Digital Transformation in the Insurance Industry Is Creating Investment Opportunities. Are You Ready?

By Kate Purschke

For decades, the insurance industry has been dominated by companies relying on a mix of legacy systems and manual processes to run core operations and service customers. But increasingly, we’re seeing insurance technology companies develop solutions with more sophisticated IT capabilities that shake up the industry – and reap the benefits of improved agility and growth needed to compete in the digital economy.

Significant demand for insurtech solutions drives new investment interest in insurance innovations. In 2022, the global insurtech market was valued at US $5.45 billion, and it’s expected to expand at a compound annual growth rate (CAGR) of 52.7% from 2023 to 2030. Additionally, $17.8 billion was invested across 697 insurtech deals in 2021; this number declined to $8.4 billion across 579 deals in 2022 but remains well above historical levels. The insurtech sector has also attracted significant acquisition interest, with insurtech M&A exits hitting an all-time high of 81 in 2022, up from 58 in 2021. According to a CB Insights 2022 report, “insurers, private equity firms, and larger insurtechs have taken advantage of lower valuations to make these acquisitions.”

Players across the insurance industry are turning to insurtech to meet evolving customer needs.

The insurance industry has demonstrated resilience and enduring demand through periods of volatility time and time again but has a history of slow adoption when it comes to technology. As noted in McKinsey’s latest global business-building report and as explored in this article, insurance carriers can significantly accelerate the growth of strategic bets by acquiring or building digital-first businesses, creating partnerships and ecosystems, and boosting the trajectory of nascent companies in their portfolio. Insurtech solutions will be essential to their success – and thus offer compelling investment opportunities.

Three Trends Redefining the Insurance Industry

Three trends are creating new opportunities for investors in the insurtech space. Let’s take a closer look.

Trend #1: Digitalization is reshaping the industry.

Tech-driven innovation is fundamentally reshaping the insurance industry. New digital capabilities offered by insurtechs, including telematics, artificial intelligence, machine learning, and automation, have transformed nearly every aspect of the insurance value chain.

Additionally, insurtechs are adapting to evolving consumer preferences and demands by offering a digitalized, integrated customer experience – streamlining traditional processes and allowing
customers to easily purchase insurance as an add-on to other services and goods.

Insurance agencies and carriers are winning in the marketplace by engaging in digital ecosystems and sales channels focused on specific customer needs.

Looking ahead, we expect digital technologies to continue to create new and improved omnichannel customer experiences. According to McKinsey, with an estimated one trillion connected devices globally by 2025, insurers will have massive volumes of new digital data to analyze and understand their clients more deeply. These devices generate a wealth of data that can be used to improve risk assessment and underwriting, as well as to develop new products and services. For example, insurers can use data from connected cars to assess the risk of accidents or from connected homes to assess fire risk. This data can be used to price policies more accurately and to offer discounts for customers who take steps to reduce their risk. This explosion of information “will result in ‘new product categories, more personalized pricing, and increasingly real-time service delivery.”

Digitalization will also yield better business outcomes. For example, it’s estimated that insurance carriers with market-leading analytics capabilities have a five-year revenue CAGR four times higher than competitors; they also increase shareholder returns at twice the rate.

Trend #2: More partnerships are emerging between insurers and insurtechs.

In the past, insurtechs competed directly with incumbent insurance companies, but today’s players are increasingly focused on partnerships. For example, Insurance Business Magazine states, “…insurers that once felt threatened by insurtechs are now willing to invest in and ally with firms that can help them deliver innovative insurance products to the market quickly and efficiently.”

Replacing legacy systems with third-party solutions is the fastest way to access innovative capabilities.

For example, we’re seeing insurance companies partner with third-party technologies to expand product offerings, provide enhanced data analysis, and create automated processes. Replacing legacy homegrown systems with third-party solutions is now considered the fastest and easiest way to access innovative capabilities to deliver digitalized, integrated customer experiences.

We’re also seeing more traditional insurance carriers partner with insurtech firms to protect their platforms and detect cyber exposures. Insurance carriers know they need to embrace more sophisticated compliance and security solutions, as security breaches are happening more frequently and costing more than ever – and regulatory scrutiny is only intensifying. Partnering with the latest technology is a fast track to success.

Trend #3: Major outside players are entering the insurance market.

Finally, we’re seeing large enterprises – outside players – entering the insurance marketplace. They’re bringing large volumes of data-driven insights, strong customer relationships, expertise in building thriving digital ecosystems, and cutting-edge technical skills to transform how people access, buy, and utilize insurance. For example:

Tesla launched its own risk carrier, creating a new profit center and offering customers an easy, integrated insurance experience. By owning every step of the process, from manufacturing to repair to responding to claims, Tesla can streamline and automate insurance activities and minimize uncertainty. They also have access to extensive data on a large customer base with a desirable risk profile, presenting an opportunity to underwrite particularly profitable policies.
Amazon offers insurance to the small and medium-sized enterprises (SMEs) that operate on its platform through an insurtech partner. This makes it easy for small business owners to find and purchase customized, digital insurance products. By “meeting customers where they are,” Amazon is improving the customer experience while tapping into a new source of revenue.
IKEA established a tech-enabled B2B2C model with tailored home insurance solutions via a partnership with a leading insurance carrier. This partnership allows IKEA to offer a more comprehensive and convenient service to its customers, increase customer loyalty and retention, and create additional revenue streams.

Insurtech companies must capitalize on their industry expertise to counter the disruption caused by major corporations entering the market.

Entry of large outside players like Tesla, Amazon, and IKEA can have significant implications for the insurance industry, including through increased competition, disruption in traditional distribution channels, creation of new revenue streams, acceleration in the use of technology and data, and changes in the regulatory landscape. To counter the potential disruption caused by major corporations entering the market, both established Insurtech companies and startups should capitalize on their industry expertise to deliver necessary solutions to insurance agencies and carriers.

Archetype is Investing in Insurtech

Insurance agencies, wholesalers, and carriers can harness insurtechs to digitize and modernize their businesses – and significantly accelerate growth. Gallagher’s Q4 2022 Global Insurtech Report observed that “the creation of a select number of individual businesses, associated with the label of ‘Insurtech,’ who have done remarkably well all have one thing in common… they treat the industry as the community it is and realize that giving is equally (if not more) important than simply taking. They are conscientious partners who understand our industry and utilize technology as an enabling force, not just a product to masquerade bad business behind.”

This outlook supports Archetype’s anticipation that there will be strong demand for insurtech solutions from legacy agencies and carriers. This, paired with expectations for continued growth across the insurance broker and insurtech markets, is a key factor in Archetype’s decision to invest in PolicyBound. PolicyBound is a first-of-its-kind insurtech platform that will empower commercial insurance agencies to scale in the digital age. By enabling existing workflows and relationships, PolicyBound seeks to modernize and optimize the insurance marketplace rather than disrupt it.

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