Some of the biggest names in the UK insurance sector have signed a pledge to promote digital disruption in the industry and encourage cooperation with tech start-ups. It is hoped the scheme will help accelerate digital transformation in a sector that has been slow to embrace the benefits of tech.
Admiral, Aviva, Brit, ensure, Lloyd’s, Munich Re Digital Partners and Investec are among the signatories of the expanded Fintech Pledge, a government-backed drive designed to set standards for partnerships within financial services. Initially launched last year for the banking sector and based on the UK Fintech Review by Ron Kalifa, chairman of payments company Network International, it has now been extended to cover insurance.
Launching the extended pledge this week as part of Fintech Week, chancellor Rishi Sunak explained it is intended “to boost growing fintechs, push the boundaries of [UK] digital finance and make financial markets more efficient”. Insurance can benefit because there is significant opportunity within the industry to digitise, explains Axe Ali, head of financial services deal strategy and value creation at KPMG. “I think [the insurance sector] is ripe for disruption. It’s not been disrupted at all in any meaningful or significant way”.
So-called insurtech has been growing rapidly around the world in the past five years. Ten start-ups globally achieved $1bn ‘unicorn’ valuation in the past two years, seven in 2019 and three, Lemonade, Root Insurance and Clover Health, in 2020. Covid-19 stalled the progress of insurance start-ups slightly as early-stage pre-money valuations dipped to $21.5m in 2020 from $25.2m in 2019. Late-stage pre-money valuation decreased significantly to $80m from $235m the year before, according to a report on Insurtech in 2020 by PitchBook. But start-ups attracted a financing volume of $6.6bn in the first quarter of 2021, 840% higher than Q1 2020 and 340% higher than Q1 2019, according to an insurance technology market update by investment bank Houlihan Lokey.
Fintech Pledge encourages Insurtech
Digital disruption in the financial sector is nothing new but the insurance industry has been late to join the party. “I think insurance companies have in many ways have been the laggards to fintech,” says Ali. “They haven’t really felt the same level of pressure to evolve their business and operating models as those who operate within the traditional banking space.” The pandemic appears to have been the final push for the industry to embrace change. Industry insights released by Deloitte indicate that 48% of insurance executives polled agreed that Covid-19 “showed how unprepared [their] businesses were to weather this economic storm,” while only 25% strongly agreed their business had “a clear vision and action plan to maintain operational and financial resilience” during the crisis.
It is hoped the pledge will encourage insurers to cooperate with the insurtech start-ups. The ability of insurers to “enhance their own value propositions as well as support emerging fintechs has always been pretty nascent,” Ali says. But, he adds, “I think being a signatory of that pledge demonstrates their commitment to establishing and developing partnerships with fintechs, but also the tech sector overall.” The insurance sector has been watching and learning the lessons of fintech, explains Victoria Roberts, director of fintech delivery panel and insurtech board at Tech Nation. “I think actually the banks and fintechs have been through this already and recognised that there’s a lot to be to be said for working together.”
How must the industry change?
There are many elements of the traditional insurance industry that will need to be updated to accommodate insurtech start-ups. Procurement and due diligence processes and legal and contractual requirements are not designed to be compatible with start-ups, states a report into productive partnerships within the sector released by Tech Nation. According to the report, industry professionals on both sides have agreed that insurers should develop a clear strategy for engaging with insurtech start-ups. “There’s so much that Insurtech has to offer through plugins or technology that improves the consumer offer,” Roberts says.
Digital disruption in the insurance industry is in its infancy, and Ali hopes the pledge will help accelerate the process and bring about much-needed change. “The industry needs to move on,” he says. “Insurance is a product that is still very traditional in the way it’s offered, serviced and sold to individuals. Whether it actually meets the requirements of today’s world, I’d be hard-pressed to say ‘yes’.”