Want to know what insurtech 2.0 will look like? Watch the cyber insurance space
For insurtech 2.0, technology is a driving force — a tide lifting all boats — rather than just a sales angle.
A reckoning is here. After more than a decade of capital-fueled growth, the tech industry is undergoing retrenchment and a sea change in the way startups are measured and valued. This sudden shift came as a shock to operators, VCs, and rank-and-file employees alike.
Looking back specifically at the insurtech industry in early 2021, when much of tech was flying high, the public markets began punishing a handful of leading insurtechs for their extravagant growth strategies and wayward paths to profitability. The similar business models of these early insurtechs, and their similar fates over the past two years, suggest a grouping that deserves a name: insurtech 1.0.
But what will the new phase of insurtech 2.0 look like? The trajectory of one of the newest types of insurance, cyber liability, shows us what we might expect from this next industry wave.
Where 1.0 missed
The first significant cohort of insurtech startups generally focused on mass-market insurance products — renters, auto, home and small business BOP among them. Despite the varied product lines, these companies were unified by a single business thesis that was dominant at the time in tech: Approach a very large and seemingly inefficient market, solve its inefficiencies with new technology and digital user experiences, then employ any means necessary — at virtually any cost — to acquire a critical mass of customers and crowd out the competition. Indeed, the problems that led to investors eventually souring on insurtech 1.0 were not failures of technology or user experience — it was a misreading of the underlying market’s fundamentals.
Very few insurance customers switch carriers in a given year. This means that those extraordinarily large addressable markets for personal lines products are, in effect, much smaller than they seem. Worse, the minority who are likely to switch are customers who have seen price increases because of factors that made them a higher risk — that is to say, the least profitable potential customers. And finally, agents and brokers are well-liked pieces of the insurance value chain. Insurance is complicated; what looks like an inefficient middleman to a tech investor represents comfort and reassurance to a typical insurance customer.
Insurtech 1.0 companies were unable to show sustained progress on improving metrics like customer acquisition cost, lifetime value per customer, loss ratio and combined ratio. Most of the 1.0 companies are still in business, but many have begun to incorporate agents into their sales models and lowered their aims on expansion to new products or new markets in order to focus on achieving profitability.
Letting tech shine
Software should be designed to help agents and brokers win, and strive to make underwriters’ jobs easier, rather than nonexistent. The companies in the insurtech 2.0 cohort work within the existing framework of the insurance industry rather than disrupting it, which allows for the value generated by their innovations to be shared up and down the insurance chain — extending to reinsurance and risk capital partners, brokers and agents, and policyholders.
In insurtech 2.0, tech is a driving force — a tide lifting all boats — rather than just a tech sales angle. While the 1.0 cohort’s heavy focus on the top line proved a poor fit for insurance, the 2.0 generation sticks to what has worked historically: accurate risk assessment, assiduous pricing and a focus on loss ratio — balanced against still-ambitious growth goals.
The final key component of insurtech 2.0 is a reorientation of the relationship between carrier and policyholder. By continually communicating with policyholders beyond the buying process, companies can realize the full potential of their technology and achieve a proactive risk management posture. This builds trust, arming them with helpful information that makes policyholders safer, rather than relying on a pricing-focused conversation once a year that can be contentious if there have been loss events or major market changes in the intervening time.
Cyber: Vanguard of insurtech 2.0
Cyber insurance continues to provide room for innovation that makes it perfectly suited for the 2.0 model. Consider that data is the lifeblood of almost every successful insurtech. Compared with perils that deal with the physical world, the sheer amount of data available within cyber is incomparable. Insurtech 2.0 cyber insurers can leverage methods of data science that are simply not possible without the vast and varied sets of data inherent to cyber.
While it’s been established that the cyber industry was in the right place at the right time to forge a new model for insurtech, 2.0 isn’t about just one line. Many businesses will develop around the concept of taking what already works in insurance and using technology to enable it.
The cumulative effect is better results — better outcomes for brokers and policyholders, a better tech experience for underwriters and, of course, better prediction of loss, better pricing and better selection. In a broader market environment that is looking for profitability and business fundamentals over a growth-at-all-costs mindset, these advantages will become apparent as companies in our cohort continue to develop.
Philip Edmundson is the founder and executive chair of Corvus Insurance, a specialty insurance MGA offering Smart Cyber Insurance products powered by AI-driven risk data. A 40+ year insurance veteran, Phil started his career with Willis and later co-founded broker William Gallagher Associates (acquired by Arthur J Gallagher in 2015) and was an active leader in both the Worldwide Broker Network and Council of Insurance Agents and Brokers. Phil is the Managing Partner of Edmus Ventures where he invests in insurtech companies including Verifly, Hi Marley, reThought, Agentero and CoverWallet.
Opinions expressed here are the author’s own.
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