Should InsurTechs partner with traditional insurance companies as underwriters, thereby just providing distribution to them based on their tech innovations, or can they leverage their position to participate in the insurance risks and profits, and be more like the insurance companies?

Insurance is a fascinating subject, and InsurTech as a technology is arriving into an industry that is beset with problems, but with a long history of steady profitability and growth. My first awareness of the industry was in the late ‘80’s when a friend of mine became a Lloyds name the same year as a few big disasters occurred, such as Lockerbie, Piper Alpha platform explosions in the North Sea and the Kings Cross fire, as well as the Clapham Junction Rail crash and the Hillsborough disaster. He was initially most despondent that he would not receive his regular £10,000 cheque, but eventually it dawned on him the full extent of the possible losses to himself – that thought has lived with me ever since.

Today however, insurance has evolved and is evolving rapidly, as firstly technology allows risks to be better measured, either through the development of IoT (Internet of Things) such as fire alarms, driver behaviour devices or vibration measurement in engines, or through more sophisticated predictive Artificial Intelligence engines which measure behaviour and thereby risk. But the piece that seems to be slow in changing is the “back end”, the balance sheet that insurers have to keep in order to “carry” the risk in their books.

This was brought home to me by a potential client that we have been pursuing to raise a Series A round. When we first met, the company was trying to become cash positive at the behest of his investors. However, once we discussed the importance of achieving scale, and the kick in value from doing so, the discussion moved and his investors decided to back the growing losses. I recently contacted our entrepreneur to find out how things had progressed to find that their business was now profitable. How is that? Quite simple, rather than pay a premium to an insurer to carry the book, this company has done the necessary to carry its own risk and reinsure at a much lower rate. In other words they have backed themselves to carry their own risk – why not, they have better knowledge of their book risk than other insurance companies. Kudos.

This and other instances got me thinking. Insurance giants are constantly looking for disruptive technologies to back, seeming to concentrate on the acquisition of customers that may have been previously hard to get, or to win customers from competitors, or to improve processing, or even to better measure risk. Indeed, they will carry InsureTech risk but in reality the only margin that they seem to relinquish in my experience is that margin that they were always ready to give away to the distribution channel in any case. So the real winners in this new world are the same insurance companies, who push risk to the InsurTechs but retain their old capital measures. On this measure these companies should becoming more profitable over time, which I believe is indeed the case for consumer oriented risk. I am starting to believe that there is a place for a new order of risk-taking where an innovative insurance company is starting to back the risk that they invest into through InsurTechs. I believe that there are a couple of insurers that consciously see this, but in my view they are not sharing the upside, the reduction of risk. If they did share the risk upside, we would see a few very wealthy start-up entrepreneurs, such as there are in the FinTech side of things.

In conclusion, a good friend of mine pointed out that underwriting management agencies and owners of captive cells have been assuming their own risk for ages. They access an insurance license and participate in the profits, paying a fee for use of the license, thereby sharing fully in the risk and profits. We would recommend therefore that InsurTechs look further than partnering traditional insurers (thereby being just distributors). In this way they not only participate in profits but they can also take advantage of license cover and other regulatory admin. Perhaps this is a new dawn for InsurTechs!