According to recently published reports, tech giants Amazon, Google, Facebook and Apple are planning to enter the global insurance market through the sale of car, home and health insurance policies. Amazon and Facebook have already begun selling insurance products in India while Google has invested capital in no less than 14 startups in the sector. Given the success of these companies in entering large markets, are we witnessing a trend that marks the decline of the traditional insurance companies, as has taken place in the past in other areas to companies like Kodak, Palm and Yahoo?
The insurance market is in the midst of a digital revolution that began in the past few years. 2020 is looking like a strong year for the insurtech market – technology in the field of insurance – which has grown to an estimated $5.5 billion, with annual growth estimated at 10%.
This is the outcome of the need to combine advanced technologies – such as artificial intelligence and image processing – with an improvement in obsolete processes and changes in the user experience. The main agents of change are startups operating as technology based insurance companies (insurtech) like Israeli company Lemonade, or companies like Next Insurance and Hippo, which have begun to emerge over the past five years, through the shift to cloud based services, mobile apps and use of big data.
According to a report by Deloitte, despite a plunge of more than 50% in venture capital investment in March-April 2020, compared with the corresponding months of 2019, mainly due to the Covid-19 pandemic, investment in the insurtech sector in May and June rose to a record $2.2 billion.
Venture capital investments put their main trust in ten insurtech companies that were founded in 2016 and 2017, which received two-thirds of the investment funds this year. In July, Lemonade, which is best known for selling insurance for rented homes in the US, raised $319 million in its Initial Public Offering (IPO) on the New York Stock Exchange (NYSE). Hippo Insurance, which sells insurance to homeowners, completed a financing round of $150 million.
Next Insurance, which provides insurance for businesses, completed a $250 million financing round in September led by CapitalG, the investment arm of Google. These companies have created disruption in the market by making the policy purchasing and claims process more efficient and friendly, while using advanced big data.
Managing the insurance process in its entirety
While many startups in the sector are positioning themselves to provide technological solutions to traditional insurance companies on a B2B basis (business to business), insurtech companies have the proven ability to manage the insurance process from end-to-end, beginning with a sales interface and through to customer service centers and claim clearance procedures and the like. A substantial number of these companies are directly oriented to customers, and in many cases millennials who regularly use apps for managing their daily lives, while challenging the traditional distribution model of sales by insurance agents. Covid-19 has sped up these innovative processes, which had begun before the outbreak of the pandemic.
Traditional insurance and reinsurance companies, which in any case were forced to streamline because of high cost structures, are not sitting idly by. Many of them have understood the signals from the market and have begun to launch their own advanced insurance products.
US insurance company Chubb has launched on the online market, allowing insurance agents to conduct the signing and selling of policies immediately and conveniently. Companies like MunichRe and AXA have begun to cooperate with technology startups in order to combine the creativity of entrepreneurs with their large customer base.
In Israel, insurance companies have launched collaborations and even set up accelerator programs for startups in the field. Clal Insurance, for example, as part of its vehicle insurance operations, offers smart dash cams for cars, developed by Israeli startup Nexar, which document accidents and assist in clearing claims.
Big data in the service of big tech
Big data is the name of the game, and traditional insurance companies, like the banks before them, understand the potential that it contains. In recent years, most insurance companies have built information infrastructures, hired software developers, data experts and artificial intelligence teams. Many of the insurance products that they are marketing were developed in internal innovation laboratories, frequently in cooperation with startups.
Big data is the outstanding relative advantage of the big tech companies, which already use it for forecasting and creating demand, the rapid development of applications, creating online markets, and more. The expansion of Google and Amazon’s businesses to extensive areas such as autonomous cars, digital health, and financial services, which are a very long way from their starting points – search engines and book sales over the Internet – symbolize their ability to expand into almost any field.
At first sight, big tech companies would seem to have the ability to take control of the insurance market. However, this can sometimes also be their weak point. A survey by global data companies in 2019 found that more than 60% of consumers are not prepared to purchase insurance policies from the big tech companies because of concerns regarding issues of privacy and the growing power of these companies.
Google and Facebook have been fined huge amounts over the past two years by the European Union and the US government for monopolistic behavior or problematic use of user details. The involvement of regulators in the US and Europe raises doubts about the readiness of these bodies to allow big tech companies to enter the supervised insurance and finance market.
It is difficult to predict whether the entry of the big tech companies into the insurance sector marks a new order in the sector. The rise of insurtech companies, as well as the digital transformation that traditional insurance companies are undergoing, produces competitive forces and opportunities for mergers and acquisitions between the different types of companies. What all of them have in common is improving the user experience for the customer.
The numbers in the insurtech market
- $5.5 billion – the amount of money currently in the market
- 10% – the estimated annual rate of growth in the sector
- $2.2 billion – the record amount of investments in the sector in May-June 2020
Outstanding financing raised in the sector:
- $319 million – the amount raised in Lemonade’s IPO on the NYSE in July
- $150 million – the amount raised by Hippo Insurance, which sells insurance to homeowners
- $250 million – the amount raised by Next Insurance, which provides insurance for businesses
Source: Globes
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