Insurtech has a complementary place in the traditional insurance world, despite remaining uncertainty in the industry about how it will function on a wide scale, Standard & Poor’s said in a new report.

“We do not expect traditional insurance business to be fully replaced by insurtech companies, as the insurance sector is highly regulated and capital-intensive, with barriers to entry,” S&P noted. “Instead, we are seeing larger established insurers actively invest in setting up insurtech joint ventures through which they can take advantage of their proprietary data, rather than outsourcing to pure technology-based entrants.”

Insurtech companies and technology are envisioned as ways to bring innovation and disruption to the insurance industry, and this has happened through startups, but also including larger company investment participation.

Allianz, for example, has Allianz X, a division focused on developing new insurtech concepts and companies. Hiscox is among participants who helped back Indio, a commercial insurance broker platform. Liberty Mutual and USAA are among the backers behind Snapsheet, a startup developing virtual auto claims technology and services that recently raised $20 million in new financing.

Lemonade launched as a peer-to-peer insurer focused on homeowners and renters insurance. In addition, Root recently debuted as an auto insurance startup that uses telematics and a customer’s smartphone to developer the cheapest rates to customers based on current driving data; Munich Re, Odyssey Re and Maiden Re are its reinsurance backers.

Ability, Innovation Does Not Equal Disruption

These and other startups and initiatives have all been pitched as industry disrupters. Standard & Poor’s notes their ability and innovations, but doesn’t see them as changing the world just yet.

“Compared with established insurers, we regard many insurtech companies as very small, with weak business positions, relatively limited data-sets, and relatively scarce financial resources,” the Standard & Poor’s report states. “Moreover, insurance industry expertise is required to exploit big data analytics to produce more-accurate risk classifications.”

In other words, Standard & Poors said that “the boards of insurance companies may be overestimating the market impact of many of the small insurtech companies that have arisen.”

The S&P report gives these startups credit for having drive and for lacking “legacy liabilities and structures traditional insurance companies have inherited.” What is more, these new companies have state-of-the art information technology systems and aren’t saddled with managing “costly physical distribution networks,” S&P noted.

But S&P said insurtech startups are weakened by the lack of “back book and strong client relationships that many established insurers rely on when financing new business.” What’s more, most of these young companies are in niche spaces.

With that in mind, the startups are hardly disrupters right now, according to S&P.

Niche status “makes them less able to seriously disrupt large insurance companies that have diversified insurance products offerings,” but larger insurers “are not standing idly by,” S&P said.

“The technologies that insurtech companies are employing offer traditional insurance companies an opportunity to revamp their products, services and distribution – and reduce costs too,” the report noted.

Standard & Poor’s forwards the idea that the market has worked well with insurers “increasingly starting to collaborate and engage by acquiring or partnering with insurtech companies, setting up internal venture capital funds to invest, or establishing startup incubators to attract and support young entrepreneurs to insurance.”

Once again, millennials come into play here, too. Standard & Poor’s said it expects millennials to help accelerate the change at traditional insurance companies toward a number of tech-advanced approaches for buying insurance. Put differently, millennials’ need for insurtech-friendly insurance buying approaches could change the industry as much as any startup.

Source: Standard & Poor’s

This article first appeared in Insurance Journal’s sister publication, Carrier Management.

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