InsurTech: Inside the race to build the next RMS

As the initial InsurTech buzz gives way to a delivery phase of successful proofs of concept and major rollouts, the most likely models for success in the sector have emerged, not as competitors or disruptors of the insurance industry, but as its technology-fuelled enablers.

An exploration of the state of InsurTech by this publication reveals that the question is not who is going to be the next Direct Line-style disruptor. (The UK insurer launched by RBS in the 1990s decimated first the brokered motor market and then the rest of the personal lines space with the aggressive deployment of direct telesales.)

Instead, the strategies gaining most traction are those that are producing enhancements for the incumbent industry.

Only two of the 25 InsurTechs identified in the 2019 edition of Oxbow Partners’ Impact 25 report were “full-stack” insurers with their own balance sheets – the remainder all service the incumbent industry in one way or another.

One of the two complete insurers, a German business called Element, doesn’t sell direct, but only through insurance and non-insurance partners. It appears to have made this move as a result of frustration at the slow development of incumbent insurers. Whatever the reasoning behind the decision, the business is not a mortal threat to the status quo.

The second plays in life and health, not P&C.

Incremental enhancements

Research reveals that the incremental enhancements which are the focus for this cohort of InsurTechs are coming all across the value chain. 

They might be helping insurers to distribute better and more relevant products at far lower cost through digital platforms. Such platforms could be rented out as a service to incumbents whose legacy tech systems will not allow rapid deployment of new products or processes.

They could allow carriers to better target the intermediaries and other sales channels through which they distribute. They could simplify the production, storage and comparison of policy wordings, saving time and money, and avoiding costly errors.

They might onboard new customers automatically, drastically reducing processing times and avoiding fraud. They might enhance understanding of complex portfolios of risk and recommend changes that make highly significant improvements to the loss ratio.

They could analyse risk information in new and smarter ways that optimise underwriting as well as the purchase of reinsurance. They could also automate the management, adjustment and processing of claims – and once again drastically reduce fraud.

One trait all of the above business models have in common is they pose little or no threat to incumbents. Instead, they promise to reduce the expense, acquisition and loss ratios while at the same time improving customer service and retention. 

At a time when margins are barely covering the cost of capital – and in some places clearly are not – this must be music to the ears of the average industry CEO.

The only threat is if the incumbent fails to engage with a new tool or service that brings vast operational savings, improved marketing or new risk insights to all their competitors.

Under such circumstances, the true risk for the incumbent is therefore that of being left behind, not being disrupted or disintermediated.

Tools of the insurance trade

The current prize for InsurTechs is therefore to produce the essential tools of the insurance trade.

They should either do this with a view to a trade sale to a single player looking to press home a comparative advantage in the marketplace through making the technology proprietary, or to create a universal product that no one can trade successfully without.

The former may be quicker and might produce a multiple return for the start-up’s original investors, but the latter has scope to create far more value in the long term.

With an insurance war raging, those InsurTechs that sell better materiel will always be in huge demand and will become completely embedded in the businesses they serve. You can’t fight a war without weapons or ammunition.

Arguably, the first commercial technology business to do this in the insurance space was modelling firm RMS.

The firm and its small peer group of AIR Worldwide and Eqecat overcame technological challenges and early scepticism to become embedded in the industry. You can’t run an insurance company today without using these tools. So deeply has the business become embedded that it is accepted and endorsed by regulators as an effective method of estimating and planning for the effect of natural catastrophes on an insurance portfolio.

You run the RMS model, buy the reinsurance or hold the capital it says you need to comply with regulatory requirements and you can trade. Despite the well-publicised travails and misfires of the past few years, RMS remains a cash-generative $300mn-revenue business.

So as a large wave of InsurTech investment begins to mature, what other RMS-like opportunities are likely to be carved out in the sector?

Potential winners

Speaking to this publication, Oxbow partner Christopher Sandilands made some suggestions of his own:

“RMS is indispensable for property business – but in the same way a business like Pharm3r could become a golden source for information on pharmaceutical liability insurance.”

New York-headquartered Pharm3r is in the consultants’ 2019 InsurTech Impact 25. The data analytics company uses machine learning and artificial intelligence to detect, predict and price litigation risk in the life sciences insurance market.

It is already working with an impressive roster of global P&C insurers including Allianz, Chubb, Sompo, OneBeacon and Ironshore.

Sandilands also tipped fellow Impact 25 member Broker Insights, which is a UK-based listings service for insurance risk – which Sandilands said could become the gatekeeper to a huge part of the UK broker portfolio. Broker Insights presents carriers with detailed but anonymised information about brokers’ portfolios so that they can target them much more effectively and at the right time.

Carriers pay subscription and transaction fees, while brokers participate because the system matches them with capacity in real time.

In its Impact 25 report, Oxbow suggested such a model could be highly relevant in the hugely complex and highly fragmented US excess and surplus lines market.

Willis Re global InsurTech head Andrew Johnston cautioned that without market buy-in it is very hard to become an RMS or an AIR. However, he suggested players look out for Denver-based InsurTech Parsyl, which has applied its technology into the cargo market.

Parsyl is a graduate of the first cohort of the Lloyd’s Lab scheme. Data provided by its tracking sensors is designed to slash the cost of administering low-value cargo claims.

The firm’s sensors collect information on temperature, light, humidity and impact. This is combined with contextual data about location, weather and telematics. The company has signed a partnership agreement with Axa XL and launched a $50mn cargo consortium with support from Ascot and Beazley in February.

Johnston also highlighted Zeguro, a Munich Re-backed MGA that offers cyber cover and risk management services as a strong candidate.

Marine boom

The broking executive also pointed to big data platform provider Concirrus.

The firm partners with marine insurers to produce a dynamic view of a marine portfolio, potentially allowing for dynamic and flexible reinsurance programmes.

Concirrus is also in the latest InsurTech Impact 25.

Another candidate in the marine market is Windward, an Israeli technology company that raised $16.5mn last year in a round led by Axa XL. The company uses artificial intelligence to find patterns in ship movements that can be indicative of the likelihood of a loss.

Oxbow noted that the degree of traction being gained in the highly traditional marine market will have taken many by surprise, but that it is in fact a “prime candidate for data-driven disruption”.

Drawing on evidence compiled by Willis Towers Watson, Oxbow noted that the InsurTech funding of 2017 and 2018 had been dominated by much later-stage rounds than in earlier years. 

It said this played into the hands of US-based firms, or those able to access US venture capital, because the higher funding capacity would allow them to fund global expansion once they matured.

First-mover advantage?

Sam Evans from InsurTech venture capital fund Eos saw large incumbent insurance technology firms such as DXC and Accenture as natural owners of the emerging InsurTech winners.

The traditional business models of these tech titans are coming under greater pressure as established insurers become less likely to pursue the major system rebuilds in which they specialise. Firms such as  DXC and Accenture are therefore likely to gravitate to acquisitions of those InsurTechs most likely to produce dominant market positions in their niche specialist service.

He pointed to the knockout $275mn price paid by P&C software firm Guidewire for cyber risk specialist Cyence in late 2017 as evidence of this.

However, Evans still noted that despite the traction and evidence to the contrary, there are many incumbents who “still don’t believe in InsurTech”.

He is right. Many players in the specialty and reinsurance arena are sitting on the fence.

Some incumbents are playing a waiting game, allowing first movers to prove winning concepts on their behalf. Provided the winners stay independent and do not become the proprietary technology of a rival, some seem to feel they can catch up quickly by simply contracting the best in class once their technologies are proven. 

If that is the case, then chasing first-mover advantage could prove an expensive and fruitless exercise.

Further reading:

Willis Towers Watson quarterly InsurTech briefing

2019 Oxbow Partners InsurTech Impact 25