Insurtechs ignore insurance fundamentals at their peril: Gallagher Re
To be successful, insurtechs must understand that insurance is unique and fundamentally different to industries such as manufacturing where fixed costs “vastly outweigh” variable marginal costs, Gallagher Re says.
Insurance is “almost the opposite,” Global Head of Gallagher Re Insurtech Andrew Johnston says.
"Our industry is unique in that the economics of scale do not manifest themselves,” he said. "If you cannot underwrite a risk profitably, the virtue of writing 10 more in the same manner does not somehow alter the underlying makeup of cost allocations and profitability curves.”
In insurance, operating costs are significantly fixed over a short period of time but underwriting and balance sheet application is “enormously influenced” by variable costs, down to unique risk level, Gallagher Re says.
This means insurtechs must not take short cuts and should focus on the “core principles of excellence” in the insurance industry.
“Long and hard is the road – and the people who work in our industry are worth listening to,” Mr Johnston said.
In what he terms the “great experiment,” $US42 billion ($66 billion) was invested globally into insurtech businesses between 2012 and 2021 – many of which have not been successful. Mr Johnston says this is in part because basic insurance sector mechanics were “skewed, in some cases ignored”.
“As a result, the correct cost allocation operations and lessons were not seared into company DNA,” he said, and this lack of due diligence was "now seeping out in a very public way”.
"A handful of very high profile insurtechs have announced various permutations which would suggest that for some, all is not well.”
As insurtechs start to struggle, “painful truths” are emerging as a direct result of the lessons that were not learned during critical phases of company development about valuations and how capital was managed.
“With wealthy backers writing enormous checks, insurtechs could cut corners, they could ignore the importance of loss ratios or customer retention and focus on the wrong metrics – growth and divergence.
“In short, the easy cash and wide berths given precluded many insurtechs from learning the extremely important lessons – our industry is unique,” Mr Johnston said.
See the report here.