How Startups Are Disrupting the Insurance Industry
The article below is from our BRIEFINGS newsletter of 04 August 2020
Insurance is typically considered to be one of the most traditional industries in financial services and, until recently, has proved to be fairly resistant to change. But changes in consumer behaviors, new technologies and emerging business models are disrupting the industry. We sat down with Goldman Sachs’ Kelly Galanis, head of the Americas Financial Technology sector in the Investment Banking Division, about the emergence of insurance technology startups, known as insurtech, and its impact on the insurance industry.
Kelly, what are some of the ways that the insurance industry has changed in recent years?
Kelly Galanis: The insurance industry is an enormous market with approximately $5 trillion in premiums globally, where even the largest players represent only a few percentage points of the global premiums. While the insurance market has long been stable and steady, companies are embracing new technologies and new data sources—think chatbots, telematics, drones, wearables and social media—that enhance their capabilities to acquire customers and underwrite and administer policies. Second, changing consumer preferences and the rise of the direct-to-consumer model are creating a new class of full-stack insurance startups to provide a more efficient, transparent and mobile-friendly way of selling policies to customers at a lower prices and providing customers a better experience—a trend that is putting more pressure on the incumbents to embrace change.
According to recent survey data from Goldman Sachs Asset Management, about 60% of global insurance companies reportedly invest in or evaluate insurtech startups. How are you seeing that interest playing out with the companies you work with?
Kelly Galanis: Technology is helping the industry find better ways to deliver and price insurance—and insurtech startups are a way for the industry to invest in technology. In fact, in just the last year, the insurtech sector globally has attracted more than $7 billion in funding and investments from venture capital and other institutional investors. The incumbents, for their part, are investing anywhere from ~$100 million to $300 million into their own corporate VC funds that are dedicated to taking minority investments in insurtech startups with the goal of forging strategic and commercial partnerships. While some traditional insurers are acquiring startups and some are incubating their own direct-to-consumer start-ups, many more are partnering with them. As insurtechs continue to scale, we expect to see more activity in the space.
How do insurtech companies use data in a way that’s different than traditional insurers?
Kelly Galanis: This may be a simplistic way of looking at things but insurtech companies are able to utilize technology in more ways than traditional insurers. Insurtech companies don’t just collect data, they integrate and connect the millions of data points they collect with the acquisition, underwriting and administration of the policies they write. This enables them to focus on increased personalization and greater accuracy and speed of service. Many use artificial intelligence and machine-learning technology to analyze the data they collect and offer deeper insights on an individualized basis. Insurtech companies have developed ways to leverage data from every interaction they have with a customer to improve upon the way traditional carriers typically rely on variables that often categorize consumers into demographic cohorts. As a result, insurtech companies are able to offer better value for their products and services—tailored for a specific individual.
How do these insurtech companies create a different user experience?
Kelly Galanis: Insurtech companies are not burdened by legacy infrastructure and disconnected platforms. This allows them to truly leverage next-gen technology to quickly launch new (and, importantly, regulated) products that address customer needs and preferences. There’s a huge flywheel effect: If you can treat the customer well—for example by helping process claims quickly and transparently—and deliver specific products that they need, then they will stay on the platform. This allows insurers to collect more data, which helps them provide a better experience and create tailored products, and ultimately allows them to grow fast. While insurtech companies are still young, the flywheel that empowers their business model allows them to generate strong customer retention and presumably decades-long customer relationships. Additionally, insurtech companies have mobile-centric or digital-first customer acquisition capabilities (in both personal lines and small- and medium-size business commercial lines). This has a two-pronged benefit: first, it creates a frictionless and even enjoyable customer onboarding experience and, secondly, companies see a material savings because these policies are sold directly instead of through an agent that is paid a commission on each policy sold. Over time, this will create a cost-to-acquire and cost-to serve advantage, allowing insurtech companies to efficiently grow market share.
How do insurtech startups address the capital and regulatory requirements that traditional insurers face?
Kelly Galanis: Insurtech companies typically rely on reinsurance arrangements that allow them to use a third-party balance sheet and remain capital light. Reinsurers that work with these insurtech companies are leading global reinsurers who, like traditional insurance companies, want to participate and invest in this space. And while some have expressed skepticism about an insurtech company’s ability to quickly and accurately underwrite risk, the fact that these companies are continuously improving their unit economics while improving their loss ratios indicates the model is working.