Insurers finally innovating after slow start

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As insurtech continues to emerge as one of fintech's most dynamic sectors, incumbent providers are under increasing pressure to adjust to a more digital landscape.

Speaking at the FCA's Project Innovate event on Tuesday, Huw Evans, head of the Association of British Insurers (ABI), discussed both the challenges and opportunities insurtech is presenting for legacy players.

Here were the main points Evans made in his speech:

• Despite a slow start, insurers are beginning to adjust to industry changes. Evans admitted that insurance has been held back by legacy systems that have hindered innovation by eating up resources through inefficiency. However, he added, insurers have woken up to the problem, and are investing in more efficient IT infrastructures, and in data analytics to deliver more tailored products and services to consumers. We have recently seen a flurry of insurtech activity among legacy providers, including partnerships and investments, supporting Evans' assessment.
• As incumbents embrace innovation, they have to bear the risks in mind. While online insurance is a huge opportunity for incumbents, Evans said, moving online also raises cybersecurity risks for an industry unused to a digital format. According to him, the ABI itself is trying to mitigate these risks by petitioning the government to make the mandatory disclosure of data breaches aspect of GDPR apply to insurers as well as banks. Although this regulation, due to be introduced in 2018, raises the risks of reputational damage and client loss for financial firms, it may also be the catalyst necessary to spur their cybersecurity efforts.
• Incumbent providers have to double down on building stronger customer relationships. Evans emphasized that building consumer trust would be essential for an industry that has long suffered from low levels of consumer confidence. He remarked that innovations like wearables and telematics are already forging more of a two-way relationship between providers and customers, by allowing consumers to be directly involved in the pricing of their policies. However, as insurer Admiral's recent stumble indicates, legacy providers will have to be careful in how they use customer data to keep from alienating clients further.
• Both incumbents and insurtechs stand to benefit from collaboration. Evans said there will be more collaboration between insurtech startups and legacy providers going forward. ABI itself is running a program through which startups can gain access to the body's market data and industry events, he added. Insurtechs stand to benefit from legacy providers' financial resources, as well as their regulatory compliance expertise. Meanwhile, legacy players can leverage these new players' tech savvy to outsource the updating of their core systems, and to boost their customer service through more personalized products and seamless interfaces. There have been many such partnerships already, including AXA's and Munich Re's collaborations with Trov.

As insurtechs bring additional offerings to the table, we are likely to see incumbents leveraging more of these solutions. New players like Ladder, Fabric, and Lemonade have rolled out products that differ from anything incumbents have had on offer to date, thereby catering to consumers' growing appetite for more affordable, hassle-free, and transparent insurance buying. As it is much cheaper for incumbents to incorporate innovations from third parties than to develop them in-house, we will probably see many more insurtech partnerships and acquisitions as legacy insurers seek to modernize and stay relevant.

The global insurance industry is worth nearly $5 trillion, and insurance companies are at risk of losing a share of this valuable market to new entrants. That's because these legacy players have been even slower to modernize than their counterparts in other financial services industries. 

This has created an opportunity for a group of firms known as insurtechs. These startups are leveraging new technology and a better understanding of consumer expectations to increase efficiencies in the insurance industry. Some are helping incumbents deliver better end products, while others are directly competing with legacy players.

Sarah Kocianski, senior research analyst for BI Intelligence, Business Insider's premium research service, has compiled a detailed report on insurtechs that looks at the drivers behind the increasing number of insurtech companies, how they are helping or disrupting legacy players in the insurance industry, and where legacy players are innovating off their own backs. 

Here are some of the key takeaways from the report:

• The opportunity is currently biggest in the US and Europe. That's because these regions have large, very mature insurance industries. 
• Insurtechs' products and services mostly target retail customers. This includes small businesses and consumers. 
• Most insurtechs are acting as enablers. This means that they offer products and services that help insurers and reinsurers improve their processes and better serve customers. 
• Of the main players in the insurance industry, brokers are most at risk of disruption. This is because insurtechs can easily replicate their services and are solving historical industry problems faster than legacy players. 
• Legacy players are also innovating. In particular, insurers and reinsurers are investing in insurtechs and fintechs working with relevant technologies. At the same time, they are improving their own direct-to-consumer digital interfaces, increasing their disruptive threat to brokers. 

 In full, the report:

• Explains the structure and current state of the insurance market.
• Highlights areas where insurtechs can help legacy players modernize.
• Describes where insurtechs are competing with incumbents and how their models compare.
• Provides case studies of insurtechs.
• Outlines the legacy response. 
• And much more.

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