We invited McKinsey & Company’s Simon Kaesler and Piero Gancia to share their views on the Future of Insurance and to take stock of the current state of the industry. They will share their views on what is required to make the next leap to shift digital transformation to a higher gear, to gain more speed in the adoption of advanced technologies, and to close the gap between what customers want and what insurers offer.

Simon, let’s start with you. How do you see the State of the Insurance Industry and the position of insurtechs?

Simon:“When we look at the insurance landscape in Europe, we see a market that is quite irresistible: 3 trillion in premiums and non-life growing very nicely, plus 19% in the last five years with 400 billion in profit. On top of that we see a lot of underinsurance: new risks and risks that are not insured sufficiently – a big opportunity. At the same time, we haven’t really seen a lot of disruption at scale yet, so this is also an opportunity. For example, the share of insurance distributed directly to the customer through many of the digital players is only about 10% globally and lagging behind other industries. In Europe we are seeing a nice development of premiums, top line going up and stable development of profits. We view this as the base case scenario: for the next 5 to 10 years top line will continue to grow and profits will remain stable.”

What other scenarios do you see for the insurance industry? And what is your view on disruption?

Simon: “We’ve recently published a report analyzing insurance in the next decade, where we looked at different scenarios. One of the scenarios is that we see a continuation of the past few years, so sluggish economic growth, limited non-life top line expansion, some growth and an expanded profit pool. There are a few scenarios that are a bit more challenging, like the one that accounts for more inflation. In this scenario we see a lot of challenges in the claims area and other areas, also in Life, combined with a decline in profits. There is also a balance sheet reset scenario, which is in between the positive scenario of productivity acceleration and the more challenging scenarios.

When you look at digital disruption, insurance is somewhere in the middle in terms of the pace of disruption and vulnerability to disruption. Other industries have shown digital disruption at scale already like retail, travel, and telecom for example. We do expect that disruption at scale will happen in insurance as well, with potential for disruption along the entire value chain. Just think about reduction of loss ratios or increasing customer retention: there are massive gains to be had – and technology has a big role to play here.”

Piero, let’s shift focus to insurtechs – what is their position and outlook? Where do you see their main opportunities and challenges?

 Piero: “First of all: please fasten your seat belts! For insurtechs, it has surely been a roller coaster ride. Looking at the investments in Insurtech over the past five years, compared to investments in other sectors by VC, we can see that insurtech investments really ballooned and then dropped. We saw a hype in 2020 and 2021 with a lot of big achievements – and now we have a drop, showing a lot of challenges.

If we start with the achievements: more than 50 insurance unicorns were created across the globe, of which 17 are located in EMEA. Today some of these unicorns have ceased to exist. To understand more about the reasons and challenges behind this, we looked at three very distinctive unicorns and insurtechs. We saw fantastic growth rates compared to incumbent insurers, but also quite challenging loss ratios. We also looked at the overall profitability, including customer acquisition costs, and costs overall. These are still deeply negative, showing some improvement, but still negative. The business model is not sustainable yet. However, our view is that good things sometimes take time. If we make the comparison with fintechs, you’ll see that just one third of them have a positive net income margin. When we look at those that are most profitable, we see that they have been around for several years, 10-15 years. So it takes time.

We also spoke with 100 founders of Insurtech companies about the challenges and the opportunities they see for their companies. We found two pairs of very consistent answers: on the opportunity side: scaling their models to more markets and trying to gain more profitability through cost reduction and technical excellence. On the challenges side: access to capital, as well as the challenge of getting scale, increasing volumes.”

How do you see the state of insurtechs in Europe? Do they face similar challenges and opportunities?

Simon: “Let’s take a deep dive into the European insurance landscape and the insurtechs here. In Europe we have about 850 insurtechs in our database. Summing up all the valuations, we estimate this is about 40 billion, which is quite sizable, despite the drops in valuation. By clustering the insurtechs in groups, we get even more insight. We took the cohort from all insurtechs from 2015 to 2019 in Europe and put them into five categories.

The first category are the segment leaders: insurtechs that have achieved scale, that are growing fast, that are disrupting – those are about 7% of the entire cohort.

The next category of 10% are challengers, they’re also growing dynamically, not really at scale yet, but on the way. So 17% of insurtechs are actually quite healthy and growing. Then we have a group of 25% in the middle, for which the jury is still out. What will happen there? Early-stage prospects could be good, but we haven’t seen the momentum yet. We see that about half of all insurtechs that started between 2015 and 2019 seem to be somewhat stuck. They are still small and they’re not growing, not increasing their employee base, and struggling to get investments. This doesn’t mean it’s over for them – the jury is still out. There are many opportunities in the market and they need to prove themselves now. Finally, we see that 9% of all insurtechs that started in that period, have stopped doing business. This is in line with other industries.”

What lessons can be learned? Which models are working?

Simon: “When you look at what is working, and what isn’t, we can differentiate three different models. The first model is the traditional B-to-C model. A lot of insurtechs started there, trying to disrupt the customer interface by going to the customer directly, digitally. What we found is that insurtechs that are successful here are doing things differentially – some by using superior data, others by doing excellent underwriting. Looking at the insurtechs that discontinued, we see that they basically tried to price below market, which was not sustainable. They didn’t really have a differentiated USP.

Looking at B-to-B, this is a real area of opportunity, with insurtechs supporting and partnering with big insurance groups, for example in the claims area or in pricing. We see lots of opportunities, especially for insurtechs that have a clear focus and bring excellence along the value chain.

On B-to-C: if we look at direct distribution, the sentiment is a bit mixed. While the market for insurance has been growing, the share of insurance that is distributed directly to the customer has been stagnant. In Europe that share is now at 18%, but that’s driven a lot by the UK, which has a very high share. The share is also flat in the US, only Asia is still growing. The question is: how to boost that share further? We see other industries where the share of direct distribution is 50%, so there is definitely room to grow.

The other big opportunity is embedded insurance. We see many companies entering insurance now and not by just distributing insurance, but by building their own insurance competence, by hiring teams, doing pricing, creating their own MGA’s. A lot of tech companies are active here and they don’t show their offer as insurance to the customer: it’s more seen as a service. We estimate that this space will grow quite a bit in Europe over the next couple of years. A very interesting arena, also for insurtechs to partner and collaborate with insurance groups.”

Where should insurtechs focus – how can they drive growth?

Piero: “Let’s take a look at the road ahead for insurtechs. How can insurtechs tackle some of the challenges they’re facing and create value? First of all, let’s talk about customer ownership. At the beginning we saw insurtechs mostly focused on B-to-C. Now we are seeing a shift, into different business models involving incumbents, embedded insurance, agents and brokers, or bancassurance to try and get access to customers and then scale. This is indeed a very good strategy to grow.

Looking at underinsurance, we see a gap of underinsurance of about €300 billion of premiums, just for Europe, which we consider typically well insured. This is mainly related to lines of business that are in non-motor, non-life due to both long term trends like the ageing population, but also new risks like cyber or the effects of climate change. By focusing on these areas, insurtechs can take center stage in the future of the insurance industry. We already see this happening with insurtechs partnering with some of the incumbents to achieve this.

The last point is tech and talking about tech, we cannot avoid talking about GenAI. Everybody is talking about it and trying to figure out how to best apply it. We are working on a number of use cases with incumbents and insurtechs, ranging from marketing and sales to claims excellence and customer experience. It’s still early to say if and how this technology will disrupt insurance. However, I do believe that, if there is one type of player that will be able to really use it and innovate insurance, it will be the insurtechs.”