Why Most Insurtechs Fail: Essential Lessons for Actuaries and Startups

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The rise of Insurtech promised to create more efficient, customer-centric, and innovative solutions by leveraging technology. However, despite significant investment and initial enthusiasm, many insurtech startups have struggled or failed to achieve sustainable success. This phenomenon offers critical lessons for both actuaries and entrepreneurs within the industry, which we cover in our article.

Personally speaking, we were active in the early 2010s and remember that time as a boom for mushrooming of new insurtechs. We remember the excitement and palpitation from that but now around a decade later, we can see so many strewn shatters of insurtech failures and can’t help but wonder: what went wrong? The insurtech boom of the mid-2010s held great promise through technology and innovation. However, by the early 2020s, it became clear that many insurtech startups had failed to live up to their lofty ambitions.

Key Reasons for Insurtech Failures

Regulatory Challenges: The insurance industry is heavily regulated, with strict compliance requirements varying across regions. Many insurtech startups, driven by the agile and fast-paced tech culture, underestimate the complexities of navigating these regulatory landscapes by moving fast and breaking things. Failure to comply with regulations can lead to legal issues, fines, and in some cases, the shutdown of operations.

That is not to suggest that regulation is not useful or should be scrapped. While regulation can and should definitely be improved, regulation exists in the first place for very good reasons as insurance is a risk accumulator from individuals and groups. Risk accumulation in one place via an insurer can be quite risky and there needs to be sufficient capital levels to ensure claim payments even if they are at extremely high levels. People need to trust that insurers will pay claims, especially for long-term life insurance that could be needed 40 years into the future. This trust is crucial and requires robust safeguards against misleading market practices.

Lack of Insurance Expertise: A common pitfall is the excessive focus on technology without a deep understanding of insurance fundamentals. Many startups are founded by tech entrepreneurs who lack insurance expertise and see their being outsiders as an advantage as they are not encumbered by pre-existing biases. While being an outsider definitely has its advantages, it also usually results in solutions that are technologically impressive but fail to address the core needs and pain points of the insurance business.

Customer Acquisition and Retention: Insurtechs often struggle with customer acquisition and retention. Traditional insurance companies have long-standing relationships and trust with their customers, built over decades. Startups find it challenging to build similar trust and loyalty quickly. Moreover, the high costs associated with customer acquisition in the competitive insurance market strain their financial resources. For example, Lemonade used to say that 20% is deducted from premiums and the remaining goes towards paying the claims and it uses AI chatbots to replace agents. Now it pays 20% in just commission to AmSuisse agents because agents are still required to acquire customers.

Risk Management: Effective risk management is crucial in the insurance industry. Some insurtech startups, in their pursuit of rapid growth, adopt aggressive underwriting practices without sufficient risk assessment. This leads to higher-than-expected claims, losses, and ultimately, financial instability.

Scaling Challenges: While many insurtechs manage to launch successful pilot programs, scaling these operations can prove difficult. Expanding to new markets, managing increased customer volumes, and ensuring consistent service quality required significant resources and operational expertise, which many startups lack.

Financial Sustainability: Insurtech ventures often rely heavily on external funding to sustain operations and fuel growth. However, securing continuous investment becomes challenging, especially when initial results do not meet investor expectations. Cash flow problems emerge, leading to cutbacks and, in some cases, business closures. One key example of this is The Blockchain Insurance Industry Initiative (B3i) which failed and filed for insolvency due to the following reasons:

• Inability to secure funding in recent funding rounds.

• Loss of confidence from investors and supporters in the direction of the company's products.

• Overstatement of the benefits of integrating blockchain technology in the insurance industry.

• Challenging macroeconomic environment. That can dry up new funding, put pressure on profit margins, and so on.

It’s also important to state that not all technology is the same. Some are riskier than others such as blockchain and generally, the more decentralized and emerging a tech, the higher the risk associated with it. First-mover advantage is real but so is the first-mover disadvantage. A lot of insurers keep a vigilant view but wait for a track record of some technology to emerge in the first place before investing in it.

Insurer Failures: That is not to suggest that insurers are immune to failure. The most comprehensive research into why insurance companies fail has been carried out by A. M. Best. In their 1999 special report, they published the findings of their research into the failure of 640 US companies. These failures took place in the years 1969 – 1998. Of the 640, they were unable to identify the primary cause of failure in 214 of the cases. The table below summarizes their findings.

Analysis of the 36 General Insurance companies that became insolvent between 2005 and 2009 revealed the following (source: American Academy of Actuaries: Property/Casualty Insurance Company Insolvencies; 2010):

The companies, in general, were small, relatively new, and/or concentrated in one line of business or state.

Indicators of poor management were apparent, as evidenced by inadequate levels of reinsurance, risk management, rapid premium growth, data problems, underpricing, and under-reserving.

In recent times, COVID-19 became a huge stressor for insurance insolvencies around the world, especially in countries more affected by it such as Italy, South Africa, and Thailand. After that, the current macroeconomic challenges, currency devaluations, and cost-of-living crisis have led insurers to post losses despite a considerable increase in premiums.

Lessons for Actuaries and Startups

When highlighting any lessons, it's important not to get carried away. Mistakes shouldn’t be seen as something that others did but as something that we wouldn’t have done. The critic should not disturb the person doing the actual work. We would always prioritize doers over someone who has no contribution other than criticizing others' work and thinking themselves to be infallible.

With that context in mind, it’s important to stay humble while still distilling what we can from collective mistakes. Successful insurtechs must balance technological innovation with deep insurance expertise. Actuaries, with their understanding of risk management, pricing, and regulatory compliance, can provide invaluable insights to ensure that tech-driven solutions are not just innovative but also viable and compliant.

Navigating the Regulatory Landscape: Startups should invest in understanding regulatory requirements from the outset and build compliance into their business models. Actuaries can play a critical role in this process by ensuring that products and practices align with regulatory standards. Regulators can encourage rapid iterative innovation via sandboxes. With the Sandbox approach, first-time innovation can be tested thoroughly and improved without worrying about fear of backlash from the client or regulator. The Sandbox approach will open a formal platform to streamline innovations quickly in an orderly way rather than being left to the mercy of ad-hoc initiatives that are half-baked and never get to see the light. It's high time to stop seeing innovation as something to be done when one would be free just for the sake of being creative because then practically it gets deprioritized and put on the back burner so even simple things take decades to get introduced.

Building Trust and Delivering Value: Building trust and delivering value to customers should be a priority. Insurtechs need to go beyond technological features to offer clear, tangible benefits to customers. This involves understanding customer needs, providing value for money, enhancing transparency, and providing superior service. If any one element of the value chain is not aligned, it can cause problems. For example, accidental insurance for on-demand ride-hailing apps is technologically superior and seamless but suffers from very low loss ratios which mean that benefits are not being transferred to the ultimate customers and there is a lack of value for money. So rather than focusing on maximizing sales of such products, these first need to be designed to provide a reasonable loss ratio as well. Claims are the actual product, not the premium, and so word-of-mouth marketing when claims get paid is the greatest source of exponential growth in today’s times which should not be given up in quest for low claims.

Robust Risk Management: Startups must adopt robust risk management practices. Actuaries can help design and implement sound underwriting processes, ensure accurate pricing, and develop strategies to manage claims and losses effectively.

Preparing for Scalability: Preparing for scalability is essential. Startups should plan for growth from the beginning, ensuring that their infrastructure, processes, and teams can handle increased demand without compromising service quality.

Financial Sustainability: Financial sustainability is crucial. Insurtechs should focus on achieving profitability and maintaining healthy cash flow. This may involve prudent spending, realistic growth targets, and diversification of funding sources. Influenced by the "growth at all costs" mentality prevalent in tech startups, many insurtechs focus on rapid customer acquisition without building sustainable business models. This leads to high loss ratios and unsustainable cash burn rates.

The macroeconomic environment is also a contributor to booms and busts in insurtechs. Easy access to venture capital allowed many insurtechs to operate with negative unit economics for years. When market conditions changed and funding became scarcer, these companies struggled to achieve profitability. As Warren Buffet once said, "only when the tide goes out do you discover who's been swimming naked."

Conclusion

The failures of many insurtechs offer valuable lessons for both actuaries and future insurance entrepreneurs. Success in this space requires a delicate balance of technological innovation, deep insurance expertise, and sound business fundamentals. Actuaries have a unique opportunity to position themselves at the forefront of insurance innovation, ensuring that future insurtech ventures are built on solid risk management principles and sustainable business models. As the insurance industry continues to evolve, those who can bridge the gap between traditional actuarial science and cutting-edge technology will be best positioned to create the successful insurtechs of the future.

The failures of many insurtech startups highlight the intricate and challenging nature of the insurance industry. For actuaries and startups, these failures offer valuable lessons on the importance of balancing innovation with industry expertise, regulatory compliance, customer focus, risk management, scalability, and financial sustainability. By learning from these lessons, future insurtech ventures can better navigate the complexities of the insurance landscape and achieve lasting success.