Small business insurance offers fertile ground for InsurTech

As InsurTech continues to scythe a modernizing path through the insurance industry and disrupt traditional value chains, the $100 billion small business insurance sector is shaping up as one of the most promising for investment. Rarely out of the specialist media headlines these days, InsurTech is a burgeoning phenomenon in the insurance industry.

That’s why Willis Towers Watson Securities has recently launched a Quarterly InsurTech Briefing, in collaboration with Willis Re and CB Insights, to monitor deal activity and to reflect on some of the emerging investment trends.

Significant declines in early-stage funding volume hint at start-ups shifting from the fundraising to product launch stage

The first edition shows funding volume of $283 million in the first quarter of 2017 for 38 transactions, broadly similar to the $271 million raised for 43 transactions in the final quarter of 2016. However, significant declines in early-stage funding volume in each of the last two quarters hint at start-ups shifting from the fundraising to product launch stage.

The most obvious, concrete signs of disruption in the insurance industry have occurred in the personal lines sector, much of it related to improved pricing models and distribution. For example, the three major direct-to-consumer personal auto carriers in the U.S. – Geico, Progressive and USAA – have increased their market share by 17 percentage points in the last 20 years

Parallel lines: personal and small business insurance

But similarities between personal lines and small business insurance customers suggest that the small business insurance market is now poised to experience similar digital disruption. The landscape is highly fragmented, with the largest carriers each only controlling approximately 6% of the market, meaning there could be significant premium opportunities for those with attractive technology propositions.

Approximately 40% of small business owners are willing to buy insurance online today

This is supported by industry research that suggests that up to 25% of total small business insurance premium could be digitally underwritten by 2020 – partly due to demographic trends and changing small business owner behaviors. For example, small businesses are forecast to grow an average of 6% annually through 2020, at which point over 60% of businesses could be expected to be owned by tech-savvy Millennials/ GenXers.

Equally, recent surveys have indicated that approximately 40% of small business owners are willing to buy insurance online today, subject to the availability of solutions that meet the needs of their organization.

Key players in the expected disruption of the small business sector, including tech start-ups, are likely to be:

  • E-brokers: Providing consumer friendly digital experience (shopping, quoting, education, service, etc.)
  • Aggregators: Providing small businesses with a view of potential available insurance options
  • Adjacent players: Non-insurance digital small business services companies beginning to partner
  • to cross-sell insurance
  • Technology enablers: Assisting incumbent carriers and brokers to develop and offer digital services
  • Traditional insurers/distributors: Partnering with start-ups, developing direct capabilities and becoming innovative around technology

And, indicative of the gathering pace of change, there are already numerous examples of incumbent, traditional insurers creating proprietary small business platforms and partnering with distribution-focused start-ups and early stage businesses.

On the money trail

Yet, for all the small-business-specific and broader InsurTech initiatives taking place, several other factors continue to influence the ability to successfully monetize industry change.  Incumbents face pressure from entrepreneurial businesses targeting friction costs within the traditional insurance value chain, a shift in emphasis from loss protection to risk mitigation and the continued influx of alternative capital into the (re)insurance sector.

Consequently, it’s important for Industry leaders to sustain an open mind, foster innovation and seize the opportunities from promising potential applications. This may involve embracing a “fail fast” mentality if they are going to identify technologies that will help them adapt their existing business models for a streamlined insurance industry that is likely to look much different in the future than it does today.

About Rafal Walkiewicz

Rafal Walkiewicz is Chief Executive Officer, Willis Capital Markets & Advisory (WCMA).  He joined Willis in 20…
Categories: Analytics, Capital Markets, Insurance and Risk Management, Reinsurance | Tags:

Leave a Reply

Your email address will not be published. Required fields are marked *