Joan Cuscó
Joan Cuscó
Global Head of Transformation

Insurtech: An Emerging Ecosystem in Continuous Growth

~ 7 minutes

MAPFRE is an insurance company that is betting heavily on continuous innovation as a way of modernizing the traditional insurance industry. In this interview Joan Cuscó, shares with NTT DATA his insights and thoughts on where the Insurtech ecosystem will grow and bloom.

With the new historical increase in investment, do you consider that the Insurtech market is still in a growth phase or is it going more towards consolidation?

Both things are going to happen, we don’t believe that investments are going to stagnate or decrease in a systematic and sustained way. There may be a certain peak driven by low-interest rates and a “herd effect” that has led many more cautious investors to invest in venture capital given the exponential growth that followed the self-reinforcing bubble. But we are still talking about emerging ecosystems, which means that they will continue to grow.

Furthermore, there may be consolidations depending on what type of products are offered, because the fundamental principle that a technology startup is based on is that its cost structure remains fairly stable. Costs would grow linearly whilst its income grows exponentially, and that is supported by the fact that the marginal cost of a new user is virtually zero. This is not the case for traditional insurance companies. Neoinsurers don’t have it easy either, but the operating models that they are creating enable new business opportunities that we must watch closely.

“The ability to create innovation is no longer exclusive to traditional areas like Silicon Valley. It’s certainly much more available to everyone.”

Do you think that Europe will reduce the gap with the US market in the coming years?

If we look exclusively at quantitative aspects, we must understand that the Insurance industry in the United States, especially in some business lines such as Health, presents some absolute figures that do not resemble at all the ones of Europe, where the entire ecosystem has different magnitudes.

However, if we look at the qualitative aspect, the ability to create innovation is not exclusive to traditional areas such as Silicon Valley, it is certainly much more available to everyone.

If what we are talking about is Insurtech innovation, European startups have traditionally been perceived as more innovative than North American ones, simply because our market is more permeable to certain innovations, especially in direct distribution and artificial intelligence.

But we are also seeing more and more – supported by a vast literature – that European startups have outperformed North American startups in terms of capital returns. This could mean that the next markets, like Latin America, could use capital in a much more efficient way.

“No one we know of has built an internal innovation model that has taken the transformation where it intended.”

How do you see the evolution of the investment volumes of insurers in startups (both related and not related to the insurance sector) compared to the last 5 years and how do you foresee it will be in the next 5 years?

I would separate the external or exogenous situation from the endogenous one, from the insurance industry itself.

When looking at the whole market, with valuations over the roof, venture capital might still seem a very interesting investment space, especially if you seek exits in the short-mid term. Although this context has its risks as well, because the size of tickets has forced investors to look for startups in earlier stages, and we might not be ready to handle such a change in our portfolios.

When it comes to the insurance industry, we may be facing the exhaustion of our innovation models. No one we know of has built an internal innovation model that has taken the transformation where it intended. Many press releases and case studies have been published and we have all been able to brag about our accelerators, our project factories, or digital hubs, but the reality is that no one has yet transformed as much as we would like to. So, as insurers in 2021, we see that the open innovation models we began to promote 10 years ago in little post-its, have not moved us forward enough. Therefore, we see a trend in which insurers take the money that we used to invest in internal or open innovation, which is not little, and put it on another table. This might be the decade of Corporate Venture Capital and the start of relevant M&A between corporations and startups, which is not happening yet in Europe when we look at the Insurtech market.

“In the work of R&D&i, the Tech Giants are creating these breeding grounds, where startups can leverage their capabilities to build amazing things quite easily.”

What kind of value do you think a Tech Giant can bring to a young Insurtech?

Sometimes it is difficult to understand what the “core” of a startup is. What makes them 10 times better than their competitors? Sometimes we confuse the value proposition with technology, sometimes technology is the value proposition, sometimes not, and other times the model changes over time.

In some cases, there are startups that say: “Hey, we have seen that the technology of this Tech Giant for this specific application does not work and we have developed a different formula.” Perhaps they will end up being acquired by a Tech Giant or perhaps they will remain as a niche solution. But in the end, we understand that much of the technology will become a "commodity" and we can leave that pure technological R&D&i work to the Tech Giants, and then we can build on top. So the Tech Giants can create those breeding grounds, those environments in which startups can leverage their capabilities to build amazing things pretty easily. And it’s obvious that they are already doing so, and I personally think they're doing reasonably well.

Do you consider that submitting an idea or project to a regulatory Sandbox is positive for an insurer? Has your company considered participating in any of them?

We all should applaud these initiatives. The role of the regulator is to look after the interests of all parties by ensuring that there is a framework whereby such progress can take place. They are the way to guarantee that these innovations reach the market without unprotecting the rights of citizens and consumers. As far as we know, the Sandbox allows that, and even once the program is finished, the solution continues to be alive and improving until there is a regulatory change that allows them to function with guarantees.

“The insurance expertise, as we understand it today, is losing value. Real-time data and predictive models will replace historical data in some risks, and some of those new risks can only be underwritten by algorithms.”

Looking into the crystal ball, what are your predictions for the Insurtech sector for the coming years? What trends do you think are becoming more important?

There is a trend that will define it all: insurance “expertise”, as we understand it today, is losing value. Not only because of the huge amount of data accesible today and the power of AI, but also because historical data could be worthless due to the volatility of the context, so you need to factor in real-time data and rely on AI and predictive models. In addition, our portfolios are already exposed to new risks, like cyber risks or climate risks, which can and will have an impact on us, whether we decide to enter those markets or not.

Who will be the next Unicorn? Why?, because awareness of the social and environmental impact of investments is no longer a gimmick; we have understood that companies exist to create value to society, and they will continue to exist as long as they create value to society. Clarity has brought light into a new investment paradigm driven by ESG criteria, and the quality of the investors in its cap table says it all.

What was the hype of 2021?

NFTs. Nothing compares to that. They have moved tons of money. You may find them absurd or amazing, but they are relevant in terms of buzzword.

What was the most important technology during 2021?

In 2020-2021 there’s been almost a breaking point in "Machine Learning" and "Deep Learning" applied to insurance, especially when it comes to image processing and unstructured information.There were many use cases that as insurers we wanted to carry out but technology was not there, or it was not robust enough, or it was not ready to be “plug and play”. In 2021, startups that we collaborated with (and invested in) reached the maturity to become partners at scale, jumping from the lab and the POC world to the full production realm, and becoming unicorns themselves.

What are the models that you think will not grow/be relevant?

We believe that anything related to the first generation of connected insurance needs to be left behind. Indeed, those initiatives brought learning, data, sometimes differentiation, but the ratio between effort and value was not sustainable.

On the other hand, we should acknowledge and assume that not all our customers want to maintain a close relationship with their insurer. Insurers have been trying to create intimacy and engagement with their customers for years, and that has provided a lot of value to some segments. But we are also ready to serve those customers that want to forget about their insurance, and do it with both diligence and excellence.