Welcome to the Insurtech Revolution
- Technological innovations have disrupted every function in the insurance industry, from distribution to underwriting to claims management.
- While startup companies have been the initial drivers of innovation in insurtech, large carriers are beginning to catch up.
- Insurance companies are looking for managers who understand functional business disciplines, can navigate software platforms, and possess a basic knowledge of the field.
As technology reshapes nearly every field of business, managers must learn what innovations mean for their companies. Today, most business leaders understand the basics of fintech, but they might be less familiar with insurtech. Just as “fintech” initially captured the idea of innovative startups in finance but has been expanded to refer to nearly all technological innovation in the industry, “insurtech” captures the idea of innovative startups in insurance—and, more broadly, all the technological upgrades designed to make the insurance industry more efficient.
In recent years, consumer insurance brands such as Lemonade, Root, and Metromile have made headlines with their approaches to home and auto insurance. But insurtech has been evolving for more than 30 years, not only spawning newcomer brands, but also transforming established companies. And it has affected functions across the industry, including underwriting, distribution, actuarial activities, claims, and back-office operations.
2023 is set to be another year of hypergrowth for the insurtech industry. For that reason, corporate leaders will need to develop an understanding of how it works and how it might evolve. At the same time, business schools should develop the programs that encourage students to consider insurtech as a career path and that create a healthy pipeline of talent for this growing field. But before we explore the future of insurtech, let’s recap its history.
The First Wave of Digitization
From the early 2000s to the mid-2010s, insurtech primarily involved large insurance carriers codifying paper-based processes into digitized systems. This was the era of system integrators, when “digitization” meant combining multiple software systems—such as those used for document management, email, and telephony—into one coordinated system-of-record to enable standardized processes and basic reporting. Insurance employees would spend most of their days within such consolidated systems.
In parallel, insurance carrier vendors—those who provide products and services to insurance carriers, such as rental car companies, auto salvage companies, and specialized in-person inspection companies—were investing rapidly in technology. Claim dollars spent every year represent a massive market. Vendors figured that if they could capitalize on new technology, they could scale up their businesses and gain a small advantage over competitors.
The technology designed for vendors quickly outpaced the technology that the big carriers were using to improve their efficiency. By the mid-2010s, ten property and casualty insurance companies dominated 75 percent of the market. At the same time, a handful of massive vendors had gained scale through technological advantages that allowed them to develop an aptitude for acquisitions and be competitive on costs.
Around 2010, three trends began to converge: the emergence of the mobile consumer, the rise of cloud computing, and the adoption of new programming languages that enabled rapid, iterative development. These trends revolutionized every kind of commerce. Suddenly, online retailers were offering nearly every product for two-day delivery. Movies were streaming whenever a customer wanted to see them. Mobile apps were popping up faster than the James Webb Space Telescope finds new galaxies. In response to these three trends, a new era of insurtech was about to be born.
The Decade of Disruption
Fundamentally, insurance carriers couldn’t keep up with the pace of change that occurred between 2010 and 2020. At the beginning of this period, distribution and underwriting were led by brick-and-mortar brokers who relied on phone calls and paper forms. Claims operations were driven by call centers, claims adjusting was done in person, and metrics were few and far between. Even as existing systems were upgraded, they were designed to optimize internal processes, not interface with new external-facing technology.
So, what did the insurance industry do? The same thing any large industry does when it falsely believes it is facing the threat of extinction at the hands of technology. Panic!
The insurance industry did what any large industry does when it believes it is facing the threat of extinction at the hands of technology. Panic!
Carriers began to invest in mobile apps that would allow customers to get insurance quotes—but customers didn’t want to download 30 apps from 30 companies in order to compare prices. So, a first wave of entrepreneurs created digital insurance aggregators to optimize pricing for consumers. The goal was to reduce the need for insurance brokers, saving carriers the 8 percent they would pay on broker fees. It didn’t work because purchasing insurance is confusing and complicated for consumers, who prefer depth of information and a high-touch approach to a cold bidding war.
Next, carriers spent billions of dollars redesigning their core policy and claims systems so these systems could reside in the cloud for ease of access. But the result was just redesigned legacy systems.
Large insurance carriers also developed corporate venture capital divisions to fuel the technology arms race and seed the funding for innovations that would provide competitive advantage. They found small-point solutions, but nothing transformative.
The Present and the Future
In the late 2010s, innovation in insurance shifted from a mission of disruption to an era of enablement. That is, technology emerged as a way for carriers to provide more services, rather than to disrupt the entire value chain. Because it is so massive and subject to so much regulation, the legacy insurance industry has proven more resilient to true disruption than it initially seemed.
Six areas of insurance have been most impacted by the new insurtech revolution:
Distribution has been tailored to suit consumers’ changed expectations. New methods of reaching customers are now coupled with fast real-time quoting and back-office automation in a “rinse and repeat” model that enables the brokers with the best systems to scale. Insurance executives will face substantial challenges in the future if they have not invested in systems that can interact with new distribution platforms that provide real-time pricing to brokers. Brokers will continue to sell insurance, and individuals will keep buying it, but none of them will wait ten days for a quote.
Underwriting has become more robust due to additional data. I’ve never met an Excel file that wasn’t beloved by an underwriter. These alchemists turn data into gold in their own idiosyncratic ways. Recent innovations include tools that provide underwriters with more data from throughout the organization, enabling them to suss out the variables they need to plug into their models.
Policy management has proved to be more standardizable than previously believed. A few insurtech companies have painstakingly figured out how to turn traditionally bespoke models into low-code variable-driven platforms that do 80 percent of the work for policy teams before those teams write a single line of code. These innovations are popular with startup carriers that have no legacy systems and need to operate on a budget. Initial results are proving that companies don’t need customized systems to manage policies.
Claims management is now the frontier of efficiency. Between 80 percent and 110 percent of all insurance premiums are spent in claims management, making this the largest expense center for any insurance carrier. (Yes, some carriers spend more than they bring in, yet they are still solvent due to their financial investment strategies.) The work of claims management is people-intensive, chaotic, and irregularly distributed, and only recently has insurtech created any innovations in this area.
Because the top ten carriers need a level of customization to manage tens of thousands of claims management employees, they have been virtually unable to adopt software-as-a-service (SaaS) in this area. However, startup carriers are flocking to new SaaS platforms as low-cost alternatives to the legacy multimillion-dollar “transformational” platforms. Over time, as the new tech platforms become more feature-rich, the large carriers will begin to adapt.
Innovation in insurance has shifted from a mission of disruption to an era of enablement as carriers use technology to provide more services.
Financial systems are increasingly digitized. Believe it or not, in 2015 nearly 80 percent of claims payments in the U.S. were still distributed via paper check. Years ago, fintech revolutionized payments, giving insurance companies access to digital payment rails—the methods that enable money transfer from payer to payee. But the legacy general ledger systems used by large carriers required companies to manually reconcile payments sent out digitally. A few insurtech payment platforms attempted to tackle this problem, but they ended up building portfolios of customized systems that couldn’t scale.
Even so, a few winners have emerged in this space. These are new versions of custodial bank account holders that manually handle money management. They publish application programming interfaces that are seamless for vendors and insurance carriers. Vitesse is the shining example of API innovation.
Vendor services have become innovation pioneers. Insurance vendors have always been a few steps ahead of insurance carriers when it comes to technological innovation. Most recently, the leaders of the pack include insurtech companies that specialize in automated fraud detection, AI repair estimation, augmented reality for home claims, drone surveillance, aerial imagery, and data aggregation.
These vendors face a few problems. One is that their data can be skewed by catastrophes and other exogenous factors. The other is that some cannot easily prove that they provide a return on investment—and they need that proof to justify the frothy valuations they received from venture capitalists during the booms. It remains to be seen whether any of these vendors ultimately can transform the industry.
Training Tomorrow’s Insurance Execs
On the whole, large insurance carrier executives are no longer primarily worried about being disrupted. Instead, their focus is on selecting the right vendors to ensure they can benefit from innovations in cost savings, risk optimization, and customer satisfaction. Tremendous opportunity exists, both for business students interested in the field and for business schools that can help this next generation of insurance executives understand the challenges and benefits of insurtech.
To better serve the industry, some business schools have partnered with major insurance carriers to create targeted programs where students can learn the basics of insurance and obtain hands-on experience in the field. But such programs require dedicated faculty and narrowly focused corporate partnerships, and not all institutions have those resources.
Fortunately, they don’t have to. Because insurance sits at the cross-section of every functional business discipline—from finance to sales to distribution to innovation—schools can merely build insurance specialties on top of the core curriculum. As an example, they can recruit expert practitioners to develop specialized seminars where students can learn the nuances of the insurance value chain and the ways that core business programs apply to the industry.
Schools also can make sure they offer courses focused on utilizing new technology in operations and making SaaS technologies work across multiple platforms. While such courses are useful for any student, they can be particularly valuable for graduates who want to take jobs with huge insurance carriers.
The Appeal for Students
For students considering their career paths, the insurance industry has much to recommend it. Insurance is one of the largest and most ubiquitous industries, and insurtech has enabled people from a variety of backgrounds to enter the market and leave fingerprints on every core operational area.
Students who learn to harness tools like SaaS platforms will be prized in a field that needs to rapidly adopt scalable innovation. But there’s another reason this industry should appeal to business students. Ultimately, the new technology that enables carriers also benefits carriers’ customers—and individual consumers. This means that students who enter the insurance field can achieve something they’re explicitly interested in: creating real-world impact.