3 reasons reinsurers are leading InsurTech investment
Many of the InsurTech companies that previously struggled to overcome regulatory and legacy hurdles are now equipped to be more effective.
Reinsurers have historically shied away from participating in primary insurance, but are currently spearheading the charge and redefining the lines of what qualifies as an insurance carrier.
Consider that a report by JLT Re and CB Insights highlights how reinsurer investment in InsurTech has grown from a meager 5% of deals in 2012 to over 55% as of 2016. Moreover, reinsurers contributed the most to InsurTech investment in Q4 2017, according to Willis Towers Watson.
As a result of this funding, a number of new technologies are being created or repurposed, all in ways that can have a profound impact on insurers. These can be customer facing initiatives such as bots or natural language processing, or behind-the-scenes initiatives like using drones or AI. Each of these technologies creates opportunity for the insurance industry to revamp common business approaches, increase the volume of data factored into decision making, and replace customer friction with flexibility. There is no shortage of ways for insurers and reinsurers to spend money to modernize their business processes.
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It comes down to capital
For reinsurers, effective deployment of capital is core to the business, requiring industry participants to look for opportunities to safely invest. Historically, this has led to investments in places largely predictable and consistent in their ROI, such as the bond market. However, a recent report highlights how investment is changing, with global expansion, consolidation, and innovation among the most common uses of excess capital.
This has created a windfall for InsurTech investment, with reinsurers investing in technologies that mitigate the risks on the policies they insure. In other words, reinsurers are making upfront investments to limit the exposure of payout.
This is manifesting in nearly every part of the insurance life-cycle. In underwriting, reinsurers are funding predictive analytics initiatives to help their insurers better understand their risks. In claims, reinsurers are incorporating initiatives that assist in limiting the risk of claims likely to skyrocket, and, thus, mitigating their own exposure to rapid escalation. Additionally, they are using technology to identify , a societal issue, but also one that can dramatically increase the time it takes employees to get back to work.
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Bridging the gap between InsurTech and insurers
Reinsurers maintain a unique stance within the insurance ecosystem. On one hand, they understand all the intricacies and regulatory issues inherent to the insurance market. On the other hand, they are not encumbered by the inefficiencies that slow down innovation within primary carriers (e.g., higher costs, fragmented distribution, legacy technology). Reinsurers have also built the infrastructure to meet these hurdles, but are not beholden to a business model requiring so many intermediaries. This allows more freedom to explore new distribution alternatives.
InsurTech companies regularly discuss the need to overcome legacy technology for insurers to be more effective. Partnering with reinsurers in ways that go beyond funding to leverage institutional knowledge can help solve these issues, but also be wildly beneficial to both parties.
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Building a competitor
However, this budding mutually beneficial relationship between reinsurers and startups is creating a new competitor for insurers, one with a deeper understanding of technology and overcoming barriers to entry. Due to the institutional knowledge and deep pockets, reinsurers are positioned perfectly to leverage InsurTech and disrupt the very market they reinsure.
There are several developing approaches stemming from this shift. One of the most common is the advent of reinsurer-backed MGAs. Essentially, reinsurers are allowing companies to create a new front for their offering. They are then backing the policies the MGAs are creating, based on specific rules which the reinsurers and MGAs have agreed to put in place.
This approach is creating an opportunity for companies to rapidly enter the insurance market, likely turning reinsurers into potential “frenemies” of sorts with carriers. Though still nascent, this dynamic is something insurers should begin to monitor more closely.
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What’s next?
The total dollars invested from reinsurers into InsurTech add up to only a small fraction of the reinsurers’ collective balance sheet. However, it is a growing portion, and today represents a majority of the funding in the InsurTech market. The implication of this shift for insurers could be a mixed bag. On the positive side, many of the InsurTech companies that previously struggled to overcome regulatory and legacy hurdles are equipped to be more effective out of the gate. On the negative side, incumbent insurers may find themselves with new, well-funded competitors in the near future.
Kirstin Marr (Kirstin.Marr@valen.com) is president of Valen Analytics.
The opinions expressed here are the author’s own.
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