The insurtech market juggernaut keeps on going. In the past five years, total global venture capital investment into the sector has increased from $1.9bn in 2017 to $11.7bn in 2021, according to data and analytics firm Preqin. The growth of the sector is encouraging for both investors and consumers, as these technologies could lead to something of a revolution in product development, competition, and price in what is widely acknowledged to be a slow-moving industry.
Most of the investment dollars from the VCs are going to insurtechs related to property and casualty (P&C) insurance, however. And, according to Tom Scales, Senior Analyst at research and advisory firm Celent, the reason for the disparity is simple.
“From my perspective, the biggest reason is complexity,” he said. “And P&C products are also generally easier to sell. Everyone needs auto and homeowners’ insurance. They have to have it. Life insurance, while critical, is viewed as more optional.”
Despite the slower burn in activity in the life side of the insurance sector, the number of start-ups receiving funding is still robust, and so far, activity has been dominated by two main areas critical to the life insurance business model.
“Activity has been heavily focused on the distribution side,” said Brian Casey, Co-Chair of the Insurance Regulatory and Transactional Practice Group at law firm Locke Lord. “That’s been the primary driver during the last five or six years. Independent distributors see this as less of a tech investment and more something where they can reinvent themselves, and benefit from cheaper distribution, but some are starting to morph into becoming risk bearing businesses seeking to obtain and leverage underwriting profits.”
Scales also says that he’s seeing activity in the distribution arena but that the underwriting function in an insurance company is also seeing some disruption.
“There is considerable investment in the sale of life insurance. Whether it be online B2C or through a call center, a higher percentage of life insurance sales are going to shift away from the ‘agent at the kitchen table‘ model,” he said. “In terms of underwriting, the process to underwrite and approve a life policy has, until recently, involved medical records and giving blood and a paramed exam. What money is going into Life is focusing on improving that process, including what they call ‘fluid-less underwriting’.”
Some insurtechs are using artificial intelligence and alternative data. These terms are buzzwords in tech and finance circles and have been for a few years now and the life insurance industry is trying to get an invite to the party.
“Alternative data is extremely hot in life insurance; it’s focusing on underwriting. Insurance companies want to underwrite with more public data and less medical records. In the U.S., electronic medical records are less of a thing, but there is less to ask a doctor personally if you have electronic health records,” said Scales.
But it’s not as straightforward for the life insurance industry as it is for the hedge fund space, for example. In December 2019, five U.S.-based regulators – the Board of Governors of the Federal Reserve System, the Consumer Financial Protection Bureau, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency and the National Credit Union Administration issued a joint statement about the use of alternative data – some of which is generated using AI – in underwriting. It’s an area that causes confusion, not least because each state will have various nuances in their insurance laws. Some state insurance regulators like the New York Department of Financial Services and the Colorado Insurance Department have jumped on the AI use train.
“Some states prohibit the use of occupation and education as a rating factor in insurance so that there isn’t discrimination against a class of persons,” said Casey. “And the regulators want to see what’s in the black box, but insurtechs that use AI and alternative data want to protect their trade secrets. There are lots of moving parts, but this is all still at a fairly early stage with the insurance regulators.”
The life settlement industry in the United States longs for more awareness amongst the general population that those with a life insurance policy can sell it on the secondary market for fair value, so developments supporting insurance agents’ ability to communicate this option would naturally be welcomed by firms in that space. For Casey, however, the application of insurtech to the life settlement market goes beyond the sales process.
“AI could provide better life expectancy estimates and therefore pricing could become more accurate. And if life settlement companies had a partnership with a distributor, as long as they adhere to privacy laws, could get more predictive underwriting, enabling better distribution. AI underwriting could have a big impact here,” he said.
Casey also says that blockchain technology also has a role to play in the life insurance market. A life insurance policy can sit on the blockchain, can be sold as a life settlement and disrupt and streamline the paper processing of transactions as wells automating the collecting of a death certificate from the coroner’s office through distributed ledger technology processes. Rules – such as the requirement in many states to prohibit the sale of a life insurance policy within two years of the policy being written – can be implemented into a blockchain process in quite a straightforward way.
The life insurance industry is still in the very embryonic stages of adopting many of these technologies. And, despite the recent tumult in public equity markets and the knock-on effect on the valuation of private companies, the foundations of the insurtech sector remain solid. Whilst the P&C market will continue to see development, insurtechs focusing on the life insurance industry have a significant opportunity.
“Traditionally, in looking at the use of tech, P&C companies are farther ahead of life insurance companies. Online sales, standardized applications, simplified underwriting, online service all exist and dominate in P&C today, but not life,” said Scales. “But there is so much room for improvement. For example, I saw technology recently that can use your phone camera to test your oxygen level AND take your blood pressure. With the camera. That is the kind of tech that can be game changing.”
