The definition of insurance is protection against potential risk. For those companies providing insurance, whether to consumers or businesses, being able to accurately predict the likelihood of disruptive events occurring is critical to their business models.

Yet as with almost every other industry, the insurance sector was severely exposed by the pandemic. Based on one estimate, insurers lost around $55 billion globally – only Hurricane Katrina was more damaging.

At the same time, major social upheaval and changes to buying behaviour has impacted customer retention. According to another report, 61% of insurers felt the pandemic had impacted customer acquisition. Where are these customers going? Increasingly it would seem they’re heading not to other insurers, but to companies more usually referred to as technology giants – the same report noted that policyholders’ willingness to buy insurance from these businesses leapt from 17% in 2016 to 44% in 2020.

It is not just established technology firms that are expanding into new fields, either. Digital-focused start-ups, collectively falling under the insurtech banner, threaten established providers as well. With a customer-centric focus and commitment to user experience, these new players are looking to disrupt and challenge incumbents. They’re backed by significant resources as well – according to one report, $2.5 billion was invested in insurtech firms in Q1 2021, up 22% year-on-year.

This is easier said than done. In contrast to finance, insurance generally has less applications and solutions that could be taken from incumbent providers. This explains why insurtech remains a relatively small sector when compared with other disruptive fields, such as fintech.

That said, there are still significant use cases for the application of technology within insurance. These include:

• Creating more targeted products, more accurate risk prediction models and optimising pricing through the use of artificial intelligence.
• Better use of analytics and new data sources support effective risk assessment, enabling more accurate underwriting and improving fraud prevention.
• Workflow management to accelerate claims processing.
• The democratisation of types of insurance, such as parametric, that were previously only the preserve of niche sectors, to increase customer bases for providers while allowing greater parts of the population to access affordable insurance.

That means incumbents can’t afford to rest easy. If they fail to react, they will find their market share further squeezed by the technology giants with seemingly endless resources, all of whom have a greater understanding of the tools (such as AI, Big Data and Internet of Things) needed to deliver the aforementioned use cases.  

Put simply, insurance providers need to innovate. Part of the challenge is ingrained culture – with insurance a requirement for many individuals and businesses, and all providers work in a similar way, there has historically been less impetus for change. At a consumer level, comparison sites may have broadened the opportunities for smaller providers, but at a business level, many organisations secure insurance via brokers.

The pandemic has changed all that. With insurers forced to work remotely, many have accelerated their operational digitalisation. This in turn has fed into how they build, develop and deliver products and services to customers. Realising their legacy systems and architecture restricts how agile they are, incumbents are increasingly being forced to change and adapt. Where they once might have looked to rip and replace, time and budget constraints mean this is no longer possible.

For insurtech start-ups, this present an opportunity to partner with incumbent providers, with both parties benefitting – the former gets access to the latter’s data and customer base, while the legacy operator can harness the start-up’s agility and in-built innovation. Each can help inform the other, so that both deliver services that meet the needs of customers.

That said, if incumbents continue to be resistant to change, insurtechs could look elsewhere for partners. For example, fintechs could offer interesting opportunities to develop new services, in effect taking a leaf out of legacy providers’ playbooks. Banks already resell or facilitate opportunities for insurance providers, with mortgages and life insurance being one example of where a bank product requires an insurance product to meet the bank’s requirements.

In the insurtech world, new providers in both sectors could partner to offer a broader range of services through a variety of models. That might mean a fintech offers white labelled insurance services, or simply that the insurtech is positioned as a preferred partner when the fintech sells services that requires insurance as a condition of sale.

That might mean small business insurance to retailers buying payment services; it could be fraud protection to service companies opening bank accounts; it could be product insurance for companies looking to export or import products.

Insurtech businesses might even partner with technology specialists to offer specialist cover for the likes of cyber security. Currently a major cause of concern for organisations of all sizes, it also presents massive underwriting challenges. If cyber security specialists were to partner with insurtech providers, the two might be able to offer a package deal which provides both first line defence and insurance in a manner that is affordable and beneficial for both the partnership and their customers.

The future acceleration of this space is dependent on a collaborative and mutually beneficial ecosystem. For incumbents this will be critical to saying relevant. Partnering with leading disruptors is way for new entrants to expand their offerings and give customers a greater breadth and depth of service. When combined with their established commitment to delivering exemplary experiences, it provides a compelling reason why incumbents need to be worried.