Incumbent Re/Insurers Drive Insurtech Investments in Q4 2017: Willis Towers Watson

By | February 2, 2018

Re/insurance industry incumbents are fueling investments in insurtech startups, sending a clear message to potential disruptive outsiders, according to a report published by Willis Towers Watson, which detailed 2017 trends in the insurtech sector.

“Re/insurers, directly and through corporate venture arms, are increasing their activity in the sector and expanding their focus to invest in a broad range of technologies with potential applications to their core re/insurance businesses,” said the report titled Quarterly InsurTech Briefing, Q4 2017 – January 2018. (Willis Towers Watson Securities and Willis Re produced the report, in collaboration with CB Insights.)

“[B]y investing heavily in start-ups and technology, re/insurance companies appear to have assumed a semblance of control over the insurtech revolution,” said Rafal Walkiewicz, global chief executive officer of Willis Towers Watson Securities, in an introduction to the report.

The report revealed that the insurtech sector received funding of $697 million in the fourth quarter of Q4, which brought the 2017 total to $2.3 billion. This was a 36 percent increase from $1.7 billion recorded in 2016 and the second highest total for any year to date.

Further, it noted that 35 private technology investments by re/insurers in Q4 and 120 investments in 2017 are the highest totals recorded in any quarter and year to date.

“Insurtechs have added value to incumbents in pricing and underwriting, claims handling and administration, fraud detection, predictive analytics and through implementation of and integration with improved software systems which have become more adept at extracting data to enable quicker and more informed decision-making leveraging artificial intelligence and machine learning,” said Alice Underwood, global head of Insurance Consulting and Technology, Willis Towers Watson, who was quoted in the report.

Indeed, the report said that 65 percent of re/insurers’ investments to date have been focused on improving the current value chain.

However, it is still unclear whether such enhanced efficiency “will drop to the bottom line for incumbents, get delivered to customers or fund third party solution providers….” added the report, explaining that it is difficult to quantify disruption within the incremental innovation resulting from these investments.

Should Re/Insurers Feel Safe?

The report asked whether incumbents should feel safe from disruptive outsiders, now that they’ve jumped soundly on the insurtech bandwagon.

It noted that less than 10 percent of insurtech investments to date have flowed into start-ups targeting full scale value chain disruption. “External capital entering the industry is searching for potential unicorns, funding disruptive ideas and breakthrough technologies that may seem crazy at first,” said Walkiewicz in the introduction.

In other words, the report indicated, external capital could provide a more fundamental disruption to the industry than the incremental innovation that it currently supports.

Technological revolutions “rarely result in redistribution of power among incumbents” and more often produce an entirely new approach to the value chain, explained Walkiewicz, pointing to Amazon’s disruption of retail companies such as Walmart

“It can be argued that incumbents’ collective response to insurtech hype has diminished their ability to recognize true disruption,” he added.

Ad-Hoc Innovation

That premise was supported by the findings of Willis Towers Watson’s re/insurance innovation survey, in which 75 percent of respondents said their companies are “moderately” to “extremely” at risk of disruption. (The survey received responses from nearly 600 re/insurance and investment professionals).

The survey also found that an average of 72 percent of companies’ innovation resources are devoted to incremental technologies, rather than disruptive or radical ones. “[N]early half of respondents describe their company’s innovation philosophy as ‘ad-hoc,’ meaning their company is neither explicitly a first mover or a fast follower,” said Walkiewicz in the introduction.

Most survey respondents think that customers and employees are valuable sources of innovation, but only 20-30 percent recognize the value of external talent pools, such as accelerators/incubators and venture capital.

The report indicated that perhaps the industry also needs to tap the external sources of innovation. Walkiewicz quoted Henry Food who once said: “If I’d asked customers what they wanted, they would have told me, ‘A faster horse.'”

“Re/insurers are evaluating the cost associated with early adoption of new technology,” said Underwood. “This investment can yield great reputational and financial benefits if handled well, but companies that position themselves as fast followers can reap a fair amount of benefit with relatively less risk.”

However, she cautioned, if companies wait too long, they may find they can’t make up lost ground.

Insurtech’s Focus

The report segmented the 100 insurtech companies to watch into four categories as they find their place in the insurance value chain:

  • Product & distribution
  • Business process enhancement
  • Data & analytics
  • Claims management

While the exercise was complicated by the tendency of companies to operate across multiple functions, the report said, these categories represent the current frontiers of innovation in insurtech.

“Over half of insurtechs target distribution and product design, with data & analytics and claims management representing relatively smaller segments,” the report went on to say. “We expect the business process enhancement category to grow based on the current level of incumbent focus on this area.”

Source: Willis Towers Watson

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