While 90 percent of insurers fear they will lose business to a FinTech start-up, only 43 percent say they have put FinTech at the heart of their corporate strategies, according to report published by PwC.
As customers demand personalized insurance products and companies increasingly look to cut costs, the rise of FinTech in the insurance industry (InsurTech) is a disruptive force that should not be ignored, indicated the PwC report, titled “Opportunities await: How InsurTech is reshaping insurance.”
Global insurance companies need to embrace “a creative culture” in order to reduce the threat of losing market share to InsurTech companies, said the report, based on the findings of the “2016 PwC Global FinTech Survey,” which surveyed management from 79 insurance and start-up companies across the globe.
“InsurTech start-up companies are accessing and analyzing data in new ways and in record time, not hindered by legacy technology systems as their incumbent competitors are,” said PwC in a statement accompanying the survey report.
Over one-third of traditional insurance business “might be lost due to FinTech popularization,” which is the pessimistic — or realistic — view “shared by one in three insurance executives,” PwC said.
Even though 43 percent of insurers say they are putting FinTech at the center of their business strategies, this does not mean action is being taken, said PwC, noting that only 28 percent are exploring partnerships with FinTech companies and less than 14 percent are actively participating in ventures and/or incubator programs.
Indeed, 38 percent of insurers don’t see the need to have FinTech as an essential part of their strategy, and, as a result, 32 percent do not deal with it at all, or even explore opportunities, which could put their businesses at risk, PwC cautioned.
Embracing InsurTech Disruption
FinTech is a disruptive force that will be impossible to ignore. Annual investments in FinTech start-ups have increased fivefold over the past three years, with cumulative funding reaching US$3.4 billion since 2010.*
“Incumbent insurers who are currently focused on catching up with their competitors around customer centricity and other current trends are missing the opportunity to become proactive,” the report said, noting that insurers need to demonstrate their willingness to play in the new InsurTech space to position themselves as “front-runners in the new insurance era.”
The percentage of insurers who launched their own InsurTech subsidiary (5 percent) or acquired a FinTech company (5 percent) is the lowest in the financial services industry, PwC confirmed.
On a positive note, however, the report said, there is a gradually growing awareness among insurers that there is a need to address changing market demands. “…[I]nsurers are increasingly active in taking on a strategic approach and embracing InsurTech,” the report said, adding that a significant portion of the insurance industry is “getting up to speed.”
“Those who address the ongoing disruption in an agile and strategic way will gain customers’ trust and, hence, win the market,” the PwC report affirmed.
Cutting Edge Technology
“Insurers need to encourage a culture of innovation and creativity within their organizations to ensure that the progress being made is not squandered,” commented Stephen O’Hearn, global insurance leader at PwC.
“There is a risk of missing an opportunity to deliver customers a similar experience to one they already receive from retail and technology companies. One size simply does not fit all in insurance anymore and, by working alongside InsurTech companies, companies can begin to reposition themselves at the cutting edge of customer interaction,” O’Hearn added.
“InsurTech will be a game changer for those who choose to embrace it. Insurers have unrivaled access to consumer data and using cutting edge technology to thoroughly analyze it could result in significant benefits for both the company and the man on the street,” he emphasized.
“Only by acting today and embracing both the challenges and opportunities presented by InsurTech will the industry be ready to tackle tomorrow’s challenges. Those who are savvy enough to address the ongoing disruption sooner rather than later will reap the benefits and emerge as market leaders,” O’Hearn went on to say.
Threats & Opportunities
The PwC report highlighted the perceived threats related to the rise of FinTech within the financial services industry: Pressure on margins (cited by 73 percent of respondents), loss of market share (69 percent) and increased customer churn (59 percent).
“Incumbent insurers see IT security as the biggest barrier to working alongside start-up companies. The start-ups themselves highlight ‘difference in management and culture’ as the biggest challenge in the relationship,” PwC went on to say.
In addition, it listed the potential opportunities of FinTech as cost reduction, differentiation, improved retention of customers, and additional revenues as the most significant potential gains from FinTech.
Drilling down into the cost reduction advantage of FinTech, the report said that the move towards cloud-based platforms means lower up-front costs and lower ongoing infrastructure spending. When compared to mainframe-based technologies, “this innovation could reduce costs up to tenfold.”
In addition, disintermediation, self-servicing and automation of core insurance functions will lead to further savings, the report explained.
Steps to Take
PwC highlighted four steps insurance companies should take to make the most of the InsurTech revolution:
Exploration. Savvy incumbents are already monitoring new trends and innovations and establishing a presence in innovation hotspots such as Silicon Valley, Singapore and London
Strategic partnerships. Partnerships with start-up companies and building pilot solutions will become increasingly popular amongst insurers who wish to see first-hand what creativity can offer them
InsurTech involvement. Start-up incubators and strategic acquisitions are efficient ways for insurers to address specific problems, which otherwise would take far longer to tackle.
New product development. By listening to, and interacting with, start-ups incumbent insurance companies will discover current and emerging risks and coverage needs – they should focus on adapting and refining their product portfolios in response
“The differences between start-ups and incumbents should be embraced as both are vital to the future of the industry,” said Jonathan Howe, UK insurance leader at PwC.
“If the long-term mindset and experience of insurance companies can successfully be partnered with the creativity and agility of start-up companies, the industry as a whole will make progress in solving problems and bringing truly innovative products to market,” Howe affirmed.
Methodology
The 2016 PwC Global FinTech Survey gathered the view of 544 respondents from 46 countries, principally chief executive officers, heads of innovation, chief information officers and top management involved in digital and technological transformation, distributed among five regions.
* This figure is based on companies followed in PwC’s DeNovo platform, which focuses on FinTech.
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