Four factors for evaluating InsurTech tie-ups
It's important for insurance companies to apply a rigorous approach to assessing whether an InsurTech startup is the right growth partner.
The annual InsureTech Connect conference has grown to include literally thousands of participants from legacy insurance companies to scrappy startups. But the real work happens after the swag gets put away. That’s when companies work through whether they’ll compete, cooperate, or even combine.
For too many property and casualty (P&C) insurers, this is also the time for strategic mistakes and missed opportunities.
When the show started in 2016, there was a lot of talk about disruption and disintermediation. Since then, the startups figured out that the industry does have some pretty daunting barriers to entry; existing players began to understand how to take advantage of their strengths, and everyone began to try to figure out what comes next. It’s a fascinating time to work in the industry.
Most P&C insurers will candidly admit that, for years, the sector wasn’t known for its agility. Development cycles were so long that companies could often succeed with a copycat approach to what their peers were doing.
Digital technology has changed that. For example, using cloud-based, computing-on-demand capabilities, new offerings can be launched in weeks or even hours. This is a very different way of thinking, and it’s rarely plug-and-play.
In a recent PwC report (“This is InsurTech’s moment”), we observed that there are many factors to consider when evaluating which partners to pursue, and it’s important for insurance companies to apply a rigorous approach to assessing whether a startup is the right growth partner. This doesn’t mean taking three years to devise a perfect strategic plan; you don’t have that kind of time anymore. But asking tough questions can help prevent mismatches that can cost millions.
Here are four considerations.
No. 1: Know thyself.
Before you can know what you want in a partner, you have to know yourself. Yes, there are amazing developments in artificial intelligence-based predictive analytics, telematics and Internet of Things (IoT) sensors. But, look beyond your technology stack:
- What’s your market focus?
- Are you the innovator, the customer service leader, or the low-cost provider?
At many insurers, entire business units are misaligned with the firm’s core strengths. To expand what you do well, you need a partner that syncs with your core capabilities and stated values. Adding shiny technology might be invigorating at first, but it can become a distraction rather than a source of sustainable growth.
No. 2: Define the boundaries.
You can structure working relationships in a variety of ways, and there are trade-offs with each. Contracts are about control, who is willing to cede what ground, and how much money is at stake. There’s a range of options between “we’d like to acquire this company” and “we’d like to purchase these InsurTech services.”
PwC works with clients on joint ventures, limited liability partnerships, minority equity investments, long-term contracts and seller financing, structural alliances, and more. The right format for your competitor may be wrong for you.
No. 3 Manage conflicting cultures.
Legacy P&C carriers and InsurTech companies often have conflicting ideas about levels of risk tolerance and corporate culture. Overcoming these differences takes commitment and transparency. For deals to succeed, both parties will want to make their expectations explicitly clear. It’s easy to imagine a sitcom episode about a small software shop being folded into a larger IT department, followed by rapid attrition. Effective deal-makers avoid the unhappy ending by defining what they need, articulating what they’d like, and rewarding behaviors they want to encourage.
No. 4: Realize that innovation takes rigor.
Innovation is often a big impetus behind InsurTech transactions. Those who succeed tend to know what they want to accomplish and have a well-defined innovation charter. This includes a sound investment hypothesis and criteria, clear allocation of authority for making decisions, and a thoughtfully selected investment committee that is aligned to the overall business strategy. For every dozen attractive InsurTech partnerships, another two dozen are emerging with ideas that might be even better. Apply a systematic way to source, gather, filter, and select the most potent innovators that can achieve real results.
During times of dramatic change, it’s easy to get swept up in the possibilities and forget the practical realities. At the same time, many insurance executives are inherently risk-averse. You can play it too safe and bypass potential partnerships that you’ll later regret passing up. Effectively evaluating InsurTech partners requires striking the right balance between dreaming big and narrowing things down.
When insurers first began to digitize their systems, most acted narrowly: “Let’s build an app to streamline our claims communication process.” But point solutions don’t define a strategy; in fact, they may even cause damage by relinquishing control over key parts of a business process. We believe that P&C companies can use InsurTech components to accelerate innovation, acquire talent, and open new markets. Leaders will do so by choosing wisely, using InsurTech to strengthen their current capabilities in a way that is scalable and sustainable.
Marie Carr (marie.carr@pwc.com) is the principal in the Global Growth Strategy division of PwC’s U.S. Financial Services Practice. These opinions are her own.
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