Global perspectives on insurtechs

In this episode of the McKinsey on Insurance podcast series, we discuss how insurtechs are driving innovation and disruption in the insurance industry. Experts from four different regions weigh in on rising valuations, threats and opportunities for incumbents, and the long-term outlook of insurtech.

An edited transcript of the conversation follows. For more conversations from McKinsey on Insurance, our podcast series about the trends, disruptions, and strategies that are reshaping the insurance industry today, subscribe to the series on Apple Podcasts, Google Podcasts, Spotify, or Stitcher.

Pradip Patiath: Welcome, everybody, to McKinsey on Insurance. My name is Pradip Patiath. I’m a senior partner in Chicago, and I’ll be hosting today’s conversation on the state of insurtech and what it means for the future. I’m joined by Tanguy Catlin, a senior partner in our Boston office; Alex Kimura, a partner based in Singapore; and Simon Kaesler, a partner in our Frankfurt office.

So we have global perspectives on the important topic of insurtechs, which are tech-driven insurance companies that take advantage of new technologies to provide coverage or to reinvent business systems in this digital era. Insurtechs are certainly extending innovation throughout the sector. We’ve seen something similar in other sectors as well—such as healthcare, retail, and banking. They’re creating a potential competitive threat to incumbents, but also creating new opportunities for everyone through partnerships.

For example, we saw the massive $29 billion acquisition by Square of Afterpay in Australia: a large, cross-border transaction, not in the insurance industry but in banking and payments. Is this a forerunner of what’s likely to happen in insurtech and insurance?

Tanguy Catlin: Three years ago, Prudential made a multibillion-dollar acquisition of Assurance IQ, and over the past couple of years, we have seen a number of incumbents accelerate their transformations through the acquisition of organizations like insurtechs. I’m not surprised at all to see this trend of carrier incumbents acquiring insurtechs. That’s the natural evolution of the market.

For me, the question is, as those insurtechs are now approaching billion-dollar valuations, will they be out of reach for traditional carriers as acquisitions? Or will we see acquisitions of smaller organizations that are a little bit less mature, which will create opportunities for incumbents to add to their growth?

Pradip Patiath: Excellent perspective from the Americas. Let’s move to Europe. Simon, what’s the view from out there?

Simon Kaesler: I think it’s very similar. Over the past few years, we have seen the first larger transactions by some incumbents investing into larger insurtechs and into digital players along the insurance value chain. I would expect this to continue. At the same time, many insurtechs are refocusing toward collaboration and B2B instead of B2C. About five years ago, many insurtechs in Europe focused on attacking incumbents. I think this has really changed. We estimate that about two-thirds of all insurtechs are now focusing on collaboration instead of attacking.

Pradip Patiath: Thank you. And what about Asia, Alex?

Alex Kimura: Just on that transaction side, I’m not surprised. I see a lot of incumbents really learning and partnering, mainly as a way to differentiate and to access new customer segments and market segments, as well as to develop new capabilities that they couldn’t create otherwise. So that sort of transaction doesn’t really surprise me.

I guess the valuation is really a function of how people view customer lifetime value on some of those deals. And we haven’t seen much of that in Asia yet. We’ve seen a lot of the Chinese insurtechs really growing by building out their own capabilities and their own market access. So there’s more to come. Obviously, China’s leading the way. We’re seeing a lot of activity coming out of Southeast Asia, as well as India. So we’re expecting more activity in that space.

Pradip Patiath: Thanks, Alex. And just to stay with you for a second, I think there’ve been very few big unicorns in insurtech, as there have been in banking and in payments. Is that changing in Asia? Are you seeing the emergence of end-to-end, large-scale insurtechs?

Alex Kimura: There are several unicorns in China, and we’re seeing some unicorns developing in India as well. But just to remind everybody, five years ago investors really didn’t invest in this space, especially the venture capitalists. It’s a relatively new space, and investors get really excited when there’s an exit market for these investments. We’re seeing that already.

A lot of insurtechs are really maturing, as you mentioned. They were mainly focusing on distribution, sometimes on claims, but now they are really expanding across the value chain. I would expect a trend of insurtechs acquiring incumbents, given the lofty valuations and the access to capital that insurtechs increasingly have.

Pradip Patiath: That’s provocative, Alex. I mean, McKinsey estimates between $8 billion and $9 billion of insurtech funding, probably even a bit higher this year with the way it’s trending. Tanguy, do you agree with Alex that you might actually see insurtechs buying incumbents in the Americas?

Tanguy Catlin: I think that underlying the question is whether insurtech and incumbents are competing with one another, or whether they will eventually need to find ways to partner. We’ve seen the rise of insurtech for two reasons. One is, unfortunately, that there are still many significant customer pain points. And two, there are very, very attractive profit pools. Both the incumbents and the insurtechs want to remove those customer pain points and to protect or capture those profit pools. And therefore, we’ve seen a lot more collaboration between insurtechs and carriers.

Those with capital will probably try to integrate, whether it is carriers acquiring insurtechs or high valuations enabling reverse acquisitions. Eventually, the two could be integrated, which would lead to a big question. We should not forget that there are also big tech companies who are looking at those customer pain points and those profit pools. What will be the role of those technology companies in the future? Could they be the disruptor of insurtech and the carriers?

Pradip Patiath: There are very large carriers that are domiciled in Europe, where the industry structure looks very different compared to the US. Do you think insurtechs can compete and create propositions that actually thrive, or will they get squeezed out by the very large carriers that already exist in most European markets?

Simon Kaelser: I think you’re absolutely right. There are many very large carriers here, and they have started to look into the insurtech space. The big carriers have set up and made significant investments in their own insurtech funds, and they have also established big partnerships. At the same time, we see that insurtechs in Europe have not really scaled. Combined, their market share is probably in the low single-digit percentages, maybe even below 1 percent. The scale is currently lacking. But at the same time, the expectations are quite high. You mentioned high insurtech valuations in other geographies. In Europe, too, we see valuations that are five times or ten times the premiums coming in, which is five to ten times higher than most of the carriers. We saw peak-level funding last year. There are many ingredients that will help insurtechs on their journey to scale and collaborate with carriers, and it is likely that some will find attractive niches and customer groups. But the jury is still out. I mean, the current scale is not yet there.

Pradip Patiath: Let’s switch gears a little bit and talk about where the activity is, across P&C [property and casualty], life, and across the value chain from distribution to claims. Simon, I’ll stay with you for a second in Europe. Given what you just said, are you seeing more emphasis in P&C, in life, or in health?

Simon Kaesler: It’s becoming much broader now. While it started with B2C, it also started with distribution and P&C—even motor within P&C. So that was a strong focus in many of the end-to-end plays. Today, we see activity across all lines of business and along the entire value chain. There’s a bigger shift from front end to back end. The first insurtechs focused very much on disrupting the customer interface. And they found it difficult. Customers are very sticky; they don’t trust new brands. Insurtechs are now focusing more on the back end—on claims, on policy admin, on pricing analytics, and so on. The same is true for life and health insurance.

Pradip Patiath: How about in the US, Tanguy?

Tanguy Catlin: I think the picture is quite similar today. You still have two-thirds of insurtechs focused on property and casualty, followed by about 20 percent for health and life each. As Simon mentioned, the focus has continued to be on the front end with distribution. I think there are two trends that that are worth noting. Initially, insurtechs were aiming to be a point solution. But as you mentioned, you have a number of insurtechs that are extremely successful, and they actually are getting massive valuations. So now, they are trying to own the end-to-end customer acquisition, product underwriting, and claims operations. That’s relatively new and requires a level of scale that’s quite different. They are no longer trying to be a point solution; they are trying to be a system supporting the industry. Whether they are claims platforms or another type of technology platform, they are gaining enormous traction, too. While the overall picture is slow to move, you see new types of insurtechs emerging with scale at a relatively rapid pace.

Pradip Patiath: Tanguy, do you think regulators are actually also catching up to the fact that the rules might be slightly different? Does that help or hurt insurtechs?

Tanguy Catlin: In general, I’ve seen the regulators catching up. There is still a learning curve for regulators around advanced analytics, machine learning, and new types of techniques. There are a number of constraints around the types of data that one can use. But I don’t think that’s unique to insurtech. Across the insurance industry, the regulatory framework continues to evolve with the new techniques that carriers are using to underwrite risks.

Pradip Patiath: Alex, it’s slightly different in Asia, right? Insurtechs leverage large amounts of public and private data and use analytics and AI [artificial intelligence] models, and so on. What’s the debate in terms of the regulations and the ethics of using AI, and how does it affect insurtechs?

Alex Kimura: I’ll start off with the trends as well. The first generation of insurtechs has largely been P&C, but, more broadly, it’s really focused on commoditized products where the cost structure is quite clear. And because it’s clear, it’s probably easy to disrupt.

Now, we’re talking about the second generation, where you get more data, especially more access to third-party data. Then it becomes a lot more interesting in terms of disrupting the underwriting and pricing space. This is where you get more activity on the life side, where the underwriting and onboarding and pricing become more complicated, especially for long-tail products. If insurtechs get access or build the expertise or the capabilities to do that, then you’ll see a seismic shift on the life side of insurtech.

I think one of the things that we’re seeing a lot in Asia, especially in Singapore, India, and some other countries, is access to primary data in the form of NRIC, which is a National [Registration] Identity Card, which is akin to a Social Security card in the US. But it also has all your financial information, all your medical information, and so on. You can imagine the amount of information that’s publicly accessible to these companies and what they can do with it in terms of product innovation, with onboarding and underwriting and pricing. That’s the second generation, especially in Asia, where the fluidity to disrupt is going to be there.

Tanguy Catlin: We’ve talked about insurtech in the context of insurance. But there is this new phenomenon of ecosystems that are actually expanding beyond the insurance industry. Based on what you see in Asia, do you think that the third generation is going to be integration beyond insurance to a broader end-to-end ecosystem?

Alex Kimura: Yeah, absolutely. I think Asia, in some respects, is leading in the ecosystem space, and it’s really being driven by China and some of the ecosystem players in Southeast Asia. They’re really major daily active-use players, where people use the platform seven, eight, ten times a day. And insurance plays a big part in the customer journey. I think that is very prevalent. It’s a very prized space. I think a lot of insurers are now at the mercy of these platform players because they have the last-mile access to the customer and that touchpoint on a daily basis. Insurance companies have access, but not very frequent—maybe once every year, ten years, 30 years. We’re talking about a totally new touchpoint that insurance companies don’t have. And they will not be orchestrators of the ecosystem. They will be participants in that ecosystem simply because they don’t have frequent access to the end customer.

Pradip Patiath: Simon, what’s your view on Tanguy’s question?

Simon Kaesler: Some of the larger carriers are experimenting and expanding their footprint in the ecosystem—for example, large multicarriers in the mobility ecosystem. But it’s certainly not to the extent we see in Asia yet. What is interesting is that other noninsurers that have customer access—like car OEMs, telco companies, energy companies—are now exploring insurance. They are trying to embed insurance products into their main products. That’s a trend that seems to be seriously picking up here in Europe. We are not just talking about insurance distribution, but these noninsurers are building their own insurtechs, their own insurance businesses, in-house.

Alex Kimura: The really interesting space that we really haven’t talked about is retirement and longevity. I just spoke to somebody at Singapore University, and they said that somebody born today will live to be 170. What does that look like from a product perspective? What does that look like from a mortality-table perspective in terms of pricing a product? A lot of the incumbents are not really ready for that sort of retirement space where people may live to 160, for example. It’s a totally new space where insurtechs—with all that data and access to data, and the ability to create products based on different kinds of data—would be in a primary position.

Pradip Patiath: Has there been real innovation in terms of rethinking the product and the entire proposition? Or are insurtechs playing the game of “We can do it better and faster because our tech systems are more efficient and more modern”? I’d welcome a bit of a debate on this.

Tanguy Catlin: Pradip, I would answer that on two levels. The first one is: Let’s define the product of insurance and how it needs to evolve. And then let’s define how you assess the risks against that product and how it needs to evolve.

Historically, insurance as a product was a claim when something happened to you. Moving forward, I think society’s asking insurance companies to move ahead in the value chain and prevent something bad from happening. It’s moving from protection to prevention. You start to see companies try to change behaviors, to lower the risks. We are in the first inning of that journey, but there is a lot of activity and energy going to that place. So the product is going to change.

Take self-driving cars as an example. The nature of the product is going to change from personal lines to commercial lines, from coverage that is high frequency–low severity to something very different. There will be a massive shift in the nature of the risks. And new risks are emerging, like cybersecurity and others. There will be a lot of innovation on the product front.

I think what we have seen so far is innovation in how we underwrite the risk. In the past, we were looking for proxies for risk, like credit scores in the US for how people drive. I think technology is now allowing us to measure real behaviors. If you look at the last couple of months, most insurtech activity has been massive consolidation in the space of telematics. This is where I suspect the fiercest innovation will happen. We have access to new information that is much more predictive, and carriers and regulators are going to evolve and adapt to these new sources of data. But eventually the big, big change will be driven by the evolution of the product from protection to prevention. And that, I would argue, is just getting started.

Simon Kaesler: I would agree that there are many things that are going to change in the next couple of years, with regard to the risks and customer interactions and how people buy insurance. When you look at the current insurtech landscape in Europe and how they make money, there hasn’t been much reinvention yet. Insurtech is making things better, improving certain processes across the value chains of insurers. They are maybe improving the customer experience, but they are essentially doing the same thing that insurers have done in the past. Today, there is not so much reinvention. But there may be potential in the future.

Pradip Patiath: Can we compare the evolution of insurtechs to something we have observed during our lifetimes—for example, the development of quantum computing and artificial intelligence? Alex, you said that a child born today will live well over 100 years. What does this mean for insurtechs?

Alex Kimura: A lot of insurtechs are looking at data differently and looking at onboarding and the customer journey quite differently. Incumbents really look at products from a risk lens, and they price everything from a risk lens. But a lot of these insurtechs take a very deep customer lens. And therefore, the way they build products and the way they price products is going to take into account a long-term horizon. Obviously, there are behavioral aspects to data. There is health data. All of that data needs to be factored in, especially for a longevity product. A lot of the [current] long-term products are based on an actuarial table that was built before World War II. They’re becoming obsolete. I think all that will change when insurtechs redefine how things will be onboarded, how things will be priced, and how things will be resolved in terms of customer pain points.

Pradip Patiath: So Julie, who is born today and is likely to live to well over a hundred, is more likely to buy her insurance from insurtechs than from incumbents?

Alex Kimura: If [insurtechs] understand the customer well, then yes. If the customer really trusts the brand and trusts the whole package, yes. But again, insurtech is still in its early days, in the first generation. Once they build up their scale or their credibility, then sure, I think it’s inevitable that’s going to happen.

Pradip Patiath: Simon, do you think the European industry structure will allow insurtechs to get to that point where Julie buys her insurance from an insurtech?

Simon Kaesler: I think it’s not clear yet who will win. Of course, insurtechs have all the funding, but that said, there has been no disruption or big reinvention yet. However, they have potential and a lot of skill. At the same time, there are also other relevant players at the party. The big insurance groups also have massive firepower and funding to invest heavily in innovation. Other players are also capturing significant shares of the market.

Take, for example, price comparison websites. It’s not a new model, but it’s a model that is actually the fastest-growing channel in Europe at the moment. These websites are also investing in technology, improving their processes, adding analytics, and so on. They are gaining a lot of scale in many of the European markets. Big corporations are also discovering insurance; tech companies are discovering insurance. I think it’s really quite exciting to see who will scale fast enough to become a winner. Because in digital insurance, at least in some markets like motor insurance, it was always winner takes all. The ones that were scaling fast and first are still the market leaders.

Tanguy Catlin: If I were to be a little provocative, I would say that insurtechs have done well when technology could solve a customer experience issue for a short-tail problem. I think the jury is still out as to whether they will be able to compete for long-tail risks, where the value is less about the customer experience and really comes down to the effective management of capital.

Alex Kimura: I don’t think it’s a win-or-lose situation. Both can win here, especially in Asia because the markets are so underpenetrated. We’re seeing market penetration under 5 percent in most markets. We have a long way to go before getting to a saturation point. There’s room for both insurtechs and incumbents. The question is which space, which country, which segment, etc.

Pradip Patiath: Since I have the luxury of having the three of you with me, let’s do one final round-robin. Coming out of the pandemic, and given what we just talked about, how do you feel about the future of insurtech: hugely optimistic, moderately optimistic, or somewhat pessimistic?

Alex Kimura: I would say moderately optimistic if they can find a way to make profits quickly, because I don’t think investors can wait too long for returns to come. So, if insurtechs can find a way to make money and make disruption happen, I think they’re in a good spot.

Simon Kaesler: Moderately optimistic as well. I think there are a lot of positive trends that favor insurtechs, like digital customer behavior and all the new opportunities we have discussed. But at the same time, there is also increasing competition and challenges from other angles. So we will see.

Tanguy Catlin: On the one hand, I’m extremely optimistic because we are seeing a once-in-a-lifetime change in customer behaviors that will favor insurtech. I do think that the high valuation of insurtech will be challenged in the future, because they’re going to need to start delivering results in ways that will be hard for them to achieve from an underwriting standpoint. I think there’ll be a redistribution of investment toward where insurtechs can really create value. That will be harmful to a couple of them.

Pradip Patiath: Let me bring this to a close and thank you all for sharing your experience. The risks insurtechs present to traditional business models are real, as digital innovation continues to redefine this industry like it has all other industries. For established insurers, insurtechs are a great partner to drive the adoption of digital technologies across the value chain and to see what propositions can actually be adopted by some of the incumbents. It’s a hugely positive and a very exciting time to be in this space.

Thank you very much to my colleagues on this panel, Tanguy, Alex, and Simon, for offering your perspectives. And thank you to the audience for listening to McKinsey on Insurance. Don’t forget to subscribe to McKinsey on Insurance wherever you get your podcasts. Thank you.