Why technology has failed to disrupt insurance

Billions invested. Hundreds of start-ups. Plenty of hype. The idea that the centuries-old insurance industry is ripe for disruption by new technology has been pulling in investors and entrepreneurs for years.

It’s easy to see why they have been casting envious glances towards insurance — it is big, can generate decent profits, and has been doing business in broadly the same way for decades. By sprinkling in some AI, some big data and some user-friendly apps, went the argument, it should be possible to win a decent slice of the market.

Plenty of people bought into the idea. According to data from insurer Gallagher Re, more than $40bn has been invested in so-called insurtech start-ups globally over the past five years.

And yet consumer insurance remains largely undisrupted. The biggest motor insurers in the UK, for example, are the same ones that were around a decade or two ago — Aviva, Admiral, Direct Line et al. It is a similar story in the US. And the actual motor and home insurance we all buy is also little changed. Yes, we may buy from a price comparison site rather than a high street broker, but the policy itself is broadly the same as it used to be.

Contrast that with the revolutions that have taken place in retailing, travel, and countless other industries.

The wave of start-ups have struggled, so far, to make a big splash. US-listed Lemonade, one of the highest-profile insurtech start-ups, is still lossmaking and is forecast to remain so this year and next. Its share price has sunk by 59 per cent over the past year. Other US listed insurtechs such as Hippo and Root have fared little better.

In the UK, companies such as 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 made a dent in the £16bn motor insurance industry.

One big problem these start-ups face is that it is tricky to get people interested. “The customers just don’t care enough about their insurance,” says Paul De’Ath at consultancy Oxbow. “You have a very competitive market where the majority of customers are focused on price. They care less about the features.” Exciting the public about the latest iPhone innovation is one thing. Exciting them about the latest insurance innovation is a far bigger challenge.

And so the start-ups have had to compete with the big operators on price. Lemonade was launched in the UK last year. Its website tells a story. After telling visitors to “forget everything you know about insurance”, the next line says “keep your stuff safe from £4/month.” The explanation of how its policies work and the good causes it aims to support come much lower down.

They also have to work hard to win business. That means lots of expensive marketing, either through direct advertising or by operating through price comparison sites. Word of mouth will only go so far in insurance.

And, argues Rob Moffat at venture capital group Balderton, they have to get better at dealing with claims by weeding out fraud and keeping repair costs down. If these expenses blow out, no amount of smart data or novel business models will keep the business in the black. Even incumbent insurers find this tough — Direct Line on Wednesday warned on profits because of rising claims costs.

It may be tempting for the big insurers to allow themselves a little sigh of relief. The much-feared wave of disruption has been smaller than many feared. And as the tech industry retrenches and funding becomes more scarce, the prospect of a big, heavily backed new entrant is receding.

But the threat is still there. Consumers rarely love insurance, so there is still scope for someone to come in with an offering that will change their minds. And looming on the horizon are the big tech groups. Although none of them has made a big push into the sector so far, they have been nibbling at the edges. Amazon is the latest, with a plan to launch an insurance portal in the UK. Those envious glances have not gone away.


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