The week begins with a few research-related announcements in the fintech and financial services space. CB Insights announced the availability of its State of Insurtech report for the first quarter of 2024, and the Federal Reserve Board issued a summary of climate risk resiliences exercises conducted recently by a handful of big banks. While the focus on this column in on the former, the publication of the latter shines some light on potential answers to the problems raised in CB Insights’ report.
With regards to the state of insurtech, there is still a great deal of hesitation among investors. CB Insights noted that quarterly funding for Q1 of this year was only $0.9 billion, the lowest level since 2018. Property & casualty insurtech suffered the most, with a quarter-over-quarter decline of 25%. Q1 2024 was also the first time since 2018 that there were no “mega-round deals” – investments of $100 million or more. There was some good news in Europe, as the number of deals increased slightly, as did the median insurtech deal size. But the overall message continues to be caution when it comes to investor attitudes about investech.
What Ails Insurtech?
Digital disruption: The challenge of digital disruption is one that the insurtechs share with the broader fintech community. The rise of enabling technologies such as AI will both steepen customer expectations as well as accelerate competition between companies to effectively deploy new, innovative solutions.
The insurance business is ripe for innovation. From the massive volume of manual processes and the document-intensive nature of the business to the challenges of underwriting and refining statistical models, the idea that AI will be a powerful ally in the insurance business is a no-brainer. One firm, Zippia, has predicted that as much as 25% of the insurance industry could be automated via AI by 2025.
There are obstacles. The disposition of regulators toward change in the industry is a major concern as new technologies are introduced to enhance operations like underwriting and statistical modeling. A regulatory authority that is indifferent, or hostile, to new technologies or their application in certain use cases can send a powerful signal that innovators are better off deploying their solutions in other industries or other geographies. Looking at the U.S., if the behavior of regulators toward innovators in the crypto space and the Banking-as-a-Service space is any indication, then we can expect to see insurtech and their investors to tread cautiously.
There are also challenges with regard to talent. Now that almost every company in every industry is looking to up their AI game, the fight over top talent in AI and automation has become all the more competitive.
Nevertheless, there is no doubt that AI promises to revolutionize many key processes that insurers rely on. And as those processes become more efficient – and as those companies best exploiting those AI-enhanced processes take greater market share – it is easy to see investment dollars returning to insurtech as investors begin making their bets on winners and losers in the space.
Climate change: The impact of climate change is another instance in which challenge and opportunity go hand-in-hand for insurtechs. The growing incidents of extreme weather – from temperature extremes to increasingly powerful hurricanes, floods, and other phenomena – have put a major strain on both property and casualty (P&C) insurers as well as those homeowners and individuals who rely on their protection. Note that CB Insights reported the biggest quarterly drop in funding this year was among P&C insurtechs. And of the top 10 P&C insurtech deals of Q1 2024, only three were U.S. based companies.
While many fintechs involved in climate change and sustainability have focused on helping businesses and institutions measure and better manage their carbon footprints, there is a need for technology companies in the insurance space that can help these firms build the models they need to better anticipate climate change-related risk. I mentioned the Federal Reserve report on climate resiliency earlier. The Fed’s report was a summary of an exploratory pilot Climate Scenario Analysis (CSA) exercise held by six U.S. banks: Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, and Wells Fargo. Among the conclusions that are especially relevant to this conversation were these two:
The role of insurance in mitigating climate change risks for consumers, businesses, and banks was emphasized, with a call to monitor changes in insurance costs and their impacts on specific markets and segments.
and
Participants expressed the high uncertainty and difficulty in measuring climate-related risks, making it challenging to incorporate them into risk management frameworks on a routine basis.
Insurtechs – and fintechs, for that matter – who are able to help financial institutions resolve these two issues, will find their services in demand as companies seek ways to quantify their own exposure to climate change risk. It is easy to envision other enabling technologies, such as quantum computing, also playing a part. Together, they could provide the kind of powerful modeling that would accurately gauge the risks of climate change and its potential impact on markets, communities, businesses, and families alike.
Photo by Vlad Deep on Unsplash
