of FAIA’s annual convention. Initially, I knew little about this trendy new term, but quickly gleaned its emerging status by uncovering the significant investment being made by the very entities it had targeted to disrupt. Needless to say, competing for insurance company funding against this new, modern-day money pit left a feeling of being less desirable and, quite possibly, extinct in the near future.

Soon after my first encounter, it seemed as if insurtech was suddenly everywhere. Like most Silicon Valley endeavors, institutional investment was steadily climbing, and new insurtech companies were being launched at warp speed. Names like Hippo, Flock, Bold Penguin, Lemonade, etc. were no longer being used to describe a day at the petting zoo. Instead, they were the latest band of disruptors (there have been many others) touting the end of insurance as we know it.

Not surprisingly, this frequently meant no more agents, faster timelines for underwriting, quoting, and claims, and a more customized, consumer-friendly experience. The promise of insurance nirvana was surely on the horizon, fully accompanied by the chorus Kum Ba Yah! What was also noticeable were the unfamiliar faces leading these new companies. By design, most were from the technology sector with little to no insurance experience. I believe this was intended to free the company conscious of any old world insurance bias that could prevent the new company from reaching its full nirvanic potential.

Obviously, the insurtech story is still unfolding; already, there have been some notable achievements and predictable failures. Let’s talk about a couple of bright spots first. It’s true; much of the insurance industry was in the technological stone age when the insurtech wave first formed. Many of the industry’s processes and people were viewed as old and steeped in tradition—exactly why it was so appetizing to those with seemingly endless supplies of cheap investment capital, a more youthful/updated outlook, and disruption on their minds.

As it turns out, pinging multiple databases to quote risks in under 5.4 seconds was a virtual “lay-up” for the insurtech gang. Predictive analytics and artificial intelligence provided underwriting a steroidal boost. Using drones, aerial photos, and other real-time resources transformed the claims settlement process. New software and nifty apps made agents more accessible to clients and effective at their jobs. These are all very positive developments that no one would deny the insurance industry desperately needed.

On the other hand, some of the disruptor’s plans have been foiled by battle-tested market realities. Most insurtech companies that focused on actual risk transfer initially launched with plans to distribute their product through almost any means other than agents, i.e., direct, affinity partnerships, embedded, etc. It was almost portrayed as a heightened level of enlightenment not to rely on agents! That flawed strategy has been exposed through a nearly complete course reversal. Today, these same companies are appointing agents everywhere and relying heavily on this proven means of distribution to attain profitable growth. Market Reality #1: Insurance is complex, and most buyers desire the counsel/advice of a professional agent.

Market Reality #2: You have to attain profitability and sustain it to exist. The fact is that many, many more insurtech ventures have failed than have survived. The ones you still read/hear about or perhaps do business with are clearly in the minority, and most are not profitable yet. Insurtech failures can be attributed to funding shortfalls, mismanagement, or were simply bad ideas. However, one common trait they all share is a lack of profitability that ultimately led to their demise.

This also explains much of the merger/acquisition activity that has occurred (and will continue) in this space. Most of today’s insurtech companies are still living off investor capital and closely monitoring their cash “burn rate” while struggling to earn a profit. Market valuations for these companies have fallen sharply over the past 18 months due to rising interest rates, investor pull-back from the tech sector, and growing concern about their bottom line. Notably, several publicly traded insurtech companies have taken a beating, with Lemonade, Hippo, Root share prices down more than 70 percent from their historical market high. These are not emotional or subjective critiques. Instead, they are the stark reality of the pressing need to become profitable.

It’s also no picnic competing against proven insurance behemoths like Progressive, GEICO, Travelers, Allstate, State Farm, and many others. They have centuries worth of real loss data, experience, and mountains of surplus. Thus, it is more likely that viable insurtech companies will ultimately be acquired by these established insurers rather than compete effectively against them.

This helps explain why the very targets for disruption are among the largest investors in insurtech. It does NOT signify the end of insurance as we know it but, instead, affirms the industry’s need for a long-overdue technological overhaul. More positive developments are sure to come from the world of insurtech in the future, and insurance veterans need not fear becoming extinct or less desirable. Instead, we should embrace these changes and take comfort in knowing they will ultimately make us better at our craft.

Onward insurance soldiers!

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