July 19, 2023 In an unprecedented move, Europe’s two leading insurtech events, InsureTech Connect (ITC) and Digital Insurance Agenda (DIA), joined forces in 2023 to create the ITC DIA Europe conference. This gathering, held in June in Barcelona over a span of two days, brought together approximately 2,000 participants comprising insurance providers, intermediaries, financial backers, and insurtech entities. Engagements with top insurtech company leaders, established insurance industry figures, and prominent financiers provided us with five key observations regarding the prospective developments in the insurtech sector.
The performance of insurtech companies in Europe is dividing into two distinct paths.
Despite facing four years of widespread economic fluctuations and geopolitical instability, the moment has come for European insurance technology startups to expand their reach. However, there’s a noticeable divide in the industry. While some firms have thrived and grown exponentially in these tough conditions, others have struggled to create and maintain viable business strategies. McKinsey’s examination of PitchBook data reveals that about 10 percent of insurance tech companies established between 2015 and 2019 have ceased operations.
Embedded insurance is establishing a foundation for prospective expansion.
Integrating insurance offerings directly at the point of sale with other consumer goods is becoming a prevailing trend in the industry, indicating a lasting change in how insurance is marketed and bought. This transformation sees an increasing number of businesses outside the traditional insurance sphere, such as automakers, tech and telecommunications firms, utility services, and supermarket chains, forming alliances with insurance providers. They are motivated by the goal of securing a portion of a market that, according to McKinsey projections, could produce up to $900 billion in annual gross written premiums by the year 2040. However, many insurance companies are still grappling with how to appeal to consumers not typically interested in insurance, and only a handful have been successful at scaling up. Meanwhile, insurance technology companies are recalibrating their strategies to concentrate on broker-mediated distribution channels.
Insurtech companies are redirecting their attention towards broker-mediated distribution channels.
Five years back, the term “insurtech” primarily referred to selling insurance directly online. Of late, particularly in Europe, insurtech companies have been pivoting towards broker-mediated distribution channels to tap into a significant customer base that still favors buying insurance through an agent or broker. The traditional model of selling insurance directly has struggled due to several issues like the complexity of insurance products that need to be explained, the customers’ inclination towards customized advice, and the challenges in forging strong relationships when limited to just online interactions. The growth of the direct-insurance model has been at a standstill in North America and Europe since 2018, and it has not managed to achieve even a 15 percent share of the market worldwide, as per McKinsey Global Insurance Pools data.
The gap in coverage where people are not fully insured is increasingly being occupied by new and unknown risks.
A study by McKinsey into the European insurance sector has revealed a significant shortfall in coverage, with a particularly noticeable deficit in the nonmotor insurance segment. This shortfall represents a missed opportunity of roughly €300 million in potential premium income. The highest levels of uninsured individuals and businesses are found in areas addressing newly emerging risks such as cybersecurity and climate-related issues. Insurtech companies are in a competitive rush to create innovative products. They are leveraging data analytics, AI for risk assessment, and adaptable policy models in order to offer thorough insurance solutions that meet the changing requirements of both private customers and enterprises, thereby aiming to bridge the existing insurance coverage gap.
Insurtech companies are tapping into the potential of generative artificial intelligence (AI).
Gen AI 1 Gen AI presents revolutionary possibilities for insurance companies by enabling applications that automate the underwriting process, identify false claims, and forecast how customers will act. During the conference, both new entrants and established companies demonstrated different ways gen AI can be used, such as in tailoring individual risk evaluations, managing claims, and interacting with customers. Start-ups in the insurance technology sector can quickly exploit and refine these gen AI applications thanks to their lack of outdated systems and their nimble, adaptable nature, potentially opening up fresh prospects.
The insurance sector is confronting a variety of difficulties, such as high distribution costs, a broadening spectrum of emerging risks, sluggish technological integration, and restricted access to risk-related capital. However, despite the instability in the market over the previous year and a half, technology-driven insurance companies are poised to address these obstacles and grow their operations, possibly through collaborations with established market players.
The writers would like to express their gratitude to Mahima Agarwal, Christina Maier, Samantha Prymaka, and Dennis Weinbender for their significant input to this article.
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Generative AI refers to a type of algorithm, like ChatGPT, which has the capability to produce original materials spanning various formats such as sound, programming code, visuals, writing, mock-ups, and film. To understand more, refer to the article “What is generative AI?” by McKinsey, dated January 19, 2023.