THE INSURTECH

REPORT
HOW FINANCIAL TECHNOLOGY FIRMS ARE
HELPING AND DISRUPTING THE NEARLY
$5 TRILLION INSURANCE INDUSTRY
September 2016
Sarah Kocianski | Senior Research Analyst

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Intelligence

KEY POINTS

The global insurance industry is huge, and the US market is the largest by far.
Global insurance premiums reached $4.6 trillion in 2015, and the US had the largest
share $1.4 trillion of that figure. But it has been especially slow to modernize,
even when compared to other financial services industries. This is largely due to
historically high barriers to entry and the cautious nature of the industry.

The insurance industry is made up of three main segments. These are brokers, or
distributors, which interact with clients; insurers, which perform the operational tasks
such as underwriting and claims processing; and reinsurers, which insure the insurers.

Consumer expectations around insurance products and the companies that

provide them have changed. Consumers now expect slick digital experiences and
the ability to access highly personalized products on demand. They also expect to be
able to contact providers whenever and however they like.

This has created an opportunity for a group of firms known as insurtechs. These
startups are leveraging new technology and a better understanding of consumer
expectations to increase efficiencies in the insurance industry. Some are helping
incumbents deliver better end products, while others are directly competing with
legacy players.
o

For now, the opportunity is biggest in the US and Europe. That's because
these regions have large, very mature insurance industries. China has a highly
active insurtech population, but the significant differences in the age and
structure of the insurance industry there put it beyond the scope of this report.

Insurtechs are mostly targeting retail customers. This includes small

businesses and is likely because these customers have simpler insurance
needs than large commercial clients. As a result, they tend to have less welldeveloped relationships with their insurers and brokers, making the retail
space more attractive for insurtechs.

Brokers are most at risk of disruption. This is because insurtechs can easily
replicate their services and are solving historical industry problems faster than legacy
players. Insurtechs are more likely to offer services that help insurers and reinsurers
improve their processes and better serve customers.

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Legacy players are also innovating. In particular, insurers and reinsurers are
investing in insurtechs and fintechs working with relevant technologies. They are
aiming to improve their own products and services to meet any competitive threat
insurtechs might present, as well as find ways to reduce operational costs. At the
same time, they are improving their own direct-to-consumer digital interfaces,
increasing their disruptive threat to brokers.

Download the charts and data in Excel

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INTRODUCTION
Insurance companies in Europe and the US have been even slower to modernize than other
financial services firms. That's because barriers to entry to the industry from the complexity
and size of capital requirements, to the difficulty of attracting clients in a pre-internet society
have historically hindered the competitiveness of new market entrants. The result is that
legacy insurers are still using bureaucratic processes, products, and distribution models that
have changed little in decades.
This means that the industry hasn't kept up with consumer expectations that have evolved in
line with the increased availability of technology, including the internet and smartphones, as
well as the products and services developed by technology giants like Google and Apple. It
also remains highly inefficient, which impacts its ability to serve commercial customers.
This has created an opportunity for a group of companies known as insurtechs, which
are using technology to update or disrupt every part of the insurance value chain.
These companies, unencumbered by legacy systems and processes, are finding ways to
better gather and understand customer data to provide more personalized products in a more
efficient manner. They are also offering slick digital user experiences and removing the opacity
that has historically made understanding insurance products difficult, and in some cases,
impossible. As a result, they are attracting significant investment over $1 billion globally so
far in 2016.
Insurtechs first emerged in the US, the largest insurance industry in the world, and they are
becoming increasingly common in Europe. Therefore, these geographies will be the primary
focus of this report. While there is also significant activity in the Chinese insurance industry,
this market is much newer and has very different drivers than Europe and the US, placing it
out of scope here.
Currently, 75% of insurtechs are operating in the retail insurance industry, which serves
consumers and small businesses, according to data from Oxbow Partners. As a result, we will
focus on these areas in this report. We will cover the drivers behind the increasing number of
insurtech companies, how they are helping or disrupting legacy players in the insurance
industry, and where legacy players are innovating off their own backs.

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MARKET OVERVIEW
Global insurance premiums, the amount of money an individual or business pays for a policy,
reached $4.6 trillion in 2015. Insurers consider this money income once it is paid. The US is by
far the biggest national market, with insurance premiums worth $1.4 trillion in 2015. The
Japanese and UK markets follow at $450 billion and $320 billion, respectively.
The insurance industry is made up of three major components brokers, insurers, and
reinsurers. Brokers, also known as agents and distributors, are typically the ones interacting
with clients, while insurers, also known as carriers, handle the operational elements including
underwriting and claims processing. Reinsurers provide insurance for insurers.
It's worth noting that some insurers sell directly to clients, while others have brokers that work
exclusively for them. Some reinsurers also offer primary insurance. For these reasons, it can
be hard to offer a market size in monetary terms for each segment, but firms in these areas
make significant profits. Munich Re, one of the world's largest reinsurers, made $3.5 billion in
profit in 2015; Aon, one of the biggest brokers, made $1.4 billion. AXA, the world's secondlargest insurer by market value, made $6.2 billion in profit in 2015.

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The Structure Of The Insurance Industry

By failing to keep up with consumer expectations around digital experiences and on-demand
services, players across the insurance industry are driving consumers to look for alternatives.
In some areas of the value chain, insurtechs are starting to present a major threat to legacy
players, while in others they are helping incumbents to modernize their processes and
products.

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Brokers
The majority (56%) of insurtechs are targeting this area of the insurance value chain because
barriers to entry are falling and legacy players haven't kept up with changed consumer habits.
The result is that brokers are at serious risk of disruption in the near future.
Brokers typically interact directly with clients, selling insurance from wholesale providers and
making money from commissions. Historically, brokers had a monopoly on the distribution of
insurance products because the products were complex and information about them was hard
to access. This meant that firms or consumers wanting to buy insurance were forced to go
through a broker to ensure they were purchasing an appropriate policy.
New market entrants were limited by factors including the high expertise needed and difficulty
related to building a network of relationships with insurers. This amounted to a lack of
competition, which hindered innovation. But these barriers to entry are being broken down due
to the increasing ease of transmitting knowledge online and the emergence of pricecomparison websites. The result is that consumers more often use digital channels to
compare and buy insurance, favoring price over brand. Legacy brokers have been slow to
understand this and most haven't responded effectively.
Insurtechs are taking advantage of these factors and finding ways to solve historical
challenges in the distribution segment faster than legacy brokers. Here are some of the
problems and how insurtechs are solving them:

Opacity in the insurance industry. The internet allows for the increased
dissemination and simplification of information about insurance products via the
internet. Online aggregators started to take advantage of this over 10 years ago,
offering alternatives to brokers that provided consumers with a wider range of options
in user friendly formats. They had enormous success in the UK where around 60-70%
of personal insurance lines are now bought through aggregators like
moneysupermarket.com. In the US, despite having been around since 1989, firms like
netquote.com have had less impact so far, thanks to the significant marketing budgets
of large insurers. But that will change as the aggregator model becomes increasingly
sophisticated, with firms now able to absorb and process more data, enabling them to
present customers with more personalized options. This has made it even easier for
users to compare and purchase insurance without the need for an intermediary.

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Substandard digital experiences. Some legacy brokers allow consumers and small
businesses to buy insurance via digital channels. But many still require customers to
enter information online and wait for a reply via email or phone. Clients may also have
different policies with different providers, meaning if their personal data changes they
have to contact each provider individually. Insurtechs are using new ways to store and
manage customer data, allowing customers to update their information across all
providers at once via an app. This data can also be used to search for new policies or
buy new types of insurance, without the need to reenter information via a website or
aggregator.

Poor client relationships. Legacy brokers typically only contact customers when
their policy is due for renewal, making customer brand loyalty unlikely. These
customers now expect more frequent communication with service providers in order
to be kept updated about new products, as well as given the chance to provide
feedback. Insurtechs are making use of apps and social media to meet these
expectations. This is especially important for millennials (born between 1981 and
2000), who are 13% more likely to interact with providers monthly than other
generations via traditional channels, and 18% more likely to do so via digital channels.

One size fits all products. Historically, brokers and insurers have provided generic
products across areas including life, health, property, and casualty. But insurtechs are
finding ways to analyze public data like Google search terms, for example to find
niche insurance requirements. These firms can then offer these groups highly targeted
policies to fit their specific needs, such as travel insurance for people with specific
health conditions.

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Screenshots showing insurance aggregator moneysupermarket.com's easy to use customer interface.

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Insurers
Some insurtechs in this space are competing directly with legacy insurers, also known in
the industry as carriers, by finding new ways to create and deliver insurance plans health
insurers Oscar and Clover are examples. But most insurtechs in the carrier segment of the
value chain operate as third-party suppliers, providing software and services to help increase
efficiency, improve processes, and provide better end products for clients.
This is because insurers mostly focus on underwriting insurance policies and processing
claims, and some barriers to entry to this market remain high. They include large and complex
capital requirements and the expense and burden of regulatory compliance. Others, like the
near-monopoly legacy players had on huge amounts of historical customer data required for
effective underwriting, are being broken down. Along with dissemination of data via the
internet, insurtechs are exploring ways to use new types of data that aren't in the hands of
legacy players.
The types of insurance products demanded by consumers and businesses are also changing,
something legacy insurers are starting to recognize. Global insurance industry participants
ranked "offering products to meet customer needs" as the most impactful trend they were
facing as a result of fintech, according to a survey by PwC.
The result is that the majority of insurtechs that operate in the insurer space are acting as
enablers, rather than disruptors. Here's where insurtechs are aiding legacy insurers:

Pricing. Insurance pricing is based in part on an analysis of risk. Historically, this

involved complex models and highly skilled employees, typically using fixed data
inputs. The more accurately insurers can analyze risk, the more accurately they can
price premiums. Devices like wearables, in-car telematics, and smart-home devices
can help insurers do this by providing richer data from new sources. Insurtechs are
helping by creating ways for insurers to easily absorb and analyze this data and
incorporate it into to their risk models.

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Claims processing. This can be time-consuming as insurers have to verify the

circumstances behind each claim, and then confirm that it is covered by a specific
policy. Insurtechs are helping to speed up this process by using blockchain, the
technology behind bitcoin, which can be utilized to create immutable records that are
simultaneously available to and approved by all participants. It can be used to create
"smart contracts" that self-execute when certain conditions are met. They enable
claims to be automatically triggered via undisputed public information for example,
delayed flights, or if in-car telematics reports an accident. This saves time by reducing
the need for employees to process claims and can also mollify the risk of fraud.

Customer acquisition. Insurers are starting to look for ways to directly acquire
customers, bypassing the need to work with brokers and saving them the costs
involved in paying commissions. One way in which they are executing this strategy is
by setting up accelerators where insurtechs and fintechs work alongside innovation
teams from insurers (and reinsurers) to solve specific problems. Others, like Aviva,
have created venture capital funds specifically with the intention of investing in
startups to help them provide "innovative customer experiences." This further
increases the likelihood of broker disruption.

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Reinsurers
Reinsurers sell insurance to insurers as a way of distributing risk. Often, one policy can involve
many reinsurers and insurers across numerous geographies with potential claims of billions of
dollars. This means that the resources required to enter the segment are even higher than for
insurers, and that these firms are at little risk of being displaced by insurtechs. But as with
insurers, insurtechs are helping reinsurers improve their businesses.

Reduced risk to employees. Reinsurers are often involved in policies regarding

natural disasters. This can mean human employees having to inspect potentially
dangerous sites in order to assess claims. Insurtechs are creating business models
around drones, which can be used to safely make inspections, often faster than an
employee can. They can also be used to assess structures that are difficult to access,
such as bridges. In the near future, these insurtechs will help employees conduct their
jobs more safely, but in the longer term, it's likely they will replace the part of the job
that requires incident monitoring.

Improved catastrophe modeling. Underwriting policies for "catastrophes," typically

natural disasters or industrial accidents, is done using complex risk modeling software.
This usually involves static inputs that are used to run simulations to try and assess
risk. Insurtechs are trying to enhance that software by incorporating machine learning
to more accurately model the outcome of catastrophes by learning from previous
scenarios, while absorbing data in real time. This enables catastrophe simulations to
run more quickly, and theoretically, more accurately.

Access to more data sources. Devices in the Internet of Things (IoT) can be
especially helpful for reinsurers given the size of their potential policies, and therefore
the increased volume of data their underwriting processes have to handle. Legacy
reinsurers have recognized the benefit the IoT can bring in terms of new sources of
data and are making direct investments in these firms Munich Re made three
investments in IoT insurtechs recently, while Swiss Re launched an accelerator
targeting IoT insurtech.

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A Note On P2P Insurance

Peer-to-peer (P2P) insurance firms make up 8% of insurtechs globally. Currently, all P2P
insurance firms are brokers US-based Lemonade plans to be the first P2P insurer, but its
model is still unknown. The P2P model involves groups of clients contributing to a communal
pool of funds, which is then used to pay out on small claims, removing the need for an insurer
or broker. The policy is underwritten by a legacy insurer, which covers larger claims. The idea
is that the groups handle small claims without the need to involve the insurer, meaning that
they do not pay the excess or deductible, and keep premiums low. Clients either form their
own groups of family and friends, or join a group of individuals with the same type of
insurance. The theory is that, because the groups share a common interest, the risk of fraud
should be decreased. Some firms reward clients with a rebate if no claim is made by the group
over a certain time.

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CASE STUDIES
Bought By Many is a UK broker for specialized insurance targeted at niche groups. It has
around 300 such groups across pet, home, travel, health, gadget, and business insurance,
each of which offers policies for a specific demographic cyclists who ride in the city,
travelers with heart conditions, or owners of labrador retrievers, for example. Bought By Many
decides which groups to offer coverage to by analyzing Google search data, and then
validating ideas with stakeholders it finds using Facebook groups and social media. People
can also suggest new groups on the firm's website. Once a group has a sufficient number of
members, Bought By Many then approaches various insurers to negotiate a deal on their
behalf. Sometimes it negotiates a better deal on an existing product, while in other cases it
asks insurers to tailor existing policies to better suit the group's needs. It has also approached
global insurance market Lloyds of London to create entirely new policies.

Screenshot showing a selection of Bought By Many's groups.

Singapore-based Fitsense is a data aggregation platform that collects and analyzes data from
a consumer's fitness wearable or smartphone in order to help insurers personalize health
insurance. Fitsense creates a consolidated view of that person and provides insurers with a
representative risk rating. Theoretically, this enables insurers to adjust policies in real time and
to more accurately underwrite and price policies, while offering consumers more personalized
products.

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Oscar is a US-based health insurer that aims to offer cheaper policies than legacy insurers
via digital tools including a mobile app. It integrates providers' services into its app, allowing
customers to request a phone call with a medic, provide photos of symptoms if required, and
receive a prescription. That means the customer doesn't have to physically visit a doctor or
nurse, reducing overall costs. It also lets customers view their entire health history, including
doctors' appointments, prescribed drugs, and test results. Oscar has a partnership with
wearables firm Misfit that offers customers free step trackers users get $1 towards an
Amazon gift card for every day they meet their step target. Oscar is one of the most wellfunded insurtechs, having raised $400 million earlier this year. That brought its total capital
raised to around $700 million, for a valuation of over $2 billion.

Screenshots showing how Oscar users can request a call with a medical professional from the app.

German company Friendsurance uses a P2P model. Consumers can either buy insurance
through the firm or join using an existing policy. Users are then added to a group of other
customers with the same type of insurance, and each pays part of their premium into a
collective pool of funds held by Friendsurance. Small claims are paid out of the pool, while
larger claims are covered by the legacy insurer behind the policy. Anything left in the pool at
the end of the year is returned to the users.

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THE LEGACY RESPONSE

In addition to working with third-party suppliers, legacy insurers and reinsurers have started to
execute their own digital and modernization strategies, which suggests that some have woken
up to the threat of new, digitally focused rivals. They will be hoping these moves help them
keep up with the competition. Modernization strategies also typically include finding ways to
cut costs, as insurers and reinsurers face the same earnings pressure as other financial
services firms.

Many have made direct investments in insurtechs and associated fintechs

not just IoT. In Q1 2016, there were 20 global insurtech deals involving incumbents or
their investment arms, compared with eight in Q1 2015, according to CB Insights.
Direct investment gives insurers access to the newest ideas, the opportunity to shape
insurtechs solutions to meet their particular needs, and provides them with a firstmover advantage should they wish to acquire.

Internal change. Insurers have realized that their future success depends in part on
changing not only internal processes, but also culture. Aviva's response has been to
set up digital "garages" where teams of employees work in a startup-like environment
in order to foster a culture of innovation. Aviva also hires employees specifically to
work in the garages, focusing on roles like mobile and web developers, as well as
those versed in startup working methodologies like agile.

Accelerators. In this model, insurers offer to sponsor a group of insurtechs in return

for a say in which firms are accepted to the accelerator, as well as the ability to direct
the projects they work on. They also get to work directly with startups, ostensibly to
mentor them, but also to see how successful startups function and learn from their
approaches.

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THE BOTTOM LINE

With $4.6 trillion in premiums in 2015, the global insurance industry is huge
and has been slow to modernize.

Brokers, insurers, and reinsurers are the three main segments of the insurance
industry.

Technological advances are changing consumer expectations around insurance

products and the companies that provide them.

This has created an opportunity for a group of firms known as insurtechs.

For now, insurtechs' biggest opportunities are in the US and Europe, and they're
mostly targeting retail customers. Brokers are most at risk of disruption.

Legacy players are also innovating, through investments, internal change, and
accelerators.

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