I’ve recently attended two insurtech trade shows and talked to many people there about their roles in the insurtech ecosystem. The term insurtech seems to have lost meaning as it now covers most of the insurance ecosystem. At FINEOS, we are a long-time member of the insurance community providing core systems to the global Life, Accident and Health industry and have acquired two insurtech companies in the last few years to enhance our capabilities and extend our application footprint. We see ourselves as an Insurtech Incumbent (defined below) and see a lot of value in the evolving insurtech ecosystem for partnerships, acquisitions, and ecosystem cooperation. However, there’s also a lot of static in the message as marketers extend the insurtech brand and look for market advantage through rhetoric.
I see three groups that live under the insurtech umbrella today, each with a different role and perspective.
Insurtech – the insurance technology startup
According to the Insurance Information Institute, the term “insurtech” split off from fintech around 2010 to address the use of new technologies (app, AI, etc.) to automate and improve processes across the insurance value chain. The term was adopted by several emerging insurance technology startups to define what they brought to market and align with insurance industry needs. This portfolio of startups helped drive innovation and transformation initiatives for insurance companies at the time. Like most portfolios, some insurtech bets did very well, some achieved a level of profitability, and many failed, even with a promising idea at the heart of their offering. As most investors understand, 1 winner and 2-3 reasonable returns on a portfolio of 10 bets is a good return. It can be hard on the insurance companies that backed the other 6 insurtech startups.
These startups do continue to help move industry innovation forward although many will fail or be absorbed by larger players over time.
Insurtech – the insurance company startup
The next iteration of the definition of insurtech began to include startup insurance companies formed under the premise they would define technology as a key strategic differentiator, effectively building their product, sales, and services processes around the technology to enable much better use and value from their underlying technology. The poster child for this movement is Lemonade, which went into the business to provide better insurance options to consumers in the personal P&C market. Their premise was that they came into the industry with no preconceived notions (and little knowledge) about insurance, and they have built a small business mostly in the renters insurance space with $370M in in-force premium and very high combined ratios as of Q4 2022. (For more detail read Mateo Carbone’s recent analysis.)
Insurtech insurance companies that focus on niche markets and products that are difficult for incumbent insurers to reach are likely to have the most success in creating their own market, such as Lemonade in rental insurance, pet insurers and the embedded insurers that make sense. Challenging incumbent insurers in large consumer insurance markets is a much tougher proposition.
Insurtech – the incumbents
If being an insurtech requires looking at innovative technologies to automate and improve processes across the insurance value chain, Prudential and MetLife’s early work with Univac and IBM in the 1940s, ’50s and ’60s should qualify.
Insurance embraced computing early and often to keep pace with change. At one of the insurtech conferences I attended recently, the term “legacy insurer” was used to differentiate incumbent carriers (and software) from insurtechs, which is more marketing than reality. The term “legacy” has become a judgement, implying old, lacking flexibility and outmoded. It is good marketing, but the reality is that established players understand where they need to go but must bring the consequences of their success along with them: customers and their long-term relationships.
It’s difficult to quickly make transformative, systemic change in a company (or software) serving a highly regulated industry with a large customer base where literally millions of people are depending on them to continue to meet obligations and get it right every day, every time. Incumbent insurers know they need to innovate and make systemic changes. They also realize organic full organizational and technology change all at once is too risky, and skunkworks initiatives first kept separate from the business can be promising but are difficult to reintegrate.
This leads larger incumbent insurers to create or invest in venture funds that are investing in insurtechs, and get the advantage of the portfolio effect mentioned above. Forward-thinking incumbent software companies are constantly looking at the emerging landscape for partners and potential acquisition candidates for the same reason.
Incumbent software companies like FINEOS are finding some new healthy competition from the insurtech technology startups, but in most cases, we find the purpose-built FINEOS Platform actually becomes an industrial-strength platform and hub for those insurtechs that can provide unique capabilities or solve a niche problem and need to be integrated into the core system insurance lifecycle.
Things to Consider
- Insurtech startups need to understand their endgame early on after their initial exploratory efforts as the playbook for flip is different from IPO – which will be more difficult in today’s economy.
- Insurtech insurers need to find places where they are providing new products and/or serving new markets. User experience enhancement is important and can’t be ignored, but it’s not the killer competitive advantage we thought.
- Incumbent insurers and software companies are part of the insurtech ecosystem and as flip becomes more likely than IPO in the near future, are likely to be part of many founders’ exits.
- Successful insurtech startups of either variety will ultimately become what they campaigned against initially: incumbents.
At FINEOS, we help our customers care for the people they serve through the delivery of superior insurance technology. That requires us to be honest with ourselves and the market around what we currently provide, what we need to build or acquire, and when we should work with ecosystem partners to meet our customer’s needs. As an industry, we need to get past the negative power of labels like insurtech and legacy and look for partners and solutions to help our customers — wherever we might find them.