While still in its infancy, the insurtech market is expected to grow exponentially. Insurers who embrace digital transformation and create an environment where both innovative technology and human experience thrive will have success.

By Lisa Henderson, Chief Strategist, Casualty Products and Insurtech Consulting, Milliman.

The insurtech market is heating up, with compound annual growth rate (CAGR) estimates greater than 10% by 2020. Relatively speaking, however, insurtech is still in its infancy, with about $8 billion invested to date. To put that in perspective, the fintech revolution spanned at least a dozen years and totaled over $150 billion in investment into fintech startups.

As we look ahead toward full-fledged disruption in the insurance industry, it’s clear the wheels of progress are in motion. The role of insurtech – whether through the implementation of emerging technology or the rise of the digital startup – can be categorized into three distinct trends:

• Enabling: innovations that help reduce costs, increase visibility and better manage risk, and tend to involve Big Data or the cloud. Enabling insurtech allows companies to become more efficient and better adept at managing business in a new digital age.
• Transformational: innovations around general and comprehensive digitization; technologies that increase revenue, allow for new product streams and improve the customer experience.
• Disruptive: these are innovations that will be the unicorns of the insurtech movement: they will offer a very different business model, will most likely be peer-to-peer, and will gain a lot of attention. This category will also see the biggest failure rate.

While enabling and transformational innovations are critical, they won’t spur the kind of disruptive market upheaval made famous by the likes of Netflix, Uber, or Airbnb. A truly disruptive business model finds the magic combination of merging the best of what exists now with the greatest potential of what is to come. In order to achieve this, three things must be present:

Flexible thinking and a willingness to change
There is a natural inertia to change, and it’s very common for entrenched legacy players in any industry to believe their own processes and ways of doing things are better informed than any new entrant – particularly one who comes from a completely different space.

Individuals within the industry have to make a decision to change and do things differently. Often, this means processes which were carefully built over time must be subject to alteration. As a professional in the industry, it’s easy to feel you know your customers and practices much better than a technologist working toward the next big thing in insurtech. It’s normal to feel resistant to these changes.

However, change has the potential to significantly increase productivity and efficiency. For example, an insurance company chose to integrate artificial intelligence (AI) into their claims processes. They tested their traditional thinking, based on years of experience, against the AI-integrated output.  The AI identified 90% of the jumper claims, whereas their existing processes only identified 15% in the same period. Why? The human brain cannot possibly process and compute the amount of data that AI can. However, the best results were achieved when the company combined the power of AI with human experience and expertise. The ability to be open and willing to consider new changes will yield greater growth and productivity.

The adoption of new technology to improve business functions – internally and externally
More often than not, innovation is born from frustration. New ideas and technology usually come from those in the field determining what is not working and finding ways to make it better.

One such example is that of Logan Green, who was frustrated with the lack of accessible transportation is the U.S. – especially in big cities where cars seemed to outnumber the population. He identified what people dislike most about their transportation – fuel and insurance costs, traffic, etc. – and worked toward a solution, inspired by a post-college trip to Zimbabwe where he was exposed to crowd-sourced ridesharing. Together with John Zimmer, they founded what we now know as Lyft – the first ridesharing network in the U.S. It has since revolutionized the way we travel.

In insurance, we also have frustrations or concerns that could use improvement. One such example is the role of risk, and how to use new advancements and capabilities to better measure and assess risk, and improve business function. With the right solution to measure risk, customers will also reap significant benefits as costs and product offerings are more aligned with their individual lifestyle rather than compensating for everyone else.

Incorporating technical innovation with subject matter expertise
Insurtechs have great technologists, but that alone won’t ensure success. The insurance industry is complex and requires leaders and institutions with deep backgrounds in everything from regulation to policy and consumer trends.

Tesla Motors learned this the hard way, when it set out to produce electric cars in Silicon Valley. Company founders had done their research on what was possible for an electric car, and were confident they could deliver it. However, learning the auto manufacturing, delivery and even political side of building cars took a great deal of time and required the professional insight of those who spend their careers in automotive. With the much-needed subject matter expertise, Tesla started to hurdle obstacles and gain real traction. As Tesla discovered, combining technology with human expertise and experience will allow each industry to yield the most powerful results possible.

The freight train of change is clearly barreling forward and everyone from investors, to insurance executives, to Silicon Valley tech titans are watching closely to see what promises the market will deliver. Those who lag behind or wait too long to change their business models will face the inevitable pending consolidation that takes place during disruption.

In the insurance field, we have the benefit of watching industries who have undergone disruption, such as fintech, and can learn from their missteps and successes. Those who succeed will embrace change, seek sea-change improvements, and create an environment where both innovative technology and human experience can thrive.