InsurTech startups targeting the property/casualty insurance industry proliferated in multiple ways over the last few years. Relatively few of them focus on reinsurers, however, and Will Dove has some thoughts as to why.
Executive SummaryAlthough reinsurers have made key investments in InsurTech that often benefit their customers and partners, the reinsurance industry has not been directly experiencing the full InsurTech explosion. There are few startups laser-focused on improving the reinsurance business. Not many tech entrepreneurs are familiar with reinsurance; for most, it’s a business behind a wall. But now more ReinsurTech startups are beginning to break through, and some see continued growth in ReinsurTech as inevitable.
“It’s a complicated business,” said Dove, chairman and CEO of Extraordinary Re, a startup platform designed to help insurers access reinsurance capacity supported by a trading market for institutional investors. “It requires a lot of industry knowledge and expertise that often doesn’t reside in the same brain as people who have the technological capabilities and programming skills.”
That may be, but industry observers and others see interest increasing in InsurTech for reinsurance—or to borrow a term, ReinsurTech—and its potential to transform and modernize the reinsurance market, a sector steeped in tradition and resistant to change.
Reinsurers themselves are sticking their toes back into the InsurTech waters after embracing new technology nearly two decades ago, something Standard & Poor’s noted in a 2017 report didn’t much change reinsurers’ overall business model moving forward.
To be sure, there aren’t many reinsurance-focused InsurTech startups just yet, noted Nathan Pacer, co-founder and chief research officer of Venture Scanner. His firm is currently tracking a few dozen startups focused on reinsurance, but they represent a “relatively small part of the 1,500 startups bringing innovation to the overall InsurTech sector.”
Pacer has a two-pronged theory as to why the number of ReinsurTech startups is relatively small. He attributes the trend to two factors: the InsurTech surge for the broader insurance industry versus reinsurance, and the nature of reinsurance as a business model.
“InsurTech is currently experiencing a large wave of innovation touching upon all aspects of insurance. So, it’s not that surprising any one area happens to be smaller given that massive amount of activity,” Pacer said.
Pacer also argues that the business model for reinsurance is more contained, which contributes to it being less exposed to innovation compared to other parts of insurance.
“Other InsurTech areas interact directly with insurance consumers and their data, which lends itself to a larger amount of experimentation on different channels, products and business models,” Pacer said. “The B2B focus along with the high degree of regulation around reinsurance makes startup activity a little more focused.”
Matthew Jones, a principal at Anthemis, a fintech-focused venture capital and advisory firm, agreed that there aren’t many InsurTech startups exclusively focused on reinsurance. The issue comes down to the idea that innovation primarily riffs off of personal experience—something that reinsurers are removed from due to their nature, according to Jones.
“Personal experience is often what inspires and drives people to start new businesses,” Jones said. “How many people out there buy reinsurance? How many people understand the process of property treaty underwriting? [It is] far fewer than those that interact with ‘standard’ insurance, at least.”
Because of this, Jones argues that relatively few entrepreneurs see reinsurance as an opportunity, which has contributed to fewer startups in the space.
Still, he has noted reinsurers are boosting investment in InsurTech “significantly” and are having an impact although the investment focus areas are limited.
“This funding is largely going toward disrupting [reinsurers’] current client base (i.e., primary insurance) rather than shaking up their own reinsurance business,” Jones said.
He said reinsurers’ investments are creating new clients including new full-stack primary insurers or ensuring direct access to certain pools of risk such as working with managing general agencies. They are also “creating optionality around corporate development activities,” Jones said.
According to Standard & Poor’s, technology has evolved to a point where InsurTech, or ReinsurTech, is positioned to profoundly change processes and practices for reinsurers this time around.
“ReinsurTech has the capacity to significantly change how the traditional reinsurance market operates,” S&P asserted in its 2017 report. Still, S&P said the effect will likely be gradual, “giving traditional reinsurers time to adapt their business models and reposition themselves for new opportunities and challenges that will inevitably emerge.”
A 2017 report by JLT Re noted that InsurTech startups were entering the re/insurance market but in a collaborative and nondisruptive way.
“The vast majority of InsurTech firms are currently focused on supporting incumbents and improving their businesses, rather than supplanting them,” concluded the JLT Re Viewpoint report, “Insurtech: Rebooting (Re)insurance.”
InsurTechs have been targeting some key areas where they can make a transformative difference for reinsurance even indirectly, according to Extraordinary Re’s Dove.
“Many of them focus understandably on the consumer-facing side of the insurance industry, whether that is an app for purchasing coverage more easily or more quickly [or they] have kind of usage-based insurance models,” Dove said. But “a lot of interesting work is going on in the data and analytics side, [such as] capturing new sources of info to better set premiums or predict risk levels, or to monitor insured assets and have earlier notification of claims.”
Dove said that InsurTech targets that benefit reinsurers include “anything that affects performance of a product that could be reinsured [or] could have significant impact on a reinsurer or be used by a reinsurer to improve their business and track their business more effectively.”
Extraordinary RE fits in the ReinsurTech space because it is “the first trading platform for a full range of insurance liabilities,” Dove said. He noted it can help investors “get access to different types of insurance risk, even if they don’t happen to have access to reinsurance. Extraordinary Re can also aid insurance companies seeking to configure their reinsurance risk. He describes the company, founded in 2013, as “a 21st century version of the Lloyd’s marketplace” hoping to “help change the insurance industry and insurance-linked securities market for the better.” It is scheduled to launch before the end of the year.
ReinsurTechs to Watch
Pacer cites Extraordinary Re as a ReinsurTech startup to watch, along with Quantemplate and Analyze Re.
“Their aim is to help reinsurance companies move forward with their digital transformation efforts and make things more transparent and market-oriented,” Pacer said.
There’s dedicated reinsurance technology, which he said Anthemis portfolio company Tremor focuses on with state-of-the-art auction technology that matches risk with capital so reinsurance contracts can be placed in real time online.
For data and underwriting, Jones cites Insurdata, a startup and Anthemis investment that provides high-resolution property data to reinsurers and insurers so they can better understand their portfolio risks.
Jones said automation is another startup category in the space, for which omni:us is a good fit. This Anthemis portfolio company extracts insights from unstructured data so otherwise manual, paper-based processes can be automated.
Whatever the number of ReinsurTech startups entering the market may be, they are important to the industry, even though the highly regulated industry sometimes prevents startups from disrupting the sector outright, at least for now, Pacer asserted.
Pacer believes the industry should be paying attention to the startups currently entering the market because they “are much more agile, and therefore more likely to develop game-changing technologies and business models.” Those companies could be a smart way for reinsurers to transform themselves outright, he added.
“Reinsurance incumbents should watch startups in their space carefully,” he said. “With the right partnerships, they may be in a good place to find an acquisition target to give them a technological advantage over their other incumbent competitors.”
However, Jones is hesitant about predicting that the number of ReinsurTechs will be increasing much.
“Given that entrepreneurs may otherwise never hear about reinsurance, the lack of experienced reinsurance talent in InsurTech is probably one of the biggest constraining factors around the number of reinsurance-focused startups,” Jones said.
Once these startups prove themselves, this could change, he added.
“From a venture capital perspective, once it has been proven that strong exits are possible [by startups dedicated to reinsurance] more capital is likely to flow toward ideas in that space, in turn attracting more talent from the reinsurance industry, and a self-fulfilling cycle begins,” Jones said.
But Dove predicts ReinsurTechs will increase in number because they are targeting a vital piece of insurance that is ripe for new ideas.
“I think from my perspective, reinsurance is the ultimate provider of capital for the insurance industry, where risk of capital gets connected,” Dove said. “It is a very sophisticated and challenging marketplace, but that is really where a lot of the value provided by the insurance industry as a whole is concentrated.”
Dove is convinced that as entrepreneurs gain further understanding of how the reinsurance industry works, “it is natural to expect new kinds of innovations to help improve functioning of that market.”