Scale, maturity, regulation, environmental factors and … more scale … are the major factors driving the insurance sector today.

They are certainly the common threads that unite the conversations we have had with industry leaders and experts across Australasia and Southeast Asia over the last month, reviewing the key thematics of a sector that while hundreds of years old, finds itself in an era of rapid transformation and disruption.

The longstanding adage in technology until recently has been “growth at all costs”, and whilst there are many sectors reeling from too strict an adherence to this mantra, it remains a necessary starting point for all insurance products. Scale is essential so that you can spread the risk of claims across all your written premiums.

The natural pattern for insurance products is that as they reach critical mass, margins reduce. Then as they collect data and build it into their projections, margins reduce, and then as competitors develop comparable products, margins reduce again.

In turn, that limits the ability of new entrants to take significant market share, which leaves us with relatively stable product sets with a small number of market participants.

We’ve seen this especially in Home and Auto – two of the oldest and best-understood insurance categories. The datasets are vast and well-mapped to their categories and cohorts. Online players were able to enter the market and simplify the customer journey, but the cohorts of disruptors are whittled down and the exits, when they come, are to the older more established traditional insurers.

What we see is a classic innovation S-curve. As each product category settles, we look to see who’s left standing. Innovation and growth come from new products, not from deep and continued innovation within a specific category.

Home and Auto have gone through this in most markets, and are now not just ubiquitous but also highly regulated – another factor that is both a result of scale and a contributor to a deceleration in innovation and in turn margin reduction. As they matured, insurers began to look to Travel – once a new frontier in InsureTech innovation in terms of product set and channel.

Embedded insurance became widespread, with offerings built into airline booking engines. It was also fractionalised to cover not just loss of property (baggage claims, anyone?), but loss of time if your flight is delayed. This fractioning of insurance products opened up opportunities in micro-insurance - allowing consumers in Indonesia, for instance, to now protect their 20-minute Gojek rides for pennies. 

The Black Swan Cometh

COVID arrived and insurers were smashed with claims numbering in the millions of individual tickets. That reinforced the virtue of scale, the only protection for the insurer. Many did not survive.

But the quiet upside of COVID from an insurance perspective was the behavioural change – globally, all at once, living patterns were disrupted. People stopped going to work, socialising, and traveling – all factors that had been costed into mature product sets. 

Suddenly, claims against car crashes dropped, because people weren’t driving to and from work five days a week, and margins jumped. Young men stopped getting into fights outside clubs at 2am on a Friday night, hence injury claims dropped and margins jumped. People stopped doing group sports and needed less physio – so claims dropped and margins jumped. 

Here Kitty

And the big one…. people stopped spending time together, and so they bought pets en masse – and a fledgling category boomed. Pet insurance – high margin and unregulated. Hallelujah.

Currently, penetration is low, standing at around 10% in Australia, and just 25% in the UK (often regarded as a leader in Insuretech trends), so it’s still a very high-margin business, bolstered by the Kibble-buying middle-class demographic that is opting in for this product.

That said, in contrast to other categories it’s also high attrition, as euthanasia in pets is considered by most a preferable option to prolonged treatments, and so trends are showing an opt-out as pets start to age. When it comes to insuring human wellness, longevity is constantly extended and is euthanasia not the norm, by any means. Indeed, we expect to see some significant margin squeezes on health insurance in the coming years.

That’s due to a time delay from people who didn’t do their regular checks during the COVID-19 pandemic, partnered with longer wait times post-pandemic in hospitals and clinics, resulting from a talent shortage.

There will be a short-lived increase in healthcare claims before things settle, and again it’s a question of needing scale to weather those fluctuations.

Where does all of this leave us from a tech perspective? One thing is clear – a great tech stack is not your “moat”. If you’re on your path to exit, your moat is scale or capital. If you’re under-capitalised you won’t live through category margin reduction, and if you’re not at scale you simply won’t live.

Companies in this space need to raise big and keep raising. If you are number one or two in each market, you’re in the scope of the traditional insurance giants looking to buy into the next S-Curve.

But if you’re sitting at number 3-5 and your competitors are starting to hit scale and have money in the bank – now might be a good time to explore consolidation.