The magic word to bridge a widening gap between successful and underperforming InsurTechs in 2023 is “data,” according to a group of InsurTech experts who spoke with Carrier Management about their predictions for the new year.

Although it has less to do with magic and more to do with careful strategy and analysis, the way InsurTechs use data next year will separate the companies that pull ahead from those that fall behind, experts agreed.

“There’s a continuing explosion and maturation of data–certainly data useful at time of underwriting, but also data available at time of service or claim,” said Ty Harris, CEO and co-founder of home insurance InsurTech Openly. “The ability to rapidly ingest new data sources will be the differentiator that determines winners and losers over the next five years.”

Shawn Ram, head of insurance at cyber insurance provider Coalition, said that while InsurTechs are already starting to think about how they use and ingest data, they now need to narrow their focus on using data for better risk modeling if they want to succeed. He said InsurTechs will likely accomplish this by optimizing underwriting with the use of new technologies that center on data ingestion and automation.

“[This] greatly streamlines underwriting and gets more policies into the hands of those who need them,” he said, adding that this use of data “is especially critical in cyber.”

This comes as cyber risks have risen in recent years, with ransomware attacks alone rising by 105 percent globally in 2021, according to cybersecurity firm SonicWall, as reported in the Insurance Information Institute’s May 2022 State of the Risk: Cyber report. The report also cited research from IBM and the Ponemon Institute, which found remote work during the pandemic drove up costs associated with data breaches in 2021. An average data breach in 2021 cost $4.24 million, up from $3.86 million in 2020, the IBM and Ponemon study found.

Jason Kaminsky, CEO of the renewables-focused InsurTech kWh Analytics, said that as cyber risks have risen, the insurance industry has also witnessed a rise in cyber-specialized managing general agencies that rely on data to price, manage and mitigate risks.

“I predict there will be an acute focus on data-driven specialization in InsurTech to come up with innovative solutions to understand and manage emerging risks,” he said.

Another area of risk that Kaminsky expects to receive more focus in the coming year is climate change.

“The biggest trend we’re watching is the ability to leverage high-quality data to drive innovative solutions to climate change,” he said. “In a time when renewable energy projects are ramping up, we’re seeing reduced capacity among traditional carriers and increased costs for asset owners. There is an acute need for new solutions to manage and underwrite climate risk.”

He said he believes specialty MGAs that use data to develop and accurately price risk transfer products will also be important in this area. This comes at a critical time for the industry as, like cyber, natural catastrophes have worsened in recent years.

III reported that natural catastrophe losses in the U.S. rose to an historic high in 2017 — the year of Hurricanes Harvey, Maria and Irma and the California wildfires — of $133 billion in 2020 dollars. While natural catastrophe losses fell in 2018 and 2019, they rose again to $74.4 billion in 2020, up 88 percent from $39.6 billion in 2019, according to III.

The report said that Aon defines a catastrophe as a natural event that causes $25 million or more in insured property losses, or 10 deaths; or 50 people injured; or 2,000 filed claims or homes and structures damaged.

“Every year, the catastrophes seem to get worse and we’re not seeing an end. The reality is the natural environment isn’t getting any more stable and capacity for property risks is getting harder to find,” Kaminsky said. “There is a real need for creative solutions in this space.”

Striking a Balance With Automation

To capitalize on the use of data, Tim Hardcastle, CEO of insurance software provider INSTANDA, said he’s watching the development of AI and machine learning in InsurTech going forward.

“[AI and machine learning] has made it possible for digital technology to evaluate very complicated data sets more rapidly and suggest the best course of action for challenging underwriting or claims management problems,” he said.

This will allow InsurTechs to focus even more on hyper-personalization of insurance — a trend Hardcastle said he witnessed in 2022 and predicts will persist next year.

“Providers use big data to analyze patterns and changes in consumer behavior to identify and even predict the products and services they need,” he said.

Marcus Newbury, chief operating officer and co-founder of auto insurance-focused Driver Technologies, said he’s seen this hyper-personalization trend playing out in the auto space as InsurTechs seek to provide services in underserved insurance markets, such as trucking, rideshare or the rental market.

“[Those industries] traditionally are outside the wheelhouse of the major carriers [because they’re] deemed too high risk,” he said. “By implementing specific safety technology such as telematics or dashcam technology, we’ve seen that startup InsurTechs are comfortable with the risk of working with these industries.”

That said, Bill Pieroni, president and CEO of insurance data provider ACORD Solutions Group, cautioned that too much personalization could be a bad thing for the industry.

“If your deployment is unique for each customer, your model is not sustainable,” he said. “While every situation is likely to involve at least some amount of tailoring, success requires a reasonable degree of standardized implementation.”

Brian Carey, senior director at insurance policy administration software provider, Equisoft, agreed.

“Something that we noticed at ITC (Insuretech Connect) was the number of niche companies that are doing very specific things but don’t necessarily have the capability to be full-fledged companies offering multiple products and services. They’re limited to specific functions and can’t diversify,” he said. “Time will tell how these things root and will ultimately evolve.”

Pieroni added one key to using data successfully is striking a balance between standardization and personalization. Another key component, he said, is storytelling.

“InsurTechs need to be able to tell their story in a compelling way, backed by data and explicit value propositions,” he said. “You need clear, value-driven business cases for the features and functionalities you’re offering. Be explicit about the timing, duration, magnitude and riskiness of the benefits to cash flow.”

The use of artificial intelligence in InsurTech can be beneficial, however. Experts agreed that it is helping with the talent gap by automating certain functions that can free employees to focus on more rewarding tasks.

“In 2023, automation will be more important than ever due to continuous labor challenges in the insurance industry, specifically from a home office processing standpoint,” Carey said. “InsurTechs and new technologies like artificial intelligence can fill in the manual, repetitive and mundane labor gaps and allow insurance industry professionals to do other things that add the most value to policyholders. As a result, we see the potential for some existing job functions to shift responsibilities away from repetitive tasks to doing things like training machine learning models to automate processes.”

Yet again, experts said the best strategy for utilizing data and automation to navigate a challenging labor market is balance. This time, it’s about striking a balance between automation and the human touch that has sustained the insurance industry for so long.

“InsurTechs are starting to understand that they need to work with and through agents rather than selling to carriers or directly to consumers. Cutting agents out of the equation will no longer be the trend in 2023 as more and more InsurTechs recognize the value that brokers bring to the table,” said LeO CEO Liri Halperin Segal. LeO is a personal sales growth and customer service tool for insurance agents. “Instead, we will see InsurTech companies creating partnerships with agencies and leveraging those relationships to promote their products.”

A ‘Flight to Quality’

A challenging labor market and emerging risks like climate change aren’t the only things on InsurTechs’ minds for next year, either. Experts cited plenty of challenges that will likely remain on the horizon for the industry to navigate, starting with the state of the economy and investor hesitation.

“I think we’re starting to see a real ‘flight to quality’ as investors and buyers apply their learnings of the past several years and become more discerning about where they put their dollars,” Pieroni said.

He added that the realities of the current economic cycle as well as the hype around InsurTech over the last several years has led to the beginnings of a more discerning environment for investors.

“The looming question is: Due to macroeconomic realities, did funding peak in 2022?” he said. “InsurTechs will have to watch closely.”

Indeed, Hardcastle said the fallout from the current economic crisis has added hurdles for insurers, from rising interest rates to international political tensions.

“Insurers are contending with a decrease in investments, rising costs and worries about business continuity. Specifically, there is a need to capture revenue growth at much lower costs, so being stuck with inflexible systems in these times makes an already bitter pill even harder to swallow,” he said. “Additional headwinds like inflation and climate change have increased the challenge of taking on the right amount of risk when underwriting.”

Despite a decline in tech investment this year, Hardcastle said, it’s not all bad news.

“The capital is still out there, albeit with narrower and tougher funding parameters,” he said. “This trend will likely continue through 2023, putting pressure on InsurTechs to reassure investors and the wider market of their strength, resilience and ability to grow sustainably. Now more than ever, InsurTechs must focus on strong business fundamentals.”

Isabelle Dumont, senior vice president of marketing and technology partners at cyber insurance provider Cowbell, agreed that InsurTechs will need to re-evaluate their business models in order to succeed next year.

“After reaching a peak of inflated expectations, InsurTechs faced a challenging market in 2022,” she said. “They now have to re-evaluate their value proposition and revise their business models to deliver a predictable path toward growth and profitability.”

Given the current economic climate and changing investor attitudes, InsurTechs will also need to focus even more on financial discipline, said Jim Dwane, CEO of property/casualty insurance exchange bolt.

“We are seeing a shift in investor sentiment. Investors who were focused on top-line growth and scale in 2021 are now expecting a clear path to profitability in 2022,” he said. “The external environment will continue to be challenging, and firms will need to work hard to strengthen their financial resilience.”

Hardcastle said that all of this points back to the widening gap between InsurTechs that succeed and those that struggle, a dynamic he expects to continue in the new year.

“In an increasingly fierce competitive environment, the next several years will determine which InsurTechs become market leaders and which are left behind,” he said. “Those with a cohesive roadmap to expand into new market segments within insurance and make the most of new technologies will be well-positioned to provide the best coverage to customers and experience rapid expansion.”

Pieroni agreed.

“The differentiation is becoming clearer between those InsurTechs that will have a lasting impact on the industry, and those that aren’t really going to add value,” he said.

Despite many challenges, Harris is remaining optimistic for the future of the industry and its ability to weather change.

“One of the biggest selling points of InsurTech companies is that they should, in theory, be agile. This agility stems partly from technology — modern infrastructure that allows rapid adaptation. It also stems from not having made legacy commitments in other areas,” he said. “So, it logically follows that InsurTechs should be best suited to react quickly to a changing environment.”