Willis Towers Watson recorded more than $1.3bn of insurtech funding in the third quarter, double the level a year previously

The age of technology

Insurance technology is turning towards parametric products as a way of finding greater efficiency, according to a new quarterly insurtech briefing from Willis Towers Watson.

There was more than $1.3bn of insurtech investment in 2018’s third quarter, double the level observed a year previously by the re/insurance intermediary.

While individual investment rounds were larger, the number of transactions reported was 20% down to 57.

Q3 saw eight transactions over $40m, Willis Towers Watson noted, up from six in the same quarter last year, with continued active participation of re/insurers.

The pipeline of insurtech partnerships remains strong, the re/insurance broker added.

Insurtech ventures are increasingly focused on deploying parametric structures, Willis Towers Watson suggested, which unlike indemnity-based insurance pay out a predefined sum based on a trigger chosen as a proxy for an actual loss.

“Parametric products align the interests of insurers and insureds in a way which traditional indemnity covers do not, by removing the parties’ respective incentives to manage down or inflate claims,” the broker said.

“Parametric insurance is also substantially simpler than indemnity products, since it does not require costly claims handling. With parametric insurance, frictional costs can be very low,” Willis Towers Watson added.

Some insurtechs have acknowledged these benefits and combined technology and information within parametric or event-based insurance structures to address existing inefficiencies or coverage gaps, the briefing noted.

“They use a combination of third-party and proprietary data, advanced sensors, and the capabilities of the Internet of Things to develop a new paradigm of insurance offerings for the connected world,” said Willis Towers Watson.

Applications include companies using parametric structures to cover the risks of earthquakes, travel disruption, flash flooding, and horticulture.

“The impact of parametric insurance can be much more profound than simply lowering frictional costs and mitigating the potential for fraud,” says Rafal Walkiewicz, CEO of Willis Towers Watson Securities.

“First, the use of parametric insurance encourages conversation around risk mitigation. Second, the simplicity of parametric insurance facilitates a decoupling of the various functions of the industry value chain and it allows for modularization,” Walkiewicz said.

Magdalena Ramada, Willis Towers Watson’s senior economist, continued: “When automated correctly, besides being increasingly economical to deploy, parametric products are an important tool to access underserved segments and bridge coverage gaps.

“Their underlying policy structure and digital nature fundamentally reduce the complexity and frictional costs of traditional insurance, allowing for the simplicity, scalability and flexibility needed to cater to most of these markets,” Ramada added.