Breaking down the silos: integrating InsurTech into the legacy insurance landscape

The global insurtech market is on the verge of an explosion after a rocky decade of inflated valuations and disappointing performance. According to a 2022 study by Acumen Research and Consulting, it’s expected to skyrocket to a valuation of $166.4 billion by 2030, up from $8.8 billion in 2021, a jaw-dropping growth rate of 39.1% annually. This meteoric rise signifies a seismic shift in the insurance landscape as we know it.

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[.figure]$166.4 billion[.figure]

[.emph]expected valuation of global InsurTech market in 2030[.emph]

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The change isn’t only in tech-savvy insurtech startups. Insurance providers large and small are embracing innovative technologies and developing cutting-edge products to cater to the evolving needs of their customers and harness the power of data. By leveraging sophisticated algorithms and predictive analytics, insurers can accomplish things that were never possible before, such as enhancing underwriting accuracy and accurately predicting potential losses. And it’s paying off with greater transparency and improved efficiency across the board.

But the benefits don't stop there. Technology developed by insurtech companies can also supercharge operational efficiency, which is important for traditional and startup insurers alike. In fact, McKinsey estimates that up to 40% of P&C and life insurers’ expenses are spent on core processes and can be significantly reduced by digitization. Reducing operational costs reduces costs for a wide variety of insurance offerings, which not only improves the bottom line for insurers but also translates into more affordable coverage options for policyholders.

In this blog post, we'll delve deeper into the world of insurtech, exploring its transformative impact on the insurance landscape and what legacy insurance providers can expect to see in the future.

The insurtech revolution: beyond buzzwords

Insurtech is a transformative force that is reshaping the insurance industry in profound ways. However, there are a lot of misconceptions about insurtech. First, it's often assumed that insurtech focuses on replacing human agents with automated processes. Yet, nothing could be further from the truth. Rather than eliminating jobs, insurtech gives insurance professionals powerful tools and data-driven insights that allow them to make better-informed decisions and become more effective in their work.  

Another misconception is that insurtech is only relevant for tech-savvy millennials. In reality, insurtech solutions enable personalized products and streamlined experiences for a wide range of demographics. For example, usage-based car insurance models are often most beneficial for older customers who tend to use their vehicles less frequently. 

Last but not least, there is a misconception that insurtech is disruptive to the traditional insurance ecosystem. However, today traditional insurers are partnering with innovative insurtech startups to drive industry-wide innovation and pave the way for a more efficient, customer-centric, and inclusive insurance landscape—more on that below. 

Legacy insurance systems: an Achilles' heel

Insurers who have not yet embraced insurtech often rely on legacy systems for various organizational processes and procedures. These systems are usually built with outdated technology and are notorious for their lack of flexibility and scalability. As the industry evolves and customer demands change, insurance providers who rely on legacy systems find it difficult to innovate and respond swiftly to market trends and opportunities. 

Furthermore, legacy systems are generally siloed, with data scattered across multiple platforms and databases. This fragmented structure makes it difficult for various stakeholders to access the information they need or gain a holistic view of customers, policies, and claims. Moreover, the complexity of legacy systems often results in cumbersome manual processes, leading to delays, errors, and increased administrative costs. Last but not least, the cybersecurity risks associated with outdated technology pose a significant concern, as legacy systems are more vulnerable to breaches and cyberattacks. 

To thrive in today's digital age, insurers must overcome these drawbacks by embracing modern technologies and transitioning away from legacy systems. History is full of examples of industries that didn’t adapt to technological advancements and ended up obsolete. For example, print journalism platforms that didn’t put their content online have disappeared. Video rental chains like Blockbuster that didn’t transition to streaming went out of business.  Department stores like Sears that didn’t offer convenient online ordering met a similar fate. Insurance companies that remain dependent on outdated legacy systems are likely to meet a similar fate. 

Insurtech's disruptive forces unleashed

Insurtech shattered many industry norms with new products, processes, and even language. A prime example of that is the insurtech maverick Lemonade. Lemonade offers a user-friendly mobile app that allows customers to obtain quotes, purchase policies, and file claims seamlessly and efficiently. It uses simple, straightforward language that makes it easy for customers to understand what they are purchasing and what is and is not included in their policy.

Lemonade's advanced technology utilizes AI and machine learning algorithms to streamline the insurance process, enables a faster and more personalized experience, and offer instant policy approvals and payouts. Additionally, Lemonade incorporates a unique business model by utilizing a portion of premiums to cover claims, while the remaining funds are donated to charitable causes chosen by policyholders. By leveraging technology and a customer-centric approach, Lemonade has disrupted the insurance industry, providing a refreshing and transparent alternative for consumers.

Another example of a disruptive offering in insurance is Metromile, an insurtech company that focuses on pay-per-mile car insurance. Their platform utilizes a device installed in the car's diagnostic port to track mileage and provide tailored insurance coverage. Policyholders pay a base rate along with a per-mile fee, making it an attractive option for those who don't drive often or have shorter commutes. Metromile's usage-based approach disrupted the traditional flat-rate pricing structure of auto insurance and has since been adopted by many other leading insurers. 

Navigating integration challenges: a roadmap to success

Despite the many innovations they have to offer, it hasn’t always been a smooth road for insurtech startups. Although there was a lot of initial investor enthusiasm, many insurtech companies have not met investor expectations. For example, when insurtech company Metromile went public via a special purpose acquisition company (SPAC) in February 2021, it was valued at over $1 billion. Less than a year and a half later, Lemonade bought Metromile for less than $145 million.

That challenge is driving many insurtech startups to look for opportunities to partner with traditional insurance providers. However, there are many hurdles and complexities involved in integrating insurtech with legacy systems, including the following: 

Technical compatibility

Legacy systems often have outdated architecture and require significant modifications or workarounds in order to become compatible with modern insurtech solutions. Integrating new technology with existing systems requires careful consideration of data formats, protocols, and APIs. 

Data migration and integration

Legacy systems typically store vast amounts of data in complex structures. Migrating this data to a insurtech platform can be a complex and time-consuming process and integrating data from disparate sources and formats can also pose challenges in terms of data mapping, transformation, and synchronization.

Regulatory compliance

Insurance is a highly regulated industry, and legacy providers must ensure that all compliance measures are met when integrating with insurtech platforms and technology. This includes data privacy, security, customer protection, and regulatory reporting. Legacy systems may not have built-in capabilities to handle evolving regulatory demands, which means adding additional customization and compliance checks.

Organizational change and culture

Integrating insurtech with legacy systems often requires changes in organizational processes, workflows, and culture. Traditional insurers may have established ways of operating that can be resistant to change. Implementing new technologies and redefining roles and responsibilities can be met with skepticism and resistance from employees. 

Overcoming these hurdles requires careful planning, collaboration between technology and business teams, and a phased approach to integration to minimize disruptions and maximize benefits. In fact, many traditional insurance providers assign an internal partnership success manager to lead the process and help transition to a digital-native, customer-centric company culture. 

APIs are also essential in legacy system modernization as they enable interoperability between outdated systems and modern applications, minimizing disruptions. APIs act as bridges, unlocking the potential of legacy systems and facilitating their integration with the latest technologies, making modernization cost-effective, improving security and compliance, and delivering a better user experience. 

The customer-centric insurtech experience

Despite the inherent challenges, collaboration can provide real benefits for both sides. Insurtech startups offer legacy insurance providers both cutting-edge, industry-specific technology as well as the holistic customer-centric approach pioneered by the tech industry as a whole. Insurtech companies focus on things like personalized offers for customers, on-demand services, and simplified claims processes, as well as efficient back-end operations all of which have significant advantages for traditional insurance providers. Some even offer new services that can enhance the value proposition of legacy insurance providers.

Insurtech startups also gain from the collaboration.  Many of these small, innovative companies lack the name recognition and customer trust that legacy providers enjoy, and therefore often struggle when it comes to customer acquisition and sales. They benefit from the large customer base that legacy providers bring to the table when they collaborate. In other words, legacy insurance companies can leverage insurtech technology and innovation across premiums that they know how to sell.

Summing it up

Legacy insurance providers and insurtech startups have complementary strengths. When they collaborate effectively, both sides can leverage each other’s advantages to create new business opportunities in an increasingly competitive market and support a culture of continuous innovation.