Challenging Traditional Insurance through InsurTech Innovation
In the rapidly evolving intersection of InsurTechs and Traditional Insurers within the digital transformation era, it is now imperative that insurance firms adapt to cultural change, regulatory demands, and a digital-first landscape.
Executive Summary
This white paper is intended to equip senior executives of global insurance companies, including CEOs, founders, and top-ranking C-Suite executives, with a comprehensive understanding of the challenges and opportunities facing the insurance industry. Our research initiative explores both InsurTechs and Traditional Insurers and offers essential insights for senior executives navigating this transformative terrain, before concluding with five key strategies for mutual growth.
Fundamentally, the insurance industry faces a critical juncture. It extends beyond technology, requiring agile working methods and strategic talent investment to ensure resilience and prosperity. Collaboration, innovation, and a shared vision of customer-centric solutions will be demanded. This paper distils these insights for senior-level executives, providing a pragmatic roadmap in the dynamic insurance landscape.
Introduction
The intersection of InsurTechs and Traditional Insurers in the era of digital and cultural transformation presents unique challenges and opportunities for both sides. In our commitment to empowering our clients within the new realities of the industry, this white paper serves as a practical guide to navigating the ever-evolving landscape of InsurTechs and Traditional Insurers.
We examine the intricate dynamics that define this landscape, offer in-depth insights, and finally conclude with five key strategies for achieving mutually beneficial growth.
In response to the growing concerns expressed by our clients, we launched a comprehensive research initiative covering both InsurTechs and Traditional Insurers, delving deep into the insurance industry’s challenges and opportunities, understanding the successes of individual companies and learning from valuable failures, with the goal of providing our clients with the best possible guidance and solutions. Our research into the intricate dynamics between these two segments is intended to offer companies tailored strategies for success.
Across the globe, insurance firms of all kinds face challenges: increasing cultural change as operating models are transformed, increasing regulatory scrutiny, pressure on margins, and the need to keep pace in a digital-first world. Digital transformation is no longer a competitive advantage; it is now a basic requirement to participate in a business landscape where platform-based business models and ecosystems are fast becoming an alternative to the traditional insurance models and paradigms.
Despite these challenges, the general sentiment is optimistic. There are opportunities for both InsurTechs and Traditional Insurers which lead to common areas of mutually beneficial growth.
Moreover, we hosted the "InsurTech Evolution: Challenging Traditional Insurance through InsurTech Innovation – 5 Key Strategies for Mutually Beneficial Growth" online event, in which key leaders representing Insurers, InsurTechs and Investors were invited to share their experiences. The event featured extensive discussions on the challenges and opportunities within the industry, and was augmented with pre-event interviews and surveys.
Key challenges confronting both InsurTechs and Traditional Insurers include: balancing innovation and operational stability, securing investments, modernising outdated legacy systems and disrupting legacy culture, balancing ideation and innovation, and seamlessly integrating new ways of working.
The culmination of our research is an in-depth awareness of the full InsurTech ecosystem, starting with an overview of the base landscape and concluding with detailed strategies for mutually beneficial growth.
The Pedersen & Partners pre-event survey featured a diverse composition of respondents, offering valuable insights into the insurance industry.
Based on the pre-event interviews and survey conducted for this paper, respondents identified the respective top five key challenges confronting InsurTechs and Traditional Insurers amidst the ongoing digital and cultural transformation.
This raw data allowed us to draw several interesting conclusions about the challenges facing the industry.
Digitising “yesterday’s processes and pathways”
One of the most pressing aspects outlined in the research in regard to digital transformation programmes is the fact that Traditional Insurers are focused on digitising “yesterday’s processes and pathways” i.e., moving application and claims processes online. At the same time, these players are aware that they are not doing enough to prepare the business for the next generation of insurance models. For example, what does a “traditional” auto insurer do when car manufacturers move to subscription models, or even autonomous vehicles?
Does the problem lie in legacy systems, or legacy thinking? Every major insurer has invested significant sums over the last 3-5 years in digital technology such as new policy and claims systems, so why are they still having legacy technology issues?
One further challenge that both sectors face is ideation versus innovation – the need to balance the continued search for the next big idea (with resultant costs) versus prioritising the ideas that can move ahead now (with a good chance of monetisation).
Founder’s vision vs scalability
InsurTech founders are often driven by a bold vision to revolutionise the insurance industry, but this vision can clash with the imperative to scale the business rapidly. Founder CEOs have a personal vision, and they are often unwilling to part with control during the scaling-up process. As the start-up develops and the product portfolio grows, founders must grapple with tough business landscapes, a high interest rate environment, and investors demanding profitable growth.
The CEO of a UK-based digital insurer points out that tension can also arise where external investors have different priorities in view of scaling faster. The question becomes unavoidable: should founders revise their original vision?
Escaping the founder’s trap: founder-driven vs. investor-driven dynamics angle
Conversely, when a business is not growing quickly, navigating the founder’s trap becomes more challenging. There are fewer opportunities to move or promote people or hire industry professionals, potentially leading to stagnation and internal challenges.
Funding shortages have led to a further unexpected consequence. A General Manager from a UK-based InsurTech explained that the investors have inadvertently “trained” InsurTechs to focus on subsequent funding rounds – i.e., achieving KPIs in order to increase valuation and go for the next funding round, with not enough focus on revenue generation and growth. When the investment money starts to dwindle, the founders do not have the mindset to focus on KPIs based on revenue generation.
Another observed phenomenon is that investors sometimes push companies towards the B2B space, as this segment has more capital availability and future fundraising potential. B2B and B2C each have their own pros and cons: B2B may have longer sales cycles, while B2C has its own challenges in customer acquisition and payback periods.
Change in focus: Investor focus on profitability
Despite the challenging investment landscape in the InsurTech sector, it is encouraging to see continued investments, albeit with a discernible shift in focus. Previously, investors were often captivated by the rapid growth potential of InsurTech start-ups, pouring funds into companies with innovative ideas and ground-breaking technologies. However, the recent evolution of the market has prompted a change in perspective, with investors now placing a greater emphasis on profitability rather than just pure growth. Investors are looking for companies that have developed solid business models, can effectively monetise their innovations, and have a strategic vision for navigating the complexities of the insurance industry, resulting in a higher likelihood of long-term success and returns.
Industry players emphasise the importance of recognising that investors might have different risk appetites, sometimes pressuring companies to shift directions based on the available capital.
Navigating regulatory hurdles
Navigating regulatory environments is a multifaceted challenge for InsurTechs. Regulatory complexities can vary significantly by region, country and even state, making it crucial for Traditional Insurers and InsurTechs to develop a deep understanding of the regulatory landscape in every market that they operate in. This understanding should extend beyond mere compliance; insurance players can encompass the ability to proactively shape regulations in ways that support innovation. Event attendees highlighted that it is imperative for founders to be well-versed in insurance regulation, and to prioritise it as a cornerstone of the business strategy. Non-insurance talents may have outstanding problem-solving and innovation capabilities, but their approaches can sometimes clash with insurance regulations, and this can cause problems and eventually lead to failure and weak governance.
Nonetheless, regulatory challenges can present as opportunities, as InsurTechs leverage partnerships and collaborations to navigate regulatory complexities effectively. The HKIA (Hong Kong Insurance Authority) rollout of the Open Application Programming Interface (API) Framework and the Central Register for the insurance sector¹ and the Bank Negara Malaysia (BNM) DITO (Digital Insurance and Takaful Operator) Licensing Framework are examples of such collaborative efforts².
Executive Leadership Talent Acquisition and Management
Challenges in hiring senior leaders
One prevalent challenge lies in attracting and onboarding senior leaders. For Traditional Insurers, there is often a preference for candidates with an insurance industry background, but while these candidates may possess a thorough understanding of how insurance companies operate, they sometimes lack the customer expertise and knowledge of new technologies that have already been adopted by other industries.
With a lower emphasis on employer branding compared to Traditional Insurers, InsurTechs typically compensate by offering salaries that are significantly above market rate, as well as ownership equity and high commissions, in a bid to attract new leaders quickly while retaining existing ones. Moreover, in the war for the best executives, Traditional Insurers also try to win over good talent in the market with money, as observed by the leader of one European broker. Overall, this is unsustainable for Traditional Insurers and InsurTechs alike.
Navigating organisational cultural changes
The ongoing technological transformation continues to have a significant impact on organisational culture, intensified by the adoption of digital and AI technologies, agile operating models, and the recent embrace of hybrid work arrangements. There is a need to address the diverse needs of a “new age” workforce (characterised by a desire for less rigid structures, greater flexibility, improved work-life balance, and a modern work dynamic), without alienating other employees who might not prioritise these elements. Finding the right kind of leadership to execute and manage this generational divide between workers within the structure and history of the insurance industry is not easy.
Hiring and role evolution in start-ups
It has been pointed out that when InsurTechs scale their businesses, they are not necessarily sure what the next senior roles should be. Should the InsurTech become more “corporate” in terms of senior leadership roles? Start-ups often fail to evolve their roles in tandem with growth. An InsurTech veteran and digital insurance pioneer that we spoke with believes that the kind of expertise founders require will necessarily change as the business grows. Similarly, the requirements for a Chief Financial Officer in Year One will not be the same as in Year Three.
Securing investments
Despite the challenges investment landscape in the InsurTech sector, we find it encouraging to see continued investments, albeit with a discernible shift in focus - signifying a maturation of the InsurTech space. Previously, investors were often captivated by the rapid growth potential of InsurTech start-ups, pouring funds into companies with innovative ideas and groundbreaking technologies. However, the recent evolution of the market has prompted a change in perspective, placing a greater emphasis on clear pathways to profitability rather that just pure growth³.
Challenges with partnerships
While there is great potential for collaboration, partnerships, and joint ventures between InsurTechs and Traditional Insurers, challenges may arise due to “cultural differences” between the two. To InsurTechs, Traditional Insurers move too slowly and are overburdened by complex procurement procedures, resulting in missed opportunities.
Conversely, from the perspective of Traditional Insurers, InsurTechs might lack understanding of the regulatory environment, fail to adequately address certain risks or neglect to address the impact of their propositions on the entire value chain. Insurers often require data-backed decisions in order to sign off on innovative propositions from InsurTechs, which can be challenging in situations rewhere InsurTech start-ups need to rely on Insurers.
Innovation cycles become longer due to Traditional Insurers’ legacy technologies, limited appetite for risk and innovation, and the lack of a common language between InsurTechs and Traditional Insurers. However, we do see a clear consensus that partnerships can be successful, although it is essential for both parties to adjust and accommodate to each other’s communication modalities and ways of working. Partnerships with InsurTech specialists in various fields, such as damage reporting, can streamline Traditional Insurers’ operations and enhance customer experience. There is a desire to strike a balance between collaboration and competition, ensuring the mutual benefit of all parties.
Human capital strategies for growth
Leaving room for agile growth
For InsurTechs to grow successfully, it is imperative that they build an organisation structure which can adapt quickly to market shifts and regulatory changes, while still being able to accommodate an innovation culture and risk-taking. Are InsurTechs CEOs/Founders keeping their finger on the pulse of their human capital strategies to a sufficient extent, compared to how they focus on industry and consumer developments?
In order to remain agile and profitable, InsurTechs are exploring various ways in which they can act more like insurers. One approach is to become Managing General Agents (MGA). The MGA model allows InsurTech start-ups to test the value of their competitive advantage and demonstrate the effectiveness of their concept. The MGA model allows these start-ups to maintain a degree of control over their vision without a large amount of capital⁴. However, it should be noted that InsurTechs moving to an MGA model do tend to lose their innovative approach to the market, as they are rather dependent on the risk carrier’s commitment and control over the products⁵.
When considering pioneer hires, using titles sparingly is essential; an eagerness to offer attractive titles such as “Chief Financial Officer” at the initial stages can obstruct the company’s long-term growth trajectory later on. For example, the CFO role at Year 1 will substantially evolve, and will look very different as an InsurTech enters its third year. It is crucial to think long-term about the kind of roles and people that the InsurTech might need as it expands. The InsurTech needs a long-term overall human capital strategy that allows room for growth, in order for the company to bring in more senior professionals and create more senior roles as the business expands.
Strategies to strengthen talent attraction
Showcasing the sector’s potential: Attracting skilled, ambitious, and talented senior leaders presents a multifaceted challenge for InsurTech companies. The relatively nascent nature of the InsurTech sector compared to the established giants can be a double-edged sword; while it offers an opportunity for innovation and rapid growth, it may deter experienced senior leaders who are more accustomed to working within established, stable industries. Convincing these leaders to pivot to the disruptive, dynamic world of InsurTech will only be possible with skilful showcasing of the sector’s potential. Showcasing the business model, core values and plan for success: Competition for top-tier talent is fierce. Not only do InsurTech firms compete amongst themselves, but they also contend with other tech industries like FinTech and Digital Health, which often offer better compensation packages. In addition to offering competitive salaries, InsurTechs must clearly articulate their unique value proposition, showcase a well-defined business plan, and paint a compelling picture of the InsurTech journey. Employees are increasingly interested in the core values and social impact of the companies they work with. Hence, showcasing and embodying an InsurTech’s core values can help to attract and retain the right leadership talent, by demonstrating “thrive and drive” opportunities that foster transformative change in the insurance landscape.
Trust and chemistry with stakeholders: a few insights
Trust and chemistry are important, not just within the internal team but also with external stakeholders such as investors. In one case, a CEO of a US Digital Insurer turned down a potentially perfect role because he felt he couldn’t trust the founder.
Growth strategies for InsurTechs
The table below provides a concise view of key strategies and considerations that InsurTechs can deploy to address the challenges of business growth and management:
| Attracting Talent |
|
|---|---|
| Navigating Regulations |
|
| Securing Investments |
|
| Preserving Original Vision |
|
“As a former investor, I know it’s essential for a company to choose the right investment partner – like choosing the right partner to marry. It’s vital to be clear upfront about the company’s goals and ensure alignment with the investor’s vision. It’s essential to be genuine and not merely show investors what they want to see. Misrepresentation can lead to issues down the line if there’s a gap between the promised direction and the actual one.” – CEO, UK Digital Insurer.
Strategies for Traditional Insurers
| Digital Transformation versus Legacy |
|
|---|---|
| Cultural Shifts |
|
| Attracting and Retaining Talent |
|
| Navigating Regulations |
|
| Securing Budget |
|
| Clarity of Objectives |
|
It is evident that an ecosystem approach allows insurers to adapt to market changes and foster innovation through collaboration, enhanced customer service, value-added propositions and promote customer trust through collective responsibility. The shift to a collaboration/partnership mindset starts from within – industry leaders often point out that major transformation changes in traditionally conservative sectors must start with the need to first change the mindset of the leaders.
This entails nurturing leaders to become more tech-savvy, externally focused, and open to learning and incorporating new ideas and concepts. Companies must maintain a forward-looking vision and truly understand their customer challenges and pain points. In Asia, for example, there is more focus on bringing in senior leaders from outside the insurance sector – for example, banks and financial institutions – as these industries have themselves gone through digital transformation, and already understand the end-to-end customer journey.
When building leadership teams in the industry, relying solely on one’s immediate network can be limiting, especially for leaders whose networks are restricted to the insurance sector. InsurTechs and Traditional Insurers are increasingly engaging with executive search firms to conduct market mappings outside their own industries to identify relevant leadership talent. A new leadership team hire from a different industry can bring in fresh perspectives, energy, and innovative thinking, which can be necessary in a traditionally rigid sector such as insurance.
The potential of “acqui-hiring”
Especially common in the tech industry, acqui-hiring allows insurers to secure talent for projects or new business lines that they need to deliver on quickly. The “acqui-hired” group of employees come with the required specialist skillsets, have worked together as a team for a substantial period of time, and have a successful track record. Traditional Insurers with capital and cash flow can consider aqui-hiring as an alternative solution for talent challenges. Acqui-hiring a start-up also allows Traditional Insurers to gain individuals with a proven entrepreneurial mindset.
Addressing data challenges through collaboration
Traditional Insurers sit on a vast amount of customer data, acquired from sources that include call centres, forms, chatbots and mobile apps. With enormous repositories of data and many teams contributing to and running analytics, it is challenging to disseminate information across departments. Moreover, Traditional Insurers typically lack the up-to-date technology which could potentially derive more value out of this data for the business.
Conversely, while InsurTech firms are faster when it comes to decision-making, tech adoption and the use of AI, they still have too little data of their own, and must therefore buy it. A data collaboration between an InsurTech and a Traditional Insurer would be the optimised combination.
The emergence of open insurance, closely linked with embedded insurance, stands out. This innovative model has the potential to foster greater efficiency, increased revenues, and reinforced business partnerships by sharing data resources with other organisations. By embracing the open insurance paradigm, insurers can not only tap into new revenue streams but also cultivate closer ties with other players. Ultimately, this approach adds substantial value for customers through the provision of novel services. Simultaneously, shifting customer demands are pushing insurers to modernise their services at an unprecedented pace. Trends such as open banking, embedded insurance, e-commerce, mobile commerce, artificial intelligence (AI), and machine learning are reshaping the industry landscape⁶.
By understanding the challenges and opportunities, adopting innovative strategies, and fostering collaboration, the insurance industry can successfully navigate the complexities of digital transformation.
5 strategies for mutually beneficial growth
The intersection between InsurTechs and Traditional Insurers offers immense potential for mutually beneficial growth. By understanding the challenges and opportunities, adopting innovative strategies, and fostering collaboration, the insurance industry can successfully navigate the complexities of digital transformation.
- Customer-Centric Innovation: InsurTech companies do best when focusing on developing innovative products and services that cater directly to the evolving needs of customers. Using data-driven insights, InsurTech companies can design personalised insurance products and services that appeal to niche customer segments, driving customer acquisition and retention. Meanwhile, Traditional Insurers have accrued immense quantities of customer data over the years. By collaborating in this space, both types of insurer benefit mutually, as do the customers.
- Strategic Partnerships and Collaboration: While the potential for the InsurTech sector is bright, Insurers should refrain from viewing InsurTechs as competition, but instead as potential gateways to unlocking more value to customer and revenue streams. Partnerships amongst Traditional Insurers, InsurTechs, tech companies and other relevant players will yield benefits from shared resources, knowledge, scalability, and customer bases. These collaborations will expand market reach, diversify offerings, and enhance scalability.
- Scaling Talent and Leadership: Successful scaling requires attracting, developing, and retaining top talent who can drive the company’s vision and growth. In addition, InsurTech founders should focus on succession planning and leadership development to ensure that the company’s innovative spirit and growth momentum grow with the company. There is a great deal to be learned from insurers who master the strategies for effective leadership succession planning.
- Regulatory Navigation and Compliance: Learning from the best practices of Traditional Insurers, InsurTechs should actively engage with regulators and invest in RegTech software-as-a-service solutions to ensure they can navigate the complex insurance regulatory landscape effectively⁷. Achieving regulatory compliance will enhance credibility and can open up new growth opportunities. A proactive approach to engagement in constructive dialogues with regulators can ensure that regulation is incorporated into innovation processes.
- Expansion into New Markets: Geographic and demographic expansion can fuel growth. By entering new markets and targeting underserved populations, InsurTechs can acquire new customers and diversify their revenue streams by partnering with Traditional Insurers that are already present and experienced in these markets.
Traditional Insurers (Opportunities)
- Resources and Expertise: Traditional Insurers possess substantial resources, industry experience, and established customer bases, providing a strong foundation for growth.
- Market Dominance: Established Traditional Insurers have brand recognition and market dominance, which can be leveraged to introduce new products and services.
- Collaboration with InsurTechs: By collaborating with InsurTechs, traditional insurers can infuse innovation into their operations and offer customers new and improved services
- Risk Management Expertise: Traditional Insurers have deep expertise in risk management, which can be leveraged to enhance underwriting processes and risk assessment for both parties’ benefit.
InsurTechs (Opportunities)
- Innovation Canvas: InsurTechs have the canvas to disrupt and innovate in an industry that is traditionally resistant to change. They can introduce cutting-edge technologies to improve efficiency and customer experiences.
- Niche Targeting: InsurTechs can identify underserved or niche segments and cater to their specific needs with tailored solutions, allowing for rapid market entry and growth.
- Agility and Speed: Startups can pivot quickly, adapt to market demands, and innovate at a rapid pace, giving them a competitive edge over larger, more cumbersome incumbents.
- Customer-Centric Approach: InsurTechs can prioritise customer-centric experiences and digital engagement, catering to the preferences of modern tech-savvy customers.
Conclusion
The insurance industry is at a crossroads. To effectively navigate this dynamic environment, Traditional Insurers and InsurTech firms must forge more partnerships and collaborations, fostering innovation through a shared understanding and a common goal of delivering customer-centric solutions.
Moreover, this transformation extends within organisations, requiring a shift beyond new technologies to embrace agile working methods. It is crucial to understand the importance of investing in the right talent for the future of the sector, for organisations to position themselves for sustained growth, resilience, and relevance in this ever-changing environment.
²https://www.bnm.gov.my/-/dito-outcome
⁴https://www.milliman.com/en/insight/getting-%20with-the-program-insurtech-startups-seek-mga-success
⁵https://www.hellogetsafe.com/en-de/posts/the-two-breeds-of-digital-insurance-3defaeb5c3a0
⁶https://www.globaldata.com/store/report/open-insurance-market-analysis/