What it means
Insurance has traditionally been a paper-heavy, broker-mediated industry with long chains between the customer and the risk carrier. InsurTech attacks the cost and friction in that chain, either by building new insurers from scratch or by selling technology to established ones.
The label covers both, which is why it stretches from a start-up selling annual cover in an app to a claims automation tool used by a two-hundred-year-old insurer. The commercial argument is mostly about the expense ratio.
If claims are roughly a fixed cost determined by the underlying risk, then the way to compete on price without losing money is to reduce everything else: distribution costs, administration, claims handling and fraud losses. A few percentage points off the expense ratio is a large swing in an industry where combined ratios cluster near 100%.
The second argument is about data and pricing. Telematics in vehicles, sensors in buildings and connected devices in homes let insurers price on what actually happens rather than on broad category averages.
Better segmentation attracts lower-risk customers at fair prices and prices higher-risk customers accurately, which improves the loss ratio over time. An important nuance is that technology does not remove the need for capital or regulation.
An InsurTech firm still has to hold reserves, satisfy solvency rules and pay claims in a bad year, which is why many operate as brokers or managing agents backed by a traditional insurer rather than carrying the risk themselves. Distinguishing who actually bears the risk is essential when assessing one of these businesses.
A further nuance is that granular pricing raises fairness questions. Pricing on detailed behavioural or personal data can make cover unaffordable for exactly the people who need it most, and regulators in several markets have restricted how far this can go.
The commercial opportunity and the social constraint sit in permanent tension.
In practice
Real-world examples.
Example
A start-up sells contents cover entirely through an app, with policies issued in under three minutes and small claims settled automatically from photographs. Its distribution costs are a fraction of a broker-led model, though it relies on an established insurer to carry the underwriting risk.
Example
A commercial insurer fits temperature and water sensors in the properties it covers for food manufacturers. Escape-of-water claims fall by roughly a third, and the insurer shares part of the saving with customers as a premium reduction.
Example
A broker deploys document-reading software that extracts details from client submissions automatically. Quotation turnaround falls from four days to under one, and the same team handles a substantially larger volume of business without additional hires.
Think of it
“InsurTech is technology reshaping insurance-innovative tech applied to insurance.
Formula
Calculation
Expense Ratio = Operating Expenses / Premiums Earned; Expense Saving = (Old Expense Ratio - New Expense Ratio) x Premiums Earned
A motor insurer earns $40,000,000 in premium with a traditional expense ratio of 32%, giving operating expenses of $40,000,000 x 0.32 = $12,800,000. It replaces manual claims triage and paper documentation with automated processing, bringing the expense ratio down to 24%, or $40,000,000 x 0.24 = $9,600,000. The saving is $12,800,000 - $9,600,000 = $3,200,000 a year. With a loss ratio unchanged at 68%, the combined ratio improves from 68% + 32% = 100% to 68% + 24% = 92%, turning a break-even book into an underwriting profit of $40,000,000 x 0.08 = $3,200,000.Case study
Seen in the real world.
Tessellate Cover is an invented InsurTech business used here as an illustrative example. It launched selling annual travel cover directly online, undercutting incumbents by 20% and reaching $14,000,000 of premium within three years on an expense ratio of 19%, well below the market norm.
The trouble appeared in its loss ratio. Because the application asked only four questions in the interest of a fast sign-up, the book attracted a disproportionate share of customers with pre-existing conditions and expensive itineraries, and the loss ratio climbed to 79%, giving a combined ratio of 98% in a segment where competitors ran at 88%.
In this fictional example, the fix required accepting some friction. Tessellate added six underwriting questions and lost roughly 9% of applicants at the point of quotation, but the loss ratio fell to 66% over the following year. Cheap distribution is a real advantage, and it does not compensate for pricing risk you never bothered to measure.
Watch out
Common mistakes.
- Assuming an InsurTech brand is the insurer, when many are brokers or managing general agents and the risk actually sits with a traditional carrier behind them.
- Judging one of these businesses on premium growth alone, since writing volume quickly is easy and only the combined ratio shows whether the business is profitable.
- Believing technology removes the need for underwriting judgement, when a shorter application form usually means the risk is being priced with less information rather than better information.
Questions
People also ask.
Is InsurTech cheaper for the customer?
Often at the point of sale, though the saving comes from lower distribution and administration costs rather than from any reduction in the underlying risk being covered.
What does telematics actually measure?
Typically speed, braking, cornering, mileage and time of day, which are then used to adjust the premium to reflect observed driving rather than category averages.
Do established insurers lose out to InsurTech firms?
Not necessarily, because many of the most successful products are technology tools sold to incumbents rather than competitors trying to replace them.
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