InsurTech investments expected to be highest on record

While there may be fewer InsurTech startups entering the market this year than in years past, investments in the space are on pace to hit record highs. That’s according to the latest report from Deloitte, “Accelerating Insurance Innovation in the Age of InsurTech.”

According to the report, InsurTechs raised $2.2 billion in the first half of 2019, the fourth-highest amount ever, and just $400 million less than last year’s total. And with a few months left in the year, InsurTechs are expected to pass the record set in 2015 when $3 billion was invested into the sector. Most recently, in October, Next Insurance, an online small business insurer, raised $250 million in a Series C financing round from Munich Re, illustrating that InsurTechs continue to be a hot ticket market.

PC360 recently spoke with Sam Friedman, insurance research leader for the Deloitte Center for Financial Services, and Mark Purowitz, senior partner at Deloitte Consulting, about how these record investments will impact the industry moving forward.

PC360: How is the insurance industry approaching InsurTech innovation right now?

Sam Friedman and Mark Purowitz: Innovation covers a wide gamut of insurance company efforts, and we’ve seen patterns emerge in three areas: (a) re-imagine the business, (b) engage customers and employees with a different experience, and (c) digitize core/legacy processes and technology. All three areas are equally valuable in assuring the industry’s long-term competitiveness in an increasingly customer-centric economy. Yet, most insurers are devoting nearly all their attention and resources to maintaining or enhancing the status quo rather than differentiating their value proposition for the long haul. Both are needed, but insurers are finding it difficult to do.

PC360: What’s keeping insurers from innovating more effectively?

Friedman and Purowitz: Part of the challenge is many insurers are so focused on maintaining and patching their current systems that they have a hard time devoting time and budget to experimental projects testing more systemic changes to their products, operating systems, and business models.

Most of those we interviewed for our study on “Accelerating Insurance Innovation in the Age of InsurTech” estimated that no more than 10% of their innovation resources are going towards fundamentally changing how insurers do business, versus 90% to keep them running as they always have — only hopefully better, faster, and cheaper. The resource gap between maintaining and evolving how insurers do business for the digital age will likely need to be narrowed considerably to fuel bigger picture innovation.

PC360: What can insurers do to accelerate the pace of innovation?

Friedman and Purowitz: We are fortunate from our vantage point to see patterns emerge across the industry. One significant finding from our research is that innovation has fundamentally been relegated to the margins of insurance companies. Too many have created corporate venture capital arms and/or innovation labs that sit disconnected from the business units, largely focusing on technology (e.g., artificial intelligence, blockchain, etc.) and coming up with ideas that are not sponsored by the customer-facing business. As a result, it has been a very difficult process to find “homes” in the business units for these ideas due to a lack of sponsorship and funding.  A second key finding is carriers should understand that improving technology alone cannot foster sustainable innovation unless accompanied by fundamental changes in insurance company strategy and operating models so they may differentiate themselves in an increasingly customer-centric economy.

PC360: How can insurers reconcile pressures from leadership to “fail fast” with the need to be more strategic about long-term transformation?

Friedman and Purowitz: Pressure to demonstrate results and return on investment won’t go away just because you’re charged with driving innovation, so their goal should be to “learn fast” versus “fail fast.” One global multiline carrier we interviewed cited the need to keep pilots from “living on as zombies for three years or more, driven by those with something invested in them.” Another carrier believes successful innovation is “not so much putting time on the court as it is putting points on the board.”

Innovation teams need to demonstrate tangible progress throughout the transformation process. Are they generating new ideas and proposals that could be breakthrough innovations? Are they getting minimally viable products built and launched regularly rather than investing in proofs of concept that never see the light of day? Are they getting quick customer feedback, and how fast are they acting on that to make course corrections? Meanwhile, helping line of business managers incrementally improve their current system could earn innovation teams the credibility and support they’ll need for bolder, more transformational projects.

PC360: Do you think rating agency scrutiny of investment-to-return ratios will be the silver bullet to solving the innovation challenge insurers are facing?

Friedman and Purowitz: There is no silver bullet, but if rating agencies are paying closer attention to how insurers are approaching, managing, and executing innovation, that’s bound to get the attention of the C-suite executives who ultimately make the decisions over funding, prioritization, and organizational issues. A.M. Best, in particular, is looking to separately quantify an insurer’s innovation efforts and rank their maturity levels. Some insurers we spoke with said such efforts could be a stimulus to push insurers to be more organized and agile about innovation, especially if it provides a framework to see how they stack up against peers and what they need to change to do better. Others were more skeptical, wondering whether carriers may end up teaching to the test, creating more box-checking compliance exercises. Ultimately, however, this development should raise the bar for insurers when it comes to generating more action rather than just talk about innovation, in part by prompting greater attention from company leadership, and in part by emphasizing tangible results rather than just exploratory activity.

PC360: In your view, what’s the outlook for InsurTech funding as we look to the next 12-24 months?

Friedman and Purowitz: We still have a full quarter to go in 2019, yet we’ve already seen a new record set with $3.26 billion invested. The difference is that with the number of startups dwindling to a handful the past couple of years, all that money is being targeted for later funding rounds at existing InsurTechs that have shown more demonstrable progress.

Insurers are looking to back InsurTech that is more readily consumable — minimally viable products, not just PowerPoint proposals. That’s likely to continue for another year or two. But we also expect more activity in areas where InsurTech has yet to make a big impact. Most of the investment thus far has gone into personal lines, but we’ve seen a rise in investment for small commercial business, as this is becoming a hot market for innovation as pressure to streamline sales and service rise in an increasingly commoditized market. Investment in life and annuity InsurTechs is also on the rise, which bodes well for evolution in that sector of the market.

Related: 

• Staying ahead of disruption in insurance
• How carriers can adopt InsurTech innovation right now
• For insurers, it’s adapt or die in a changing environment