Insurtech: Poor Pioneer Performance Will Discourage New Money

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Disrupting a highly regulated and conservative industry was never going to be easy. Insurance companies have attracted significantly less investment than their peers targeting other parts of the financial sector. But the pandemic has accelerated digitization. Large sums are injected into potential insurgents.

Global venture capital investments have more than quintupled over the past four years to $ 11.7 billion in the first nine months of 2021, according to PitchBook. European insurance companies have a combined enterprise value of 23 billion euros, according to Dealbook.

Advances in AI and the Internet of Things offer new ways of doing business. The emergence of more data sources is fueling interest in “parametric” insurance which offers rapid pre-defined payments based on trigger events. London-based FloodFlash, which partnered with Munich Re in November, provides fast-paying flood coverage based on pre-installed sensors that measure the water level on site.

Another London-based insurtech Tractable, which achieved unicorn status in June, uses ‘computer vision’ – a type of AI that trains computers to interpret the visual world – to perform lightning-fast assessments of damage photos caused to a car. San Francisco-based start-up Kettle is using deep learning and AI to better identify the risks of climate change. For the 2020 California wildfire season, the company says its technology would have reduced insurers’ claims ratio – losses to earned premiums – by 89%.

But there are challenges. Regulators are wary. AI-based decisions must be explainable. There might be some unease about algorithms that make more people uninsurable or force them to provide more data as an eligibility price.

Another concern is the poor performance of many US listed insurance companies. The HSCM Public Insurtech Index, a basket of publicly traded insurance companies, has lost more than a third of its value in the past year. In some cases, growth-hungry companies have taken on too many risky clients, too cheaply.

It would be a mistake to tar all the insurtechs with the same brush. These companies are a diverse group. But the difficulties of listed stocks will likely make it harder for their successors to prove their worth.

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