Regulators must increase scrutiny of insurtech companies to prevent them undermining the wider insurance industry, S&P Global says.

“So far we have seen limited regulatory and supervisory activity in this field, leaving an almost unregulated online realm,” the ratings agency says in a report.

“In our view, this could become a threat to the reputation, privacy, fair competition and – in the longer term – stability of insurance markets.”

S&P says it is inevitable some customers of poorly regulated insurtech companies will fall victim to losses, mis-selling, data security breaches or misuse of personal data.

It also notes regulators in many jurisdictions do not allow insurtechs to offer traditional insurance products without meeting the standards expected of incumbents.

S&P predicts insurtechs will ultimately complement traditional providers, given insurance is highly regulated, capital-intensive and has high barriers to entry.

It says tech giants such as Google and Facebook have not entered the market, and the industry may be overestimating the threat from small insurtech companies with limited data sets and relatively weak business positions.

“Moreover, insurance industry expertise is required to exploit Big Data analytics to provide more accurate risk classifications.”

Start-ups such as Lemonade, ZhongAn Online Property & Casualty and Friendsurance tend to be niche players that are unlikely to seriously disrupt large companies with diversified offerings, it says.

“We consider that investing in insurtech may help insurers focus on their core competences.

“Insurers are increasingly starting to collaborate and engage by acquiring or partnering with insurtech companies, setting up internal venture capital funds to invest, or establishing start-up incubators to attract and support young entrepreneurs to insurance.”

Insurtech lags behind banking sector equivalents and no ratings impact is expected in the short to medium term, according to the report.

“We characterise insurtech as both a long-term challenge and an opportunity, with material effects that may only start to emerge in 10 years,” S&P says.