The Uncharted Waters of Insurance and Technology

The Uncharted Waters of Insurance and Technology

David Schapiro; DavidSchapiro1958@gmail.com  www.linkedin.com/in/dschapiro/

Introduction

The insurance industry is currently experiencing a profound transformation, propelled by the ascent of advanced technologies like Generative AI and cloud computing. This paradigm shift is creating opportunities in an industry traditionally underserved by technology, yet challenges persist. In this article, we delve into some critical insights for investors, Insurtech CEOs and Founders navigating this dynamic intersection of technology and insurance.

The Untapped Potential of the Insurance Market

The global insurance business commands a staggering ~$7,000 billion Gross Written Premium (GWP) in 2023 and beyond. Despite playing a pivotal role in serving a significant portion of the global population and businesses, the industry's fundamental technology, reliant on advanced mathematics for risk estimation, currently falls short of achieving world-class status.

P/L Dynamics in Insurance

Insurers navigate a distinctive landscape where estimating, rather than definitively knowing, their cost of goods is the norm due to the inherent nature of claims, which occur after the policy has been sold. Importantly, profitability in insurance can also be achieved through investment income, even in the absence of underwriting profits. This is reinforced by the industry's high renewal rates, often exceeding 80%.

Tech vs. Insurance Cultures

A fundamental cultural distinction distinguishes the tech and insurance industries, primarily shaped by the factor of longevity. Tech investors and startups are accustomed to achieving results in relatively short timeframes, contrasting with insurance companies that, burdened with long-term risk-bearing duties, necessitate extended periods to establish credibility and achieve significant outcomes. Moreover, the discourse in these two realms diverges; tech emphasizes disruption, while insurers center their focus on evolution.

AI and Data Analytics Provide Unique Value to Insurers

AI and data analytics offer insurers a unique value proposition by enhancing the accuracy of loss predictions and enabling precise pricing for reliable profit margins. Despite this potential, a significant portion of insurance premiums is still processed without leveraging these advanced technologies.

Traits of Successful Insurtechs – the Next Wave

For success, the emerging generation of Insurtechs should embody an intrinsic understanding of insurance DNA, acknowledging their core identity as either insurance companies or providers of insurance technology, not mere technology-driven entities. Crucially, they should grasp the intricacies of insurance unit economics, discerning the distinctive risks associated with insurance carriers, such as the pitfalls of hyper-premium growth, and be adept at establishing a resilient insurance carrier capital structure.

Challenges and Opportunities in the Insurance Landscape

The insurance industry faces enduring challenges, navigating through rigid underwriting practices entrenched in deep-rooted traditions and frequently dealing with archaic IT systems. Opportunities abound in addressing pricing and underwriting sophistication, enhancing data and insights, expanding underwriting capacity, predicting dynamic risks, reducing customer interaction friction, exploring embedded insurance, and delving into Environmental, Social, and Governance (ESG) insurance.

Embracing the Future of Insurtech

A novel cohort of Insurtechs is on the rise, characterized by a proactive stance in addressing challenges and opportunities within the insurance realm. These forward-thinking companies, exclusively devoted to insurance, aspire to revolutionize product launches, optimize claims processing, and actively support the insurance industry in adapting to the ever-evolving landscape of innovations, including AI.

Conclusion

As the Insurtech evolution unfolds, investors, CEOs, and founders must remain vigilant, recognizing the industry's potential while navigating its unique challenges. Embracing advanced technologies, understanding cultural nuances, and addressing long-standing pain points will be pivotal in shaping the future of the insurance landscape. However, this transformation will undoubtedly require time and steadfast commitment.