The year 2022 was not kind to the publicly traded InsurTechs. But beyond that smokescreen, new and growing InsurTechs continue to drive innovation. Here are seven trends to watch in 2023.

1. Cyborg Underwriting: AI Becomes Reality in Insurance

I asked Open AI’s ChatGPT how the insurance industry uses AI, and here’s its AI-generated response:

“The insurance industry uses AI in a variety of ways, such as for risk assessment and fraud detection. AI can help insurance companies analyze large amounts of data to identify patterns and make predictions about risks. This can help the companies to assess the likelihood of a claim being filed and to set premiums accordingly. In addition, AI can be used to help detect fraud by analyzing data for anomalies and red flags. This can help insurance companies to protect themselves from financial loss due to fraudulent activity.”

There already are InsurTechs using machine learning to extract granular information and deliver instantaneous analysis, exposing hidden risks and potential fraud. InsurTechs are using AI to prioritize workflow in real time, focusing agents on the most urgent needs. Customers converse with bots who can cover the basics.

2023 will see both existing and new InsurTechs deliver compelling AI solutions for insurance, with the potential to permanently improve loss ratios through better, more thorough analytics, identifying risks that can be mitigated, priced for or avoided.

2. Time for an Upgrade: Modernizing Infrastructure

What can American singer-songwriter Taylor Swift and Puerto Rican Rapper Bad Bunny teach insurers?

Ticketmaster’s outdated systems were overwhelmed when 5 percent of the over-18 population of the U.S. logged on to buy Taylor Swift tickets. The same inadequate IT failed to read valid tickets, leaving Bad Bunny fans in the parking lot while the arena was empty.

Southwest Airlines and the FAA have had similar public debacles, caused by many years of decisions to delay systems upgrades.

Many in the insurance industry have delayed systems implementation, focusing on immediate priorities. Aging IT systems are now standing in the way of delivering digital solutions that customers and employees expect.

There are a growing number of InsurTechs delivering tech solutions to the insurance industry, including carriers, brokers, agents and reinsurers. From a startup’s point of view, these are great customers: They have problems that are hard to solve internally, and they have cash. The decision process remains lengthy. Successful sales depend on an InsurTech demonstrating a compelling return on investment, proven out by other customers.

In 2023, InsurTechs will enter into partnerships with established insurers to deliver cloud services and focused solutions that enable insurers to leverage better technology without the traditional long implementation times.

3. Risk of the Year: Climate

Full disclosure: I have been predicting that InsurTech would tackle climate risk since 2019, but it really feels like the time is right now.

2022 delivered extreme weather across the country, turning non-flood zones into flood zones and delivering $120 billion in insured losses, more than 20 percent higher than the prior five-year average (according to Munich Re). According to PwC, climate tech attracted a quarter of all venture funding in 2022.

Climate is an existential issue for property insurers. Similar to cyber, past experience is not a good predictor of the future. Risk assessment and pricing based on past performance is likely to deliver high, unsustainable losses. Another similarity with cyber is the “silent” aspect, meaning that insurers are covering catastrophic climate risk without compensation.

Several InsurTechs already are focused on parametric solutions for weather risk. There are bigger solutions to come.

2023 will see InsurTechs leaning into climate with bigger, bolder solutions.

4. Business Focus: Commercial Lines

The first five years of InsurTech were all about the consumer, with InsurTechs focused on personal lines delivered direct to consumers. As entrepreneurs seek difficult problems to solve, they are turning to commercial insurance. This trend started with SME, delivering standard small business lines via new, digital channels. Now, InsurTechs are starting to focus on higher-value, multi-product transactions.

In 2023, we will see increased focus on the more complex problems of larger enterprises.

5. Meeting Customers Where They Are: Embedded Insurance

Embedding insurance into other transactions has long been discussed. The model works well in the broader fintech market, with the Buy Now Pay Later startups working with every retailer from Amazon to auto repair. InsurTechs are now reaching customers through a variety of channels, selling as part of another purchase. Travel insurance was an early embedded success, and the post-pandemic travel rush has created multiple new travel portals. There are InsurTechs offering embedded auto insurance (Insurify), homeowners insurance (Branch and Matic), extended warranties (Extend) and weather insurance (Sensible Weather).

So far, the focus of embedded insurance has been selling to consumers. InsurTechs have been enthusiastic to reach consumers who are at the point of purchase, which is a much more efficient and cheaper versus the expensive direct to consumer channel.

In 2023, InsurTechs will expand their embedded operations, and we will see sales to businesses, not just consumers.

6. Staying Capital Light: MGAs

In early InsurTech, MGA was just the first stage on the way to becoming a full-stack carrier. As some of those early entrants discovered, the risk of going full stack was always being valued as an insurance carrier not a tech company.

We’ll see more tech-enabled MGAs that use proprietary data sources and analytics to underwrite better. The market for capacity has tightened significantly. So, new MGAs need to prove their differentiated underwriting quickly. The multiple paths to exit will continue to attract strong entrepreneurs and investors to high-quality new MGAs.

In 2023, expect to see more InsurTechs launching tech-enabled MGAs focused on commercial lines, with the ability to quickly demonstrate the ways in which they differentiate themselves to capacity providers and customers alike.

7. The End State: Mergers & Acquisitions

Over the past several years, we have seen two types of InsurTech acquisitions. The first type is insurance companies and established software vendors acquiring highly accretive strategic startups. The second type is an “aquihire,” bringing in high-value teams who might not originally have chosen to work at an established company.

2023 will see a broad range of acquisitions, as InsurTechs explore alternatives beyond venture capital. There will be more types of acquirers, including carriers, established software vendors, brokers and private equity investors.