Bridging the Gap – accelerating InsurTech innovation between Incumbents and InsurTech’s

Jackie Clark
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FinTech, InsurTech

This blog proposes that cross sector collaboration is the key to accelerating sector Innovation for the good of all. It identifies the core market participants (with a particular focus on energising engagement between InsurTech’s and Incumbents) and notes the core issues the writer observes the InsurTech sector seeks to surface and discuss.
The blog supplements the ‘Bridging the Gap’ event hosted by InsurTechNZ and Suncorp.

Context
In 2017, 45% of Insurance incumbent CEO’s rated changing customer behaviour and the speed of technology change as ‘extremely concerning’ with 28% believing technology will ‘completely reshape the sector’ within five years and 58% saying it will have a ‘significant impact’ (PWC). Clearly, the sector is changing – but who are the core actors and what are the core areas to focus on in order to address this need (and opportunity) for innovation?

Without a doubt, there is an appetite for Insurance innovation developing across New Zealand in response to changing customer sentiment and various competitive pressures. As we have seen across the broader Fintech sector (retail banking in particular), there is a well-established pattern of the traditional incumbents value chain being targeted by innovators and stimulating change. We are now seeing the rapid emergence of platform players such as Google and Amazon who come with a high degree of trust and consumer acceptance (and while most likely to collaborate with Insurers) can dilute the traditional Incumbent’s ownership of the customer. With disruption usually comes sector iteration (sometimes accelerated by partnership) and typically works in the favour or incumbents who can re-bundle and modify their offering but still able to leverage their inherent strengths and market position.
You can understand why start-ups want to engage with Incumbents as a primary route to growth (and often exit)!

Despite this trend, we sometimes hear the narrative that InsurTech’s are attacking the traditional insurer’s domains of business and thus pose a threat to traditional Insurers. This is a fallacy. Both international research – and indeed our own NZ experience identifies that over 75% of InsurTech’s exist to compliment incumbent insurers by invariably adding value to their business. However, the simple fact is that successful collaboration between these two parties is rarely a smooth and easy process. Successful collaboration involves learning, experimentation and sometimes an appetite for unquantified risk – certainly not a part of the genetic make-up of most insurers!

Question?
So, how do we ‘Bridge the Gap’ between Incumbents and InsurTech’s – and just who are the core participants?

Answer: Enabling innovation supported by cross-sector collaboration!
Advancing an ecosystem approach supports all the parties who have a stake in insurance innovation to not only learn of their own challenges and barriers, but also understand the perspective and challenges for the other sector participants. This insight and engagement not only promotes cross sector collaboration, but also helps address some major challenges that can stand in the way of sector wide innovation. Regulation is one example.

To better understand these problems and find ways to break down barriers, below is a high-level overview of the main participants and their innovation challenges

Core participants
For ease of discussion the four groups and their core issues are summarised as;

  1. Incumbent insurance business’s – and their distribution networks
  2. InsurTech’s and funding networks
  3. Technology companies and platform providers
  4. Regulator’s and industry associations
  5. Incumbent Insurance business’s – and their distribution networks

With the potential for major market shift stimulated by changing demographics, digital platforms and associated changes in customer expectations, significant market disruption is coming. Larger organisations have the challenge of changing distribution/sales models, an aging broking workforce, increasing regulatory and compliance requirements not to mention the inflexibility of their Legacy systems and IT infrastructures (and more).
Incumbent challenges to innovation

  • Not looking outside their own business
  • Diversity of (technology) enabled talent. A lack of ‘innovative thinking’
  • Gaining internal support and buy-in. The ability to actually execute change
  • Sales channel and distribution constraints
  • Complexity and scale of legacy systems.
  • Moving to digital is usually iterative– not transformative
  • Data, security and risk concern
  • Internal innovation doesn’t always deliver. Mixed experience of Hybrid partnerships and the (some-times) hard road of external partnership, M&A etc

Incumbent challenges to collaboration with InsurTech’s

  • InsurTech’s perceived (im) maturity and understanding. Lack of domain knowledge
  • Alignment: Mis-match of attitude and their reasons for engagement
  • Perceived brand /customer risk for the incumbent
  • IT systems not compatible – or judged a ‘risk’
  • Start-ups often can’t scale to need nor have the manpower, technology, insight and resources which stand in the way of successful implementation
  • Trust; Start-ups often lack good governance and structure
  • Challenge of partnering with new platform providers and/or perceived risk
  1. InsurTech’s

Typically, InsurTech organisations are addressing industry pain points or attacking ‘single- point’ areas of weakness within traditional insurer/incumbent companies. While on the face of it, their solutions may be appealing and desirable; InsurTech’s face the classic challenges for any new business – particularly access to capital and gaining market acceptance.

InsurTech Internal challenges

  • Access to sustainable Investment capital.
  • Undeveloped Funding eco-system where ‘InsurTech’ is seen as an ‘investable proposition’
  • Finding, enabling and retaining good talent
  • (Enterprise) capability and capacity
  • Market awareness and trust
  • Access to larger markets and the ability to scale outside of a small market

InsurTech challenges working with Incumbents

  • Market recognition and trust. Having the ‘secret knock’
  • Cash flow. Navigating procurement barriers and surviving long payment cycles
  • Regulatory restraint or uncertainty
  • Having quality IT partners who are able to adapt over time to the quite different partnering requirements of both Incumbents and InsurTech’s
  1. Technology companies and platforms
    There are rapid advancements in hardware, devices, software and the rise of platforms like Amazon all having an impact. In addition, the rise of dis-intermediated sales environments such as Air B-n-B, Tesla etc. are changing the manner by which customers engage with traditional brands and values. New partners are emerging for Reinsurers. We are also seeing significant efficiency improvements to back-end processes and much more.
    Fundamentally, the advantage is shifting to those that innovate.
    Challenges for Technology companies
  • Lack specialist domain insights and knowledge – requires partnership approach
  • Innovation is sometimes seen as a threat
  • Lack of regulatory acceptance

Enablement challenge between Incumbents, Start-up’s and Technology companies

  • Some technology companies have been able to dominate in parts of the Insurance value chain. Often their own desire to maintain market dominance (or simply their own lack of innovation) actually holds back the sector
  • There are few technology companies (especially in NZ) who have deep industry insights, have technical capability and are flexible enough to meet the implementation and integration needs between Incumbents and InsurTech’s
  1. Regulators and Industry Bodies

While there is little doubt that Industry bodies and Regulators actively support innovation, they are simply not at the forefront of change. However, their influence can be significant for the market (as we are now witnessing with the recent changes in Robo-Advice) stimulating new AI/Chatbot/Social media solutions for consumers

Wrap-up
While the relevance of ‘Bridging the Gap’ between InsurTech’s and Incumbents may find a new equilibrium over time, without a doubt the sector needs to develop an affinity with innovation and learn to embrace collaboration.
The outcome will be diversified business benefiting Insurers, InsurTech’s, technology companies and regulators, with the success ultimately judged by their consumers.

Jason Roberts, Chair, InsurTechNZ, 29 Aug ‘18