Invest billions. Hundreds of startups. Lots of hype. The idea that the century-old insurance industry is ripe for disruption by new technologies has fascinated investors and entrepreneurs for years.
It’s easy to see why they’ve been looking enviously at insurance — it’s big, it can generate handsome profits, and it’s been doing business in much the same way for decades. By throwing in some artificial intelligence, some big data, and some user-friendly apps, it should be possible to win a sizable market share.
Many people have embraced the idea. Over the past five years, more than $40 billion has been invested globally in so-called insurtech start-ups, according to insurer Gallagher Re.
Consumer insurance, however, remains largely undisturbed. For example, the largest car insurers in the UK are the same insurers they were about a decade or two ago – Aviva, Admiral, Direct Line, etc. There are similar stories in the United States. And the amount of auto and home insurance we actually buy has changed little. Yes, we may be buying from price comparison sites rather than high street brokers, but the policies themselves are largely the same as in the past.
Contrast that with the revolutions happening in retail, travel, and countless other industries.
So far, the wave of start-ups has struggled to make a splash. U.S.-listed Lemonade, one of the most high-profile insurtech start-ups, is still losing money and is expected to remain so this year and next. Its shares have fallen 59% over the past year. Other US-listed insurtechs such as Hippo and Root have fared no better.
In the UK, companies like By Miles (pay-by-the-mile car insurance) and Cuvva (short-term car insurance) have good ideas and are growing, but have so far barely captured a slice of the £16bn car insurance industry.
A big problem with these start-ups is that it’s hard to get people interested. “Clients just don’t care much about their insurance,” says Paul De’Ath of consultancy Oxbow. “You have a very competitive market, and most customers focus on price. They don’t care much about the features.” It’s one thing to get the public excited about the latest iPhone innovation. Getting them excited about the latest insurance innovation is an even bigger challenge.
As a result, start-ups have to compete with larger operators on price. Lemonade launched in the UK last year. Its website tells a story. After telling visitors to “forget everything you know about insurance”, the next line reads “Keep your stuff safe from £4 a month”. Much less explain how its policies work and the good causes they are designed to support.
They also have to work hard to win business. That means a lot of expensive marketing, either through direct advertising or through price comparison sites. Word of mouth can only go so far in the insurance industry.
And, according to Rob Moffat of venture capital group Balderton, they must do a better job of handling claims by eliminating fraud and reducing repair costs. No amount of smart data or novel business models can keep a business profitable if those expenses skyrocket. Even established insurers are finding it tough – Direct Line warned on profits on Wednesday as claims costs mount.
Large insurers may be tempted to breathe a sigh of relief. The worrisome wave of disruption has been smaller than many feared. As the tech industry tightens and capital becomes more scarce, the prospect of a big, well-backed new entrant is fading.
But the threat remains. Consumers rarely like insurance, so it’s still possible someone will come up with an offer that could change their minds. Looming on the horizon are large tech conglomerates. While neither has made a big push into the space so far, they’ve been nibbling at the fringes. Amazon is the latest with plans to launch an insurance portal in the UK. Those envious eyes didn’t go away.