By Russ Banham
Just a few years ago, the nascent insurtech sector received scant attention from the insurance industry. But with the number of companies in the space growing exponentially, more insurers, intermediaries and risk managers are being forced to take notice.
Insurtech refers to the subset of technology startups focused on process enhancements in underwriting, claims administration, back-office systems, customer-facing interactions and other insurance activities. To date, most of the work in insurtech has focused on developing more efficient and cost-effective ways of transacting personal and small commercial lines. But these innovations have real implications for corporate risk managers. “Insurers are looking for ways to better understand, manage and price risk, but these same aims are also in play for risk managers,” said Jamie Yoder, leader of PwC’s insurance advisory practice.
For example, many of the same technology solutions designed for insurance can be used by risk managers to better evaluate corporate exposures, determine how much risk the business can bear on its own balance sheet, and decide how best to transfer remaining risk. While such capabilities would theoretically allow risk managers to reduce their reliance on brokers and carriers, their proper application would require risk managers to develop the skills to better take advantage of them.
“The next generation of risk managers will have to be very quantitative and savvy in trying new things out—just like insurance companies are trying new things out today,” said Kabir Syed, founder and CEO of RiskMatch, an early insurtech startup and developer of a platform to organize commercial insurance portfolios. “Otherwise, the sustainability of their roles will be vulnerable.”
Investment in insurtech is primarily driven by venture capital. According to CB Insights, total funding for these startups in 2016 was $1.69 billion, spread across 173 deals—a 42% increase in deal volume from the prior year (a “deal” represents both new and follow-on rounds of capital provided to the startups). Since 2010, more than $4.74 billion has been invested across 470 deals.
Syed estimated that there are now more than 1,200 startups in various stages of formation, most still at seed stage, others in Series A, B and C rounds of venture capital (VC) financing, and the rest now in business and selling their wares. This broad array of startups is looking to either sell their technology products to insurers and brokers, or compete against them. “Roughly half of insurers fear that up to 20% of their business could be lost to insurtech in the next four or five years,” Yoder said, referring to a recent PwC survey. “The ingenuity in the space is nothing short of remarkable.”
This potential has attracted major interest from VC firms. Last year alone, more than 140 traditional and corporate VC firms invested in an insurtech startup, compared to 55 in 2011, according to CB Insights. Insurers and reinsurers were also major investors in the sector in 2016. More than 20 insurance companies created VC funds to invest in insurtech startups last year, closing more than 100 deals, while reinsurers like Munich Re and Swiss Re engaged in 79 deals.
Among the insurer VC funds is XL Innovate, which was launched by XL Catlin in April 2015 and made nine investments in 2016. “We’re placing our bets on startups that provide data analytics solutions, have developed new operating models, or offer the potential to create a new business,” said Tom Hutton, XL managing director. “In each of these cases, the startup may provide products and/or services to insurers, brokers and risk managers, depending on the focus.”
AXA Strategic Ventures, an insurer-capitalized VC fund backed by AXA, also has its eye on startups with predictive modeling and data analytics solutions. Among the fund’s investments is BioBeats, developer of a biometric machine learning platform that analyzes employee health and wellness data from wearable technologies. “The more information companies have, the better they can manage their risks,” said Manish Agarwal, the fund’s general partner. “Technologies that offer deeper insights are of interest to us.”
The technological innovation at the heart of these new companies offers great promise for managing risk in the future. “The digitization of risk management and insurance is a good thing, making everyone’s lives and business better,” Hutton said. “It may change the nature of how risks are analyzed and how insurance is transacted, but in the long run it should promise enhanced efficiencies and more cost-effective transferring of corporate exposures. At the end of the day, risk managers will have greater visibility into their company’s risks and how to better manage and insure them.”
The Insurtech Toolbox
The focus of most insurtech companies is currently on products for insurers and brokers, but many have risk management applications, or soon will. “The best innovations happening in insurtech are those designed to capture and interpret complex risk information in more refined and reliable ways,” Yoder said. “Eventually, these tools will have great applicability for risk managers to better understand their organization’s risks. In turn, this will inform better risk management practices and more cost-effective use of insurance.”
The following is just a sample of some of the companies and products that may be of particular interest to risk managers:
Understory Weather. The company is creating a network of solar-powered weather stations with proprietary rooftop sensors that detect weather at ground level, in contrast to traditional weather centers that collect data from satellites. The sensors provide information on a location’s humidity, temperature, wind speed and precipitation. Once enough data is collected, Understory hopes to eventually be able to predict the weather for clients in a specific location. Insurers are the primary market, but the technology may also be useful for risk managers in industries like agriculture, special events and construction.
SafetyCulture. The startup has created iAuditor, a smartphone app for employees to detect and prevent workplace accidents. The app is a virtual library of 22,500 safety checklists sourced from companies worldwide. This data has been integrated and analyzed using proprietary algorithms to pinpoint workplace safety risks. Plant safety supervisors are the primary market, but more broadly, risk managers can use the tool to reduce the incidence, severity and cost of workers compensation claims.
SecurityScorecard. Founded by two former cybersecurity leaders and cryptographers, the company has created a cloud-based platform called ThreatMarket to collect and correlate terabytes of proprietary security information from around the world. The platform assesses the strength of an organization’s cybersecurity plans, and benchmarks these plans against those of other companies. Insurers and corporate chief information security officers (CISOs) are the primary market, but risk managers can introduce the software to better understand and transfer their organization’s cyberrisk vulnerabilities as well.
RiskIQ. The startup has developed a digital threat management platform that offers a unified view of an organization’s digital assets and the risks to its data. The tool anonymously monitors employees’ web, mobile and social media activities, using algorithms to assess these actions against different types of attack vectors exploited by hackers. Primary target customers are insurers, CISOs and risk managers.
Cape Analytics. This company has developed a cloud-based platform that incorporates computer vision and machine learning to provide automated property underwriting for insurers. The tool uses satellite photos and other geo-imagery of a home or building to determine the features such as roof type and material, square footage of the structure, and its overall condition. The images are interpreted by data analytics to refine the underwriting and pricing process. Insurers and reinsurers are the primary markets, but risk managers could also use the data to reduce commercial property insurance premiums.
Cyence. This data analytics startup models the financial impact of different types of cyberattacks, helping insurers better understand the related risk probabilities in underwriting cyber insurance products. For now, the primary market is insurers and reinsurers, but the company has expressed interest in rolling out its products to commercial enterprises as well.
Human Condition Safety. This startup manufactures wearable devices with embedded sensors, artificial intelligence and data analytics to prevent or reduce the severity of injuries. The cloud-based product is aimed at industries that have the highest safety risks, such as manufacturing and construction. Among the wearable devices is a smart vest that informs the wearer if he or she is carrying too much weight or bending incorrectly. Risk managers in the target industries may be interested in using the devices to reduce workers compensation claims duration and cost.
DAQRI Smart Helmet. The startup is one of several making safety helmets embedded with sensors that inform the wearer of imminent safety issues, such as venturing too close to a machine or beyond a safety barrier. Connected to a data analytics tool, DAQRI’s visual and thermal sensors provide automated instructions guiding workers on how to perform job tasks more efficiently. While plant supervisors and foremen are the primary market, risk managers can also introduce the helmets to improve workplace safety.