The rise of insurtech continues
Throughout the insurance industry, the growth of insurtech is driving new opportunities and risk solutions. We expect investments in insurtech companies to continue to grow, particularly as incumbent insurance and tech businesses settle on their insurtech strategies and make bigger and bolder moves.
These investments will need to consider general investment issues (e.g. form and structure of investment) alongside the more insurtech focused factors such as IP ownership and protection of reputation. Our experience shows that the most successful deals in this space are characterised by parties adopting a partnership mindset, holding frank discussions on respective ‘red lines’ at the start and effective management of key internal stakeholders. Look out for a future briefing by us on the do’s and don’ts of insurtech M&A.
Participants in the market can also expect increased scrutiny and sophistication from European and national regulators. We expect regulators to encourage innovative technologies to the extent they bring about better customer outcomes. Regulators are therefore grappling with issues such as the role of cloud services as well as ethical issues arising from big data such as price optimisation practices and black box AI algorithms.
How we are looking at insurtech companies
At Freshfields, each insurtech proposition is different but we see them forming three broad categories:
- Devices and data
- Focus: the ability to properly evaluate risks through data. This covers the collecting, analysing and sharing of data to improve efficiencies in the underwriting process. For example, certain insurtechs are developing systems to allow insurers to collect real time health data and factor this into underwriting decisions.
- Legal issues that arise: companies holding or acquiring large amounts of personal data need to be careful to not accumulate data in violation of data protection laws or use the data for abusive purposes (e.g. discriminatory pricing). Certain types of information (e.g. personal sensitive information) are particularly at risk, such as medical records. GDPR only increases the scope and severity of sanctions for getting it wrong.
- Distribution and customer engagement
- Focus: ensuring that businesses and people are aware of available insurance products, have appropriate advice as to what insurance products are suitable for them (e.g. by way of insurance “check-up” services) and have a means to buy such insurance products (often outside of existing distribution networks). Insurtechs are also looking at how to improve and maintain customer engagement throughout the life of a policy to enable insurers to play an ongoing risk mitigation role and not just be the financial backstop where the risk has crystallised.
- Legal issues that arise: robo-advice is a hot regulatory topic at the moment and one that would be relevant to any company looking to automate insurance advice – for example, who is responsible for missold robo-advice? Companies operating in this space also need to be aware of the requirements of the Insurance Distribution Directive (and comply with them where necessary).
- Claims handling (and fraud prevention)
- Focus: simplifying and digitising the claims handling process (and improving fraud prevention). There is a lot of interest in artificial intelligence from insurtech participants in this area.
- Legal issues that arise: smart contracts could be used to automate the claims handling process which gives rise to questions such as who is responsible if the contract executes “wrongly”?
Insurance Innovators Summit
Our team attended the Insurance Innovators Summit in London last month, where established industry players as well as start-ups took to the stage to provide their view on innovation in the insurance industry. We saw three key themes emerge:
- A customer-centric approach remains key. Insurers need to remain acutely aware of the need to ensure that the use of tech solutions is being deployed for the benefit of customers and not just to jump on a trend or cut back-office costs. The opportunities presented by vast data-gathering need to be weighed against rightful customer concerns relating to data privacy and discriminatory pricing for example. Some insurers have told us they see the digitisation of back-office services as a positive way of enabling the reallocation of human resources to the front line of customer interaction.
- One size does not fit all. We have seen insurance segments are increasingly being defined by needs and behaviours rather than size of business. Individual consumers as well as global corporations have a range of insurable risks that suit different levels of technology-driven personalisation. The market will need to continue to provide a range of insurance solutions from lower cost generic policies to ‘fully-connected risk ecosystems’ (think life insurance connected to health data or shipping insurance linked to real-time weather updates).
- It's all about price. The prevailing view is that, generally, the key determining factor as to whether someone will purchase an insurance product is price (evidenced by the wide use of price comparison websites), and technology is unlikely to change that. Therefore, the benefits of technology-driven elements to any insurance product need to either reduce premia or be seen by the insured as more beneficial to them than a reduction in premia (and this is where many “value added services” fall down).