What strategy should large insurance companies adopt in the face of the insurtech boom?

Posted by media on July 26, 2016 at 9:00 AM


It seems that nothing can halt the digital transformation currently taking place in all sectors, driven primarily by companies who have dared to question the status quo while taking advantage of new technologies to create easy-to-use digital solutions perfectly adapted to consumer needs.

Although disruption in the insurance sector has hit somewhat later than in other industries, the changes ushered in by insurtech companies are well underway and progressing rapidly. Every day, new companies are bidding for a share of the insurance pie - a market that back in 2014 was valued at an estimated 3.8 trillion, according to McKinsey.

Faced with this avalanche of new digital competitors, what strategy should large insurance companies adopt in order to enjoy the benefits and mitigate the risks posed by insurtech?

This post is also available in Spanish.

The figures do not lie: the insurance sector boom is now in full swing and predicted to be the next biggest thing after the financial industry upheaval, particularly as it is being literally bombarded with new insurtech companies.

In 2015, global investment in insurtech companies amounted to $2.65 billion. Although the figure is much lower than investment in Fintech, it represents a giant leap from the $740 million dollars invested in insurtech back in 2014.

In the first half of 2016, investment in insurtech had already reached $1 million.

- Source: Insurance Tech Insights by CB Insights.

Although the power of this market is obvious, it seems that the fear of insurance companies losing a large share of their business due to the rise of these new tech companies exceeds the desire to profit from their innovations. A recently published report by PwC showed that only 28% of insurers have considered the option of collaborating with insurtech companies.

74% of insurers predict that disruption of their business will occur over the next 5 years.

- Source: Opportunities await: How InsurTech is reshaping insurance. PwC 2016.

However, the same report stresses that cooperation between insurers and insurtech is key to "closing the gap and overcoming the mismatches" between the two. The three main challenges that collaboration between them may pose are the following:

  1. Security of IT systems.
  2. Differences in company culture and management styles.
  3. Differences between business models.
  1. Differences in company culture and management styles.
  2. Differences in operational processes.
  3. Regulatory uncertainty.

Despite the reticence for insurers that the PwC report reveals and the challenges of directly collaborating with insurtech, many traditional insurance companies have already realized that the rise of these companies is not a threat but an opportunity for boosting innovation in the sector.

Without change there is no innovation, creativity or incentive for improvement. Those who initiate change will have a better opportunity to manage the change that is inevitable.

- William G. Pollard (1911 - 1989), American Physicist.

But it's a fact that large insurance companies find it difficult to innovate: their hierarchical structures prevent them from making big decisions at the speed required in today’s world, given the rapidly changing preferences and habits of consumers. In this sense, virtually none of the traditional insurers have the ability to break with the operational and cultural tradition that prevails internally, at least not in the short term.

Therefore, a collaborative strategy is posited as the best means for traditional insurers to maintain their leadership role in the new insurtech ecosystem and reinforce their authority.

How can a collaborative relationship between large insurance companies and insurtech be established?

There are two main ways of approaching the insurtech companies: by launching incubator or accelerator programs and/or by establishing strategic alliances.

In both cases, the main benefits that insurance companies can reap from a collaborative relationship with insurtech are:

  1. Access to the most disruptive innovations and new products on the market designed to mitigate those new risks arisen in the digital era, all of which can help better define an insurer’s product portfolio strategy.

  2. Having the option of ensuring that the development of new technologies integrates seamlessly with both IT systems and company procedures, thereby facilitating integration.

  3. Being able to assume a pioneering role in the incorporation of technological solutions that contribute to digitizing and streamlining internal processes, as well as improving employee efficiency and optimizing customer experience.

  4. Hands-on experience of entrepreneurial culture and an opportunity to pass on that knowledge to all workers and managers, so as to achieve the change of mentality required to implement the company’s digital transformation.

Among these benefits we would like to emphasize the importance of incorporating technological solutions to help meet the overdue need in the insurance sector to
optimize customer experience.

The customer service policies of most traditional insurers remain fragmented, inefficient and overly complex. That is exactly the opposite of what digital customers expect and demand - they want efficient, fast and transparent transactions that allow them to take out and manage policies from the comfort and convenience of their smartphone, tablet or computer.

The sheer ability to initiate and close such an important transaction on a website is without a doubt the most desirable option for any digital consumer today. However, not all insurance companies can guarantee this service to customers without giving up legal and security guarantees, that could have otherwise been provided by the advanced electronic signature. In this respect, Signaturit offers an advanced electronic signature solution that enables insurance policies to be taken out quickly and easily online, while meeting the highest standards of security.

>> DAS Spain's experience with the electronic signature: an interview with Jordi Rivero, CEO of DAS Spain.

As the insurance industry evolves, insurers must decide what strategy they want to follow and how far they are willing to get involved to fully participate in the changes taking place. What is clear is that the opportunity to innovate and secure a significant market share is still very large, and both insurance companies and brokers have a great opportunity to join the tide of change and positioning themselves among the key players of this rapidly-growing industry.

This post is also available in Spanish.

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Topics: Finance & Insurance

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