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Navigating the Evolution: A Reflection on Insurtech Journey

HIGHLIGHT /
The Insurtech sector has evolved from its initial promise in 2012-2015 to a focus on profitability in 2023, prompting a shift towards Insurtech 2.0 and 3.0 models.

In recent years, the profitability of public Insurtechs has become a focal point for insurance experts and investors in 2023. These innovative companies often hailed as disruptors, tested various hypotheses addressing pain points within the insurance sector, offering a glimpse into the actual impact of Insurtech on the market

The period from 2012 to 2015 marked the emergence of the First Wave in the form of young insurance companies such as Lemonade, Oscar, Hippo, and Root Insurance. Their mission was clear: to tackle fundamental pain points and transform insurance into a more appealing product. These companies aimed to elevate the customer experience, enhance transparency, and simplify insurance processes. However, the performance of Wave 1.0 fell below expectations, especially during the hypergrowth phase pre-COVID, where priorities shifted away from profitability

The Insurtech sector faced challenges unique to its nature. Unlike other industries, Insurtechs 1.0 didn't enjoy the luxury of patience and support from investors. Despite their potential for long-term growth, the spotlight on profitability was relentless, leading to skepticism about the success of these companies

Over the years, the Insurtech sector underwent significant evolution, witnessing promising startups from the first wave struggle to redefine industry standards. The period of 2018-2019 saw heightened optimism, with companies making grand promises. However, the subsequent years brought the challenges of the COVID-19 pandemic, leading established Insurtechs to go public, while the market experienced a correction in 2022

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Photo by Vincent NICOLAS on Unsplash

Amid these changes, 2022-2023 emerged as an "innovation window". New Insurtechs aimed to address emerging risks like climate change and mental health, while lessons from struggling B2C models paved the way for embedded insurance and employee benefits. However, instead of a clear path to success, the Insurtech world seemed to jump from one trend to another without a parallel impact like other industries' disruptors

The appearance of new companies with shifted business models and a focus on different technologies strengthens the argument for Insurtech 2.0 and 3.0. However, acknowledging the limited understanding of this complex market is essential. Unlike sectors such as banking or retail, insurance operates on the less clear-cut positive side of customer lives, making it challenging to predict what will truly resonate with end customers

In 2023, attention turned to critical metrics such as loss ratio, customer acquisition cost, and profits. Insurtechs faced scrutiny and judgment from specialists based on insurance metrics. The market's impatience prompted these companies to prioritize profitability over rapid growth, challenging them to prove the sustainability of their business models

While systematic risks like inflation, war, and natural disasters impacted Insurtech investments for the second consecutive year, the industry perceives this as a new wave of innovation. Emerging companies with different business models and technologies strengthen the argument for Insurtech 2.0

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Photo by Christin Hume on Unsplash

Venture capitalists encourage an old-school approach for early-stage companies, suggesting a more cautious strategy as valuations rise and interest rates increase. Despite challenges, insurers have realized that low customer engagement is an industry-wide issue, leading to a collaborative approach with external resources

In the realm of insurance, supply and demand dynamics play a crucial role. Addressing protection gaps, serving younger customers, and improving distribution channels contribute to the development of the supply side of insurance. However, the demand side follows suit only if the product aligns with market needs. Customer-centric approaches and data-driven product development are crucial for achieving the perfect product/service market fit

As we navigate through this intricate dance between innovation, adaptation, and market dynamics, the future of the Insurtech sector remains uncertain. Industry must embrace humility, acknowledging the limited understanding of what truly works and does not work. In a world marked by dynamic shifts, the Insurtech sector continues to evolve, offering both challenges and opportunities for those willing to explore its complex landscape. 

Header photo by Iván Díaz on Unsplash

Authors
Richard Calvo, Alvaro Takashi Yamashiro, Dian Jin
Richard Calvo
Author
Richard Calvo
Head of Insurtech at NTT DATA Insurance EMEAL
Alvaro  Takashi Yamashiro
Author
Alvaro Takashi Yamashiro
Analyst Digital Insurance at NTT DATA EMEAL
Dian Jin
Author
Dian Jin
Analyst Digital Insurance at NTT DATA EMEAL
Published on 31/01/2024
~ 3 minutes
Business Transformation
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