Having written a blog on the insureTech industry several months ago where we looked at vertical integration as a possible route for Insuretech’s seeking sustainable earnings, we believe that the time is right for this to happen at a quicker pace. Indeed, is this the time of true disruption in the insurance industry? For decades the risk takers have taken more profit than the risk would suggest.

To tell the story best one really needs to look at the investors behind insurance. I recently attended a family office briefing which was illuminating – the investment house in question was suggesting that the highest returns of any asset class over the next investment period would be insurance underwriting at Lloyds, with Private Equity very close behind in expected returns. Perhaps this is because of another observation – the insurance market is hardening – i.e., the money in the market has evaporated over this period as investors scramble to deal with Covid-19 and its impacts, or perhaps its just the cycle. Prices and therefore returns to the industry are therefore expected to rise. What are the implications for InsureTechs?

Given this backdrop, it is especially interesting to note that InsureTechs will not necessarily benefit, unless of course they become “full stack” or at the very least start participating in the risk. Recent exposure to a client’s actual returns has once again convinced me that it is very difficult for a business offering only the “front end” of insurance (i.e. anything other than underwriting) to really become profitable.

The very interesting factor about the InsureTech journey is exactly how much margin contribution comes from the carrying of risk, or underwriting, as opposed to pleasing the customer – about half of that margin is my estimation for a typical consumer facing business. Can you imagine literally doubling one’s profits by merely understanding and therefore being willing to carry some risk?! I say “some” because there is always the catastrophe or “black swan” event that can truly disrupt our worlds and we’re in the middle of one right now with Covid-19. That is where the reinsurers have always played and I suspect always will play a very important role. And that market, too, is hardening rapidly with the current environment.

But what about understanding the risk of insurance? The Insurance industry is full of verticals and it seems to me that people that understand claims do not necessarily understand underwriting or pricing and those actuaries who look at mortality rates for life companies don’t necessarily understand “property and casualty”. It is a huge industry, which as a close friend noted is about betting.

“I will bet that nothing is going to happen to you for the next period”. Once that bet is past someone has made money or they have had to see someone good. Understanding that bet then is critical and of course history is helpful in this regard. Data is the new currency, not only for marketing but for understanding that risk, be it weather, traffic density, crime or subsidence. Taking part in this margin profitably means being able to measure the risk quantifiably because, especially in the consumer world, we have volume to support the pricing of such risk.

InsureTechs that only address customer or claims efficiency can’t take advantage of that. But when you have four or five years of experience in managing, not only pricing the risk, then you are able to step up to this next phase in the evolution of the “insuretechnopreneur”. Managing risk is an interesting topic – one client has managed to reduce their loss ratio by half over some five years. This means that the profit ratio has doubled – but if this profit falls into the hands of the carrier, that is meaningless for an MGA type insuretech. Perhaps as much as data helps one to price the risk, experience (and data) helps one to reduce this risk. The client in question was able to fix problem loss areas quickly through rewording of policies, pricing more intelligently and just being more proactive. But if the Insuretech is reliant on its underwriter to approve any changes to any of these points, it becomes a very hard slog. And one of our less successful clients fell into this trap. Each change in advertising wording needed approval – and that was before they got to insure anyone!

Nimbleness is the answer to most business challenges and InsureTech is no different. As the minnows become funded (or able to underwrite risk), they also become more profitable and therefore more capitalised, being able to take bigger and more complex bets. The incumbent carriers are protected today by legislation which seeks to protect the end user, but also produces a minefield for newbies. But the days of incumbents are numbered if the regulators start to recognise that the consumer is best protected not by big balance sheets, but by effective and well thought out rules.