Reinsurers Turn To Tech: Insurance Market Cannot Carry Double
Anyone who looks at InsurTech investment data, can identify the level of investments from the traditional insurance companies in InsurTech startups. An interesting angle related to this matter is the reference of the startups to the reinsurance companies and the benefit that the reinsurance companies derive from the nature of their activity.
InsurTech startups do not want the insurance companies as shareholders
Logically, insurance companies are supposed to be much more involved in investing in startups because they have a lot of capital to invest and moreover, they need new and interesting technologies. There might be a possible reason that the startups do not want an insurance company to be a shareholder in their projects because this will cause them to be associated and identified with the same insurer, which will impair their ability to work with other insurance companies and severely limit the type of investors in future rounds. Therefore, the entrepreneurs do not want an insurance company to be a shareholder in their companies.
Such opportunities are well estimated by the reinsurers, as they understand the disruptions carried forward by InsurTech startups, as well as the impossibility to stop the upcoming significant changes brought to the markets. Clive O’CONNELL, partner and head of insurance and reinsurance at McCarthy Denning, has already predicted a potential decline in the requirement for reinsurance globally. The reinsurers strive to look for new opportunities, while time is running out.
“I had a lot of contact to the startups and can confirm that many people see the dependency and are afraid of it, because the investments are not only the shares but also include a certain participation right and therefore the limitation arises,” confirms Paul MIZEL, founder of an InsurTech startup. “In my opinion, the fear is justified with some insurance companies, because with the participation exclusivity, they can also be regulated contractually. For example, the market in Germany with more than 525 insurance companies is very competitive and every diversification advantage means a market privilege. On the other hand, a partner in the insurance industry also means market access — which is essential for startups.”
Indeed, here reinsurance companies enter the matter and have a built-in advantage for startups. On the one hand, they have the entire world of insurance like underwriting, insurance products, claims. On the other hand, the reinsurance companies are not identified with any single insurance company, and therefore the entrepreneurs have no future restriction on the activities of the startup and the identity of the shareholders. “Insurtech ventures who focus on product innovation and distribution, need to engage with large reinsurers to cede a part of the risk. The prime reason why an insurer or insurer would invest, is to gain early access to technology that could either increase their ability to take risk, access a new market or leverage the technology to enhance their existing processes,” says Kalpesh DESAI, the President and CEO of Agile Financial Technologies.
Moreover, the reinsurance company is also an excellent distribution channel for the technology of the same startup so that the introduction of a reinsurer as a shareholder is a very big advantage, and the reinsurers themselves benefit from it.
A hypothesis why the reinsurers around the world get very active in InsurTech
Right now the reinsurers are the biggest beneficiaries of the current situation and any change may cause them a financial damage. They understand that the insurance field is changing these days, but why do they invest so much time and resources to promote the change that could cause them losses? It is clear that underwriting results will lead to greater profit for the reinsurers. But we see that they invest not only in the underwriting field but also in the area of service, quality of insurance coverage, contact with customers and more.
So, there is a hypothesis, interesting but simple — the reinsurers seek to reach to the end customer directly through the new technologies. And they plan to do it in the near future.
At this day, the reinsurers' customers are not the insured but the insurance companies. The reinsurer must pay to the insurance company a high commission, as well as to the brokers. The InsurTech can enable them to get to know the end customers (the policyholders) better and later on, will let them be in direct contact, reducing their expenses, and improving the underwriting — and their profits. The market is not expected to grow significantly during the upcoming years, but the disruption will cause the changes in distribution of the powers, the shares of the market. It may prove to be even devastating for some of the players.
The reinsurers have to constantly adapt their business models. In the case of industrial risks, there are now ever increasing deductibles for reinsurance customers. “In the face of historically low interest rates, new competitors such as pension funds or hedge funds are penetrating into their business. The prices for catastrophe bonds and other securitized insurance risks have slipped, margins have deteriorated rapidly,” Paul MIZEL describes the current shifts in the market. “These developments are tempting reinsurers to take action and invest in innovation in a variety of ways, setting up co-operations such as B3i and also getting involved in InsurTech startups.” Globally, the reinsurers have a growth problem, that’s why they turn to new tech, confirms Martin JANDA, Senior Software Engineer, Blockchain and IT Security Expert from Germany: “In the growth markets, they are unable to reach customers who are becoming wealthier. This is mainly due to the encrusted administrative structures of the primary insurers. With cost-effective insurance solutions, reinsurers want to reach their clients in Africa and Asia themselves and are increasingly penetrating primary insurance. Many enter into cooperation with government agencies. In the emerging markets, insurers are particularly active in the development of blockchain. In India, a consortium of thirteen insurers intends to develop a central customer register based on blockchain technology.”
Such a phenomenon occurs today in many countries around the world. Insurance companies seek to sell directly to the policyholders and skip many products from brokers, thereby achieving the same goal that reinsurers want to achieve in the future. What the insurance companies do today to brokers and agents, the reinsurance companies will do in the future to the insurance companies. “New distribution models, enabled by technology, gives reinsurance access to the end consumer. Cut the middle man and increase margin, whilst lowering the end customer premium. Win-lose-win. I think the hypothesis is reality,” says Daniel SCHMIDHEINY, Co-Founder & COO of insurance company from Switzerland.
Technology will increase profits. In a world where distribution methods are better, most insurance products will not be required by intermediaries, and therefore the volume of insurance companies and brokers will greatly reduce what will cause the main business to be in the hands of individual entities. A reasonable possibility for the reinsurers. That's the core reason they're very active today.