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

Established insurers have been able to slide by with incrementalimprovements, but new entrants are demonstrating that approachisn't enough anymore.

Three of the biggest drivers of change to the industryinclude:

1. Customer expectations – Customers expectconvenience and transparency, and have greater ability to find itthan ever before.
2. Pace of innovation – So far, incrementalinnovation 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 incumbentsare struggling to provide them.
3. Start-ups – New, lean players that have theability to innovate quickly — notably InsurTech innovators— are taking advantage of the opportunity to fill the gapsthat incumbents have not.

Technology levels the playing field

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

Related: 'Orthodoxies' keep insurers from disruptingthemselves

For example, several Internet of Things (IoT) companies provideanalytics that generate insights from sensor-based data andadditional external data sources like telematics and real-timeweather observation. The promise of lower premiums coupled with abetter risk management service resulting from this model is likelyto appeal to buyers of personal and commercial products.

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

Protection-based models are also shifting to more sophisticatedpreventive models that facilitate loss mitigation in all insurancesegments. Sensors and related data analytics can identify unsafedriving, industrial equipment failure, impending health problemsand more. More deterministic models like the ones that now existfor crop insurance, are starting to emerge and new entrants areoffering both risk prevention (not just loss protection) and a moreservice-oriented delivery model.

Additionally, effective core systems enable insurers to operateat a large scale. Because of cost, establishing these systems hastraditionally been a barrier to market entry. However, cloud-basedcore solutions have changed this, as are new developments likerobotics and automation.

Surge in start-ups

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

Activity around seed, angel and series A stage InsurTechcompanies also has generated considerable buzz, which indicatesthat investors and incumbents are eager to get on board with earlystage start-ups.

Think like a disruptor, act like astart-up

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

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

Related: 5 disruptors that could turn the P&C industryon its head

As innovative as some InsurTech solutions are, they cannotreplace decades of experience. Technological innovators may havesolutions to customer needs, but often lack insight into how theycan apply and scale them and in which industries. Accordingly,insurance companies are in a powerful position to help maximizeinnovation potential.

InsurTech opens up new avenues to innovate, can improve therelevance of insurance products and services, acceleratespeed-to-market, and provide new options for growth for industryfront-runners.

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Prescient insurers are:

• Exploring and discovering – Savvyincumbents are actively monitoring new trends and innovations. Someof them are even investing in operations in innovation hotspots(e.g., Silicon Valley) where they can learn about the latestdevelopments directly and in real time.

Action item: Plan an InsurTechimmersion session for senior management. This should be aneffective eye-opener and facilitate sharing of relevant insights ondesired InsurTech solutions. Subsequently, FinTech analystplatforms can keep management up-to-date on the latest developmentsand market entrants.

• Partnering to develop solutions – Explorationshould lead to the development of potential use cases that addressspecific business challenges. Incumbents can partner with startupsto build pilots to test in the market.

Action item: Select a few key businesschallenges, identify possible solutions, and find potentialpartners. A design environment ("sandbox") will help boostcreativity and also provide tools and resources for designing andfast prototyping potential solutions. This approach also can helpestablish the baseline and approach to building future InsurTechsolutions.

• Contributing to InsurTech's growth and development– Venture capital and incubator programs play an importantrole strategically directing key innovation efforts. Establishedinsurers can play an active role by providing industry knowledgeand resources to develop appropriate solutions.

Action item: Define a strategy to directstart-ups' focus on specific problems, especially those thatotherwise might not be addressed in the short term. Incumbentsshould consider startup programs such as incubators, mechanisms tofund companies, and strategic acquisitions.  

• Developing new products and services –Beingactive in InsurTech can help incumbents discover emerging coverageneeds and risks that require new insurance products and services.Accordingly, they can refine — and even redefine — productportfolio strategy. This will result in the design of new riskmodels tailored to underserved and emerging markets.

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

This piece was co-authored by Jamie Yoder and JavierBaixas.

Jamie Yoder is PwC's Global Insurance Advisory PracticeLeader, and previously managing partner of Diamond Management &Technology's Insurance practice (acquired by PwC in Nov,2010). Email him at [email protected].

Javier Baixas is a director at Strategy&, PwC's strategyconsulting group, focused on the insurance industry for bothP&C and Life. Email him at [email protected].