While the insurance industry has remained much the same for more than a century, the status quo cannot endure.

Established insurers have been able to slide by with incremental improvements, but new entrants are demonstrating that approach isn't enough anymore.

Three of the biggest drivers of change to the industry include:

Customer expectations – Customers expect convenience and transparency, and have greater ability to find it than ever before.
Pace of innovation – So far, incremental innovation has helped insurers meet most new customer expectations, but it hasn't been enough to adequately address the shared economy, usage-based models, and/or risk prediction. In this context, customers have a need for new insurance solutions, but incumbents are struggling to provide them.
Start-ups – New, lean players that have the ability to innovate quickly — notably InsurTech innovators — are taking advantage of the opportunity to fill the gaps that incumbents have not.

Technology levels the playing field

Established insurers traditionally have had an advantage over prospective newcomers of being able to leverage many years of detailed risk data. However, much data now can be captured in a real-time, innovative way and is available from external sources. As a result, there are new market entrants that have the ability to generate meaningful risk insights in very specific areas using new data sources. This will positively impact a business that mainly relies on data to understand and manage the risk.

For example, several Internet of Things (IoT) companies provide analytics that generate insights from sensor-based data and additional external data sources like telematics and real-time weather observation. The promise of lower premiums coupled with a better risk management service resulting from this model is likely to appeal to buyers of personal and commercial products.

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While the pace of change and market disruption has been daunting, the growing presence of InsurTech companies is not a threat, but rather a game-changing opportunity for insurers. (Photo: iStock)

Protection-based models are also shifting to more sophisticated preventive models that facilitate loss mitigation in all insurance segments. Sensors and related data analytics can identify unsafe driving, industrial equipment failure, impending health problems and more. More deterministic models like the ones that now exist for crop insurance, are starting to emerge and new entrants are offering both risk prevention (not just loss protection) and a more service-oriented delivery model.

Additionally, effective core systems enable insurers to operate at a large scale. Because of cost, establishing these systems has traditionally been a barrier to market entry. However, cloud-based core solutions have changed this, as are new developments like robotics and automation.

Surge in start-ups

Because of the promise they have to quickly meet changing customer demands, funding for FinTech startups is surging. Increased funding activity not only demonstrates venture capitalist investors' interest, but also indicates how incumbents may leverage the FinTech to address their own business challenges. In FinTech, a specific focus on insurance has emerged, known as InsurTech. Funding activity is in line with FinTech investment in general and is expected to rise as new players and investors enter the space.

Activity around seed, angel and series A stage InsurTech companies also has generated considerable buzz, which indicates that investors and incumbents are eager to get on board with early stage start-ups.

Think like a disruptor, act like a start-up

In a time when societal changes, technological developments and empowered customers are changing the nature of the insurance business, established insurers need to determine — with all possible haste — how InsurTech fits in their strategies. According to our Global FinTech Survey, 23% do not deal with FinTech; 20% engage in joint partnerships; 16% buy and sell services to FinTech companies, while very few acquire or launch their own.

While the pace of change and market disruption has been daunting, the growing presence of InsurTech companies is not a threat, but rather a game-changing opportunity for insurers.

As innovative as some InsurTech solutions are, they cannot replace decades of experience. Technological innovators may have solutions to customer needs, but often lack insight into how they can apply and scale them and in which industries. Accordingly, insurance companies are in a powerful position to help maximize innovation potential.

InsurTech opens up new avenues to innovate, can improve the relevance of insurance products and services, accelerate speed-to-market, and provide new options for growth for industry front-runners.

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Prescient insurers are:

Exploring and discovering – Savvy incumbents are actively monitoring new trends and innovations. Some of them are even investing in operations in innovation hotspots (e.g., Silicon Valley) where they can learn about the latest developments directly and in real time.

Action item: Plan an InsurTech immersion session for senior management. This should be an effective eye-opener and facilitate sharing of relevant insights on desired InsurTech solutions. Subsequently, FinTech analyst platforms can keep management up-to-date on the latest developments and market entrants.

Partnering to develop solutions – Exploration should lead to the development of potential use cases that address specific business challenges. Incumbents can partner with startups to build pilots to test in the market.

Action item: Select a few key business challenges, identify possible solutions, and find potential partners. A design environment ("sandbox") will help boost creativity and also provide tools and resources for designing and fast prototyping potential solutions. This approach also can help establish the baseline and approach to building future InsurTech solutions.

Contributing to InsurTech's growth and development – Venture capital and incubator programs play an important role strategically directing key innovation efforts. Established insurers can play an active role by providing industry knowledge and resources to develop appropriate solutions.

Action item: Define a strategy to direct start-ups' focus on specific problems, especially those that otherwise might not be addressed in the short term. Incumbents should consider startup programs such as incubators, mechanisms to fund companies, and strategic acquisitions.

Developing new products and services –Being active in InsurTech can help incumbents discover emerging coverage needs and risks that require new insurance products and services. Accordingly, they can refine — and even redefine — product portfolio strategy. This will result in the design of new risk models tailored to underserved and emerging markets.

Action item: Take a close look at emerging technologies in order to define a promising product strategy, determine required capabilities, and create a plan to build a portfolio and seize market opportunities.

This piece was co-authored by Jamie Yoder and Javier Baixas.

Jamie Yoder is PwC's Global Insurance Advisory Practice Leader, and previously managing partner of Diamond Management & Technology's Insurance practice (acquired by PwC in Nov, 2010). Email him at james.r.yoder@pwc.com.

Javier Baixas is a director at Strategy&, PwC's strategy consulting group, focused on the insurance industry for both P&C and Life. Email him at Javier.baixas@pwc.com.

Special Reports /

InsurTech: A challenge to and opportunity for insurers

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