Insurtechs’ Innovation, Big Data Catch the Attention of Reinsurers
Reinsurers are benefiting from rapid access to insurtechs’ high-quality data.
- Marie Suszynski
- August 2021
As an insurtech, auto insurer Root uses driving data through an app its customers download to their phones. Root then monitors insureds' driving behavior, including whether they're being distracted by texts, how gently they turn, their acceleration, and how smoothly they brake.
“There's so much data that can be captured on a mobile phone” using the sensors in the phone that come standard, said Isaac Espinoza, head of reinsurance at Root. “We capture massive amounts of data that reinsurers really value because they didn't have a window into that previously.”
Root also collected data on the percentage of reduced driving that took place during the COVID-19 pandemic simply by tracking mileage and shared the data with reinsurers.
Across the board, global reinsurers are showing increased interest in working with insurtech companies to better understand emerging risks, according to Carlos Wong-Fupuy, AM Best's senior director of global insurance ratings, who, like Espinoza and a lineup of executives, participated in an InsurTech Live panel discussion in May.
It's important for companies to remain relevant, and “we're seeing interest in innovations and insurtechs all across the board,” Wong-Fupuy said during the discussion, which focused on the increasing prominence of insurtechs in the reinsurance industry. The largest global reinsurers have specialized units that look at the potential solutions and monitor them closely, he said.
Innovation is the focus of a new criteria piece AM Best is using during its formal rating process. During rating meetings, AM Best analysts are having separate discussions on how innovation initiatives are being managed. “We're quite positive in that respect,” Wong-Fupuy said.
Wong-Fupuy, who is actively involved in AM Best's rating process for the world's largest reinsurers, oversees a team of AM Best analysts responsible for the financial ratings of global reinsurance organizations covering the United States, Bermuda and European markets.
AM Best sees segments such as automobile, health and reinsurance as most likely to find leading positions in innovation. They don't have to undertake massive projects, Wong-Fupuy said. Even small initiatives can bring value. “The important thing is that there is input from different parts of the organizations,” he added.
Insurtechs use technology innovation to capture high-quality data that helps their businesses and makes them more attractive to reinsurers.
“One of the things that's exciting for reinsurers about startups is the quality of data and how much they know about their book,” said Jerad Leigh, co-founder and CEO of Supercede, a company that created a platform for reinsurers. Supercede cleanses cedent data and trades it to reinsurers via its platform.
That rich set of data is something reinsurers, who are actuarial heavy, can appreciate. Insurtechs are also transparent with the data they share—another thing reinsurers have been receptive to, Espinoza said during the InsurTech Live discussion.
“They like that we're nimble, we're accessing big data, we're focused on customer experience—a lot of things we think are the future and we're heading in the right direction,” he said.
The better-quality data insurtechs offer is an important benefit. Traditionally, the data reinsurers received can have challenges, such as missing information or it may be formatted in ways that aren't easily digestible. Supercede built tools to help solve those issues.
“But I think reinsurers are getting really excited for a future world where the core client data is profoundly better,” Leigh said.
Also, the speed at which insurtechs share the data is a plus. Reinsurers have the potential to interpret the data insurtechs offer, combine them with their modeling capabilities, and use it to price and develop terms and conditions for their reinsurance agreements at a speed not normally seen with traditional insurers, Wong-Fupuy said.
“The added value that insurtechs can provide is agility, with how quickly that information is gathered and how granular the information can be,” he said.
Timeliness is important, since reinsurers sometimes learn about losses nine months later when the claims start coming in, according to Frank Perkins, chief executive officer and co-founder of INARI, which offers a cloud-based blockchain platform.
The technology provided by insurtechs means reinsurers can receive that information in nine seconds rather than nine months. Combined with the transparency of the data, insurtechs are able to create a foundational relationship with insurers, Perkins said.
The companies can also use the data to show how they're improving their businesses. After making changes to its business, insurtechs can show how the data is evolving to represent a shift in the book, Leigh added.
An Explosion of Growth
The term insurtech began being used about five years ago, according to Espinoza. At the time, only a few companies fell into the category and, combined, they ceded perhaps up to $100 million to reinsurers. Today, insurtechs are easily ceding $1 billion, he said. They include well-known companies such as Root, Lemonade, Metromile, Hippo and Next—along with newer companies.
“I expect this area to grow quite a bit and be a huge part of the reinsurance industry going forward,” Espinoza said.
Insurtechs offer a way for reinsurers to remain relevant, Wong-Fupuy said, but like any startup, there are issues about costs and their financial viability. Innovation has to be translated into financial results.
Profitability has been elusive for many property/casualty insurtechs, BestWeek reported in May. Although Farmers Group subsidiary Toggle posted an annual profit in 2020, several other insurtechs posted net losses.
Espinoza pointed to insurtechs' growth rates, which are much higher than traditional carriers, and their higher loss ratios. Significant growth is usually associated with poor performance or more aggressive pricing and gaining of market share. As a result, insurtechs tend to have higher loss ratios and expense ratios, and their combined ratios can suffer, he said.
Those key metrics run higher for several reasons. Insurtechs that are growing rapidly have a heavier portion of their book classified as new business, which usually brings with it a penalty on the loss ratio side, he explained. Also, expenses are higher because the companies are still making investments in their brand and are working on distribution and building a following. They also have large up-front investments in technology.
Because of this dynamic. the mindset among insurtechs is vital. “When you're innovating, it's sometimes new territory,” Perkins noted. “You need to have a fail fast mentality.”
Wong-Fupuy said that, as part of their rating meetings, analysts give (re)insurers the opportunity to discuss their innovation initiatives and to talk about what hasn't been successful and what they've learned from it. When partnering with insurtechs, reinsurers want to be there for the medium to long term with a business that's viable.
“There has to be trust and there has to be confidence. The reinsurer, in the end, will need to have some control over the quality of that business,” Wong-Fupuy said.
Finding the right balance between remaining relevant and watching the long-term transformation of the business turn sustainable profits are what reinsurers are looking for, he said.
Insurtechs have left a mark on the insurance industry. While the industry tends to be cautious and moves slowly when it comes to major changes, insurtechs have pushed advances in technology to the forefront, according to Best's Special Report DTC: Expanding Distribution and Seeking Opportunities.
The added value that insurtechs can provide is agility, with how quickly that information is gathered and how granular the information can be.
The report called insurtechs a catalyst for transforming the industry by bringing technological advancements and an expectation among consumers about how to do business.
New insurtech entrants are driving competition and innovation, according to Best's Special Report Reinsurance, Autos, and Health the Most Innovative Lines of Business. Many insurtechs are being launched to help solve legacy problems, such as operational efficiency, underwriting distribution and claims functions.
Reinsurers provide instant credibility to insurtech startups when they invest in them, according to the report. When reinsurers back startups, those companies quickly gain traction and scale, outpacing their peers.
Over the last several months, investments have been flowing to insurtechs as they continue to grow. Cyber managing general agent Coalition recently announced that it had raised $175 million to spur growth and expansion. In May, Parametrix Insurance said it raised $17.5 million to expand the reach of its IT downtime products, which protect businesses from significant financial damages during outages caused by third parties.
Also, managing general agent Corvus, which covers cyberrisks, said in March that it had raised $100 million in a Series C round. Also in March, Counterpart said it had raised $10 million to expand its management liability insurance platform.
Globally, insurtech investment reached an all-time high during the first quarter of 2021. Willis Towers Watson reported global investment in the sector reached $2.55 billion during the quarter.