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Insurtech trends: using data to create dynamic insurance

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By Simon O’Dell

Like the prolonged soft insurance market cycle, the macro-economic cycle was an extended one and it took the largest recession since the Great Depression, triggered by a global pandemic, to bring the economy down.

Such events filter out the vulnerable; “survival of the fittest” for the corporate world.

The global “COVID recession” was the first macro downturn since the term insurtech was coined, and the data shows that insurtech is fit, with the sector bouncing back in late 2020 to register an annual all-time high of $US7.1 billion ($9.2 billion) in funding volume, across 377 deals – a 12% increase in funding volume and 20% increase in deals from 2019.

The funding of insurtech innovation is proving important and timely. We face real threats that pose varying degrees of risk across all five collectively exhaustive macro areas of life; society, environmental, technology, geopolitical, and economic.

With a broad remit, new founders from non-insurance backgrounds – world leading climate scientists, AI engineers and neuro-scientists – are increasingly stepping up to solve important and pressing problems.

There is now enough insurtech value and traction to identify trends, one of which we will explore in a little detail.

Utilising data to synchronise dynamic risk with dynamic insurance

The progressively dynamic nature of risk is exposing the flaws of the traditional, static approach to underwriting.

In an ideal world, the data inputs that inform underwriting would move in sync with shifts in the risk profile.

Connected devices are increasingly being deployed by insurtechs and insurers alike to pull these two – often determinants of performance – into harmony.

Google is the single largest cost of sale in the world’s insurance market, though connected devices are likely the fastest growing cost of sale.

Insurtechs are paying anywhere from $50-$150 per device/policy, for the value of new and sometimes dynamic data insights on customers.

Connected devices allow the capture, processing and delivery of data that informs risk profiles, unlocking the ability to underwrite more deliberately. Connected devices are driving innovation in various areas, including:

  • Identifying and acquiring better performing risks within a certain class i.e. more profitable customers
  • Creating a risk profile for previously uninsurable assets
  • Creating objective claims triggers to enable parametric products, enabling near-instant claims payments, zero-low cost loss adjusting
  • Augmenting the insurance premium pool
  • B2B2C business models
  • Embedded insurance.

We are seeing a phasing out of “blind acquisition”, growth, for growth’s sake.

The new age insurtech deploying a managing agent business model has an ethos of controlled growth, sustainable growth, growth driven by key risk metrics of frequency and severity for the benefit of the insurers’ P&L and the insurtechs’ P&L.

This is impacting insurance in a number of ways:

  • Managing agents are creating more value for their capacity providers, with greater premium margins hitting the insurer’s P&L
  • Insurers face a dilemma with increasing consequences. For an insurer to deploy a usage-based insurance model, for example, and under-price the lower risk customers, it would expose the cross subsidies that make the moderate-high risk clients’ premiums affordable. As such, one could anticipate that insurtech managing agents will be increasingly used by insurers as a vehicle to join the race and capture some of this value
  • There is a growing class of uninsurable risks e.g. homes in identified bushfire red zones. With more granular data comes the moral hazard of unaffordable insurance, a temporary negative externality of the modernising of insurance. A big positive coming from this consequence is that governments, government agencies and high risk asset owners will be forced to proactively improve risk profiles, rather than reactively pursuing remediation following a loss.

Given the increasing number of connected devices in the community and increased computing power, we will eventually see the gap close between reality and the reality reference layer.

The insurance industry has an interest in consuming such reference layers to optimise profitability, unlock new products and services, and augment the premium pool.

  • Simon O’Dell is MD of insurtech incubator Insurtech Gateway Australia, and a former CEO and co-founder of Insurtech Australia.