Amidst the unfolding of 2023, insurance industry trends are driving a refocus on core operations, with a heightened emphasis on climate and environment-related risks for a sustainable approach. Investments now strategically pivot towards early-stage opportunities, while a remarkable surge in generative AI solutions reshapes processes across the insurance spectrum, from underwriting to claims processing. This signifies a transformative integration of advanced technology.
Our article provides a comprehensive understanding of the latest trends, thanks to Plug and Play's unique position in bridging corporates and startups. We've gathered insights from seven industry experts, including Lorenzo Cordin from UnipolSai, Chris Curran from Irish Life, Magdalena Ramada Sarasola from Willis Tower Watson, as well as leading venture capitalists Florian Graillot from Astorya.vc, Clarisse Lam from New Alpha Asset Management, Isabel Holding from Motive Partners, and Dom Nolan from Insurtech Gateway. With such a diverse range of perspectives, we offer a well-rounded view of the events and trends of the past year and what to expect in the near future.
The Insurtech sector in the EMEA region has mirrored 2020's investment patterns in 2023, signifying a robust rebound to pre-pandemic levels. This underscores a broader trend toward normalization within the startup ecosystem.
The Insurtech sector in the EMEA region has realigned its focus, emphasizing two key areas: risk management and boosting operational efficiency. This trend is evident in the increased investment in risks like commercial and cyber insurance, alongside significant advancements in technologies that enhance efficiency and accuracy in risk assessment.
Regarding operational efficiency, Tractable's (Plug and Play portfolio) $65m Series E funding led by SoftBank and Akur8's $25m raise with FinTLV stand out. Their technologies boost risk model export efficiency and pricing accuracy in insurance.
The commercial insurance has experienced significant investment influxes, exemplified by Superscript's €54m Series B, Orus' €11m Series A, and SureIn's €4m Seed round after the Sequoia Arc program.
Digital and cyber risk insurance also witnessed significant investments. Coincover's €28m Series B, Stoïk's €10m expansion funding, and Dattak's €11m Series A in France highlight the growing focus on cyber risk. Plug and Play has also made a strategic investment this year in Coinnect, a Swiss cyber insurtech offering a comprehensive platform engineered to integrate with insurance policies, enabling efficient assessment, proactive mitigation, and response to cyber threats.
2023, however, posed its unique challenges for the European insurtech sector. Unlike previous years, 2023 did not witness the rise of new unicorns, and some existing ones even lost their status. Post-Series A funding rounds presented significant hurdles, with many firms struggling to secure later-stage investments. Nonetheless, the UK's early-stage (Pre-seed and Seed) investment landscape remained vibrant, indicating a continued interest in nascent insurtech ventures.
The case of Luko, a French insurtech company, exemplifies these sector-wide challenges. Despite significant previous funding rounds from top-notch investors and ambitious growth plans, Luko faced financial and operational obstacles, leading to its sale at a nominal value. This situation mirrors the difficulties other later-stage European insurtech firms faced in 2023, marking a year of challenges and reassessment in the investment landscape.
Mergers and acquisitions in the sector have decelerated, aligning with 2020 levels. Nonetheless, a few early-year public listings suggest enduring investor interest. This evolving scenario indicates a maturing market where investors prioritize long-term value and sustainability over rapid growth.
Finally, the global surge in AI funding, especially in generative AI for insurance, as seen in companies in the US like Nirvana Insurance ($57M Series B) and Sixfold ($6.5M Seed), hints at similar upcoming trends in the European market.
Trends in the Insurance Industry: Optimizing Operational Efficiency
Given the current state of the economy, as seen fully reflected in last year’s investment dynamics, insurance companies faced slower growth. This led to a renewed focus on enhancing the operational efficiency of core businesses, particularly in distribution, underwriting, and claims, aiming to improve customer experiences and reduce costs.
Operational efficiency improvements emerged as a pivotal trend, with key areas of focus including:
Underwriting precision: The pursuit of operational efficiency in underwriting took center stage, with a notable trend towards precision and speed as a critical driver for greater expected revenues and cost reduction due to improved risk assessment. This was facilitated by the mass adoption of AI-based solutions, improving businesses’ risk assessment capabilities.
Claims automation: As insurers sought to drive efficiency gains, a spotlight was cast on automating claims processing capabilities. This year, claims automation and improving the overall claims value chain were top topics for most insurers. Companies like Omni:us or Sprout.ai (raised £5.4m in November 2023 to transform claims processing) continued to play a pivotal role, offering innovative solutions to streamline insurance back-end processes. In this regard, the focus was once again on improving the experience for the final customer, shifting the needle towards more and more digital journeys in line with renewed customer expectations.
Fraud detection: In the insurance industry, operational efficiency encompasses a renewed emphasis on fraud detection. While fraud detection has long been a concern for insurers, it now takes center stage more than ever before. The Coalition Against Insurance Fraud reports that insurance fraud amounts to a staggering $309 billion annually in the United States alone, with an estimated 3 to 4% of all insurance claims being fraudulent. This highlights the pressing need for heightened vigilance in combating fraudulent activities.
Companies like Finovox help reduce this figure by empowering insurers to detect and identify potential fraud before it can impact their operations — providing a proactive approach to risk management. Eyst Technology helps reduce this figure by offering a white-label technological solution that integrates into the insurers' mobile application or website and allows, at the time of compensation by the insurer, to transfer the claim funds instantly to the insured on an Apple Pay/Google Pay card. These same payment cards on which the compensation is paid allow insurers, via the Eyst tool, to monitor transactions in real time, receive alerts of suspicion of fraud, and understand what the insured is doing with their compensation.
Climate
On top of a shift in focus toward higher operational efficiency, climate risk also played a significant role. From an insurance perspective, the climate crisis has substantial consequences, affecting various aspects of risk assessment, pricing, and claims. Multiple of those have been experienced worldwide across the entire length of 2023 and are expected to roll over into the years to come.
Emerging risks, such as those associated with carbon credit delivery failures and operational challenges in renewable energy projects, are outpacing traditional insurance offerings. In response, companies like Kita Earth and CarbonPool are breaking new ground in the European carbon insurance market. Those startups stand out for their insurance coverage against the risk of failing to deliver on carbon credit projects, addressing a previously unmet need in the insurance landscape.
Technological advancements in risk assessment are also seeing significant contributions from startups. Companies like Reor20 are enhancing the accuracy of risk assessments and streamlining claims processing, which is vital in managing the complexities of climate-related insurance claims.
In asset valuation, climate risk is becoming an integral factor, affecting both underwriting and claims processes. Mitigrate is at the forefront of this trend, leveraging satellite imagery and AI to offer climate adaptation strategies for real estate, aiding insurers in recalibrating valuations and adapting their portfolio of properties to climate-related risks.
Additionally, the burgeoning renewable energy sector presents unique insurance needs. A UK-based InsurTech, Renew Risk (raised £1.7 million in 2023), is addressing these needs by offering software solutions for financing, arranging, and insuring renewable energy projects. This software is instrumental in managing the risks associated with developing renewable energy infrastructure.
Tech World Buzz: Large Language Models & Gen AI Take Center Stage in 2023
In 2023, large language models (LLMs) and gen AI attained significant prominence in the tech world. A year after Chat GPT's debut and following Mistral AI's impressive second funding announcement of €500 million in just six months, their influence remains undeniable.
At Plug and Play, we were fortunate to have Florian Bressand, Chief Business Officer of Mistral AI, present the latest AI advancements to one of our corporate partners. He discussed the distinctions between closed models like OpenAI or Anthropic and open models like Lama or Mistral AI. Given Mistral AI's corporate-focused design, we observe a growing trend of major financial corporations integrating gen AI into their fundamental operations.
Morgan Stanley launched an AI assistant for wealth managers, already boasting thousands of users. JPMorgan Chase & Co. began employing gen AI to enhance the capabilities of their investment advisors. Stripe implemented an AI assistant for searching and summarizing complex technical documentation.
In the insurance and insurtech sectors, Shift employed gen AI for fraud and risk detection. In 2023, AXA launched AXA Secure GPT, an AI tool powered by Microsoft's Azure OpenAI, aimed at secure data management and AI-related tasks. Initially rolled out to 1,000 employees, it's set to expand to all 140,000 employees globally, focusing on responsible AI use and risk management.
The surge of startups entering this space is noteworthy. Existing players like Zelros are enhancing their offerings with gen AI capabilities, introducing highly advanced AI agent copilots. New, fully gen AI-centric solutions like Lararus are revolutionizing document processing in the insurance industry.
This development significantly impacts nearly every aspect of the insurance value chain, from enhanced customer experience and streamlined claims processing to proactive risk management, improved risk assessment, cost savings, operational efficiency, and data-driven insights.
However, in 2023, we observed insurance companies implementing readily apparent use cases, significantly emphasizing efficiency and streamlining operations.
Challenges & Opportunities Facing the Insurance Industry in the Coming Year
Verticalized Use of Gen AI
Like any maturing technology, we can expect future applications of gen AI to evolve in a much more verticalized fashion, hence detaching from the apparently ready-to-use first applications in favor of more sophisticated interpretations of the needs at hand.
The distinction between horizontal and vertical AI models underscores the growing demand for industry-specific solutions as businesses recognize the need to harness AI's power for tailored optimization and growth opportunities. Vertical AI models, designed for specific industries or use cases, excel at incorporating extensive industry data and expertise to deliver targeted solutions. In the insurance sector, the potential applications of vertical AI are substantial and expected to be introduced sooner rather than later. Amongst the most relevant applications are:
• Automated underwriting processes: Verticalized gen AI can streamline underwriting processes by automating the analysis of extensive datasets. This includes assessing risk factors, analyzing customer data, and generating more accurate underwriting decisions;
• Insurance products personalization: Verticalized gen AI allows insurers to create personalized insurance products based on individual customer profiles and preferences. By analyzing customer data and behavior, AI can recommend customized coverage options, helping insurers meet the unique needs of their clients;
• Cybersecurity and data protection: With the increasing digitization of the insurance industry, gen AI can play a crucial role in cybersecurity and data protection. It can identify potential vulnerabilities, detect unusual activities in real-time, and enhance overall data security measures to safeguard sensitive customer information.
Other than the more traditional and understandable applications, these include customer interaction and support, fraud detection and prevention, claims automation, and more.
The ability of vertical AI to incorporate subject matter expertise is particularly valuable, allowing the model to tap into the knowledge of insurance experts and achieve more personalized and reliable results. This not only enhances decision-making processes but also contributes to improved customer satisfaction through tailored and efficient insurance services. The transformative impact of vertical AI in addressing industry-specific challenges positions insurance organizations for sustainable growth and a competitive edge in an evolving landscape.
The importance of managing risks in the age of AI
Of course, as often happens, from great opportunities come significant risks. As AI becomes more integrated into business operations, there's a rising need to understand and manage its associated risks, driven by complex ethical, legal, and operational challenges. In response, companies seek tools that provide in-depth insights into the performance, costs, and risks of their AI models. With AI tools becoming more accessible, the urgency to address these challenges increases.
This trend is further accelerated by regulatory developments, including the EU's AI Act, Racial Equality Directive, and Gender Directive, which focus on governing Al use, preventing discrimination, and safeguarding personal data. These regulations highlight the growing necessity for effective Al risk management solutions.
Companies like Calvin Risk from Switzerland offer customizable risk management software for AI models, offering in-depth insights and analysis in a flexible, tiered SaaS format. It caters to the unique challenges of AI integration in businesses, providing options for additional functionality through ancillary modules, thereby efficiently managing AI-related risks and compliance. It will become a must-have for insurers.
The EU Sets the Global Standard for AI Regulation with Landmark AI Act
The European Union reached a groundbreaking deal on Friday, 8th of December, on the world's most ambitious law to regulate AI. The AI Act, covering the 27-nation bloc, aims to establish a global standard for AI regulation by classifying risk, ensuring transparency, and imposing financial penalties on tech companies for non-compliance. Tech companies operating in the EU would need to disclose data and undergo rigorous testing, especially for high-risk applications like self-driving cars and medical equipment. The law prohibits scraping faces from the internet for facial recognition databases, with exemptions for certain law enforcement activities. Violations could result in fines of up to 7% of global revenue.
The legislation positions the EU as a leader in tech regulation, influencing global standards and addressing concerns related to AI's economic benefits and societal risks. The deal follows intense negotiations between the European Commission, Parliament, and Council, with compromises made on controversial aspects to strike a balance between protection and innovation.
Insurance Industry Trends Beyond 2024:
Open Insurance
RELATED: Turning Cyber Threats into Opportunities: Cyber Insurance Coverage for SMEs
Finally, while we expect 2024 to bring long-lasting, substantial changes to the industry, we believe the years beyond 2024 will signal a fundamental transformative shift. The European Commission is spearheading efforts to extend the regulatory framework for financial data access to insurers, fostering transparent and data-driven relationships between insurance providers and customers. This framework will also be known as open insurance.
At its essence, open insurance mirrors the principles of open banking, involving insurers sharing information securely with authorized third-party service providers. This approach aims to facilitate regulated data transmission, creating a mutually beneficial ecosystem for insurers and consumers alike.
Enablers of Open Insurance:
• Technology: Open insurance relies on APIs, like those employed in open banking, to enable seamless data exchange between insurers and authorized third parties.
• Regulation & Financial Information Data Access (FIDA): The European Commission's proposed regulatory framework, FIDA, plays a pivotal role in open insurance. It empowers customers to share their financial data securely with other institutions or service providers. Unlike the free access model under PSD2, FIDA introduces compensation mechanisms for data sharing, ensuring a secure and compliant exchange of information.
• Standardization: Open insurance necessitates the development of standardized methods for insurers to share personal and non-personal insurance information with third parties.
Key Considerations Under FIDA
While FIDA covers various financial sectors, insurance is treated differently due to consumer protection concerns. Certain products, such as sickness and health insurance, are excluded. Introducing a "data use perimeter" helps delineate which personal data is essential for risk assessment and pricing in specific insurance products.
Benefits of Open Insurance
Open insurance is poised to deliver several advantages akin to the success witnessed in open banking:
• Opportunities for Innovative Startups: The ecosystem fostered by open insurance encourages innovation, efficiency, and collaboration within the insurance industry. Regulators stand to benefit from real-time data access, facilitating advancements in regulatory technology (regtech) and supervisory technology (suptech).
• Benefits for Insurance Consumers: Customers will enjoy holistic policy overviews, streamlined switching services, and access to tailored insurance products, providing enhanced transparency and choice. The increased availability of data will enable insurers to deliver more personalized and responsive customer service. Open insurance promotes transparency in insurance transactions, fostering trust between insurers and policyholders
• Benefits for insurance corporations: The regulated data transmission ensures efficiency gains, real-time data access for regulators, and the ability to diversify offerings. Open insurance fosters transparency, builds trust with policyholders, and provides broader data access for improved risk assessment and fraud detection. Embracing open insurance delivers a competitive edge, positioning insurers as industry leaders and facilitating swift adaptation to regulatory changes, ultimately paving the way for growth and enhanced customer relationships.
Among the most exciting startups navigating the trend is Insurely. Insurely's vision for open finance centers around consumer empowerment and transforming the insurance industry into a more accessible and consumer-friendly space. The platform enables consumers to make well-informed decisions by providing real-time access to insurance data, fostering loyalty and better coverage. Actively aligning with the EU's upcoming open finance framework, particularly the FIDA regulation, Insurely advocates for a clear, consumer-centric data-sharing approach.