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quarterly-insurtech-briefing-q4-2017

Quarterly InsurTech

Quarterly InsurTech Briefing Introduction Rafal Walkiewicz Global Chief Executive Officer Willis Towers Watson Securities Foreword: The Sobering of InsurTech The fourth edition of our Quarterly InsurTech Briefing offers an opportunity to reflect on a full year’s worth of InsurTech activity in 2017 – another year of record investment into the space from both financial investors and (re)insurers. 2017 brought a new trend to the industry, which we describe as the The Sobering of InsurTech. Incumbents sent a clear message to potential disruptive outsiders: by investing heavily in start-ups and technology, (re)insurance companies appear to have assumed a semblance of control over the InsurTech revolution. During the year, conversations about disruption of the existing value chain evolved towards an efficiency-driven search for incremental innovation. However, technology revolutions rarely result in redistribution of power among incumbents. Instead, these developments more often produce an entirely new approach to the value chain that defines winners. Look at Amazon, Tesla and Apple as examples, and consider the markets they’ve taken from Walmart, GM, Ford, Kodak, Nokia and others. Insurance may not trace the same trajectory – high barriers to entry associated with regulation, product complexity and the value of longterm customer relationships may shield incumbents from large-scale disruption. It is also possible that incumbents’ collective response to InsurTech hype has diminished their ability to recognize true disruption. Should Incumbents Feel Safe? Our Q4 Industry Theme feature focuses on (re)insurers shaping InsurTech. 65% of incumbent investments to date have focused on enabling the current value chain, as (re)insurers have attempted to enhance the efficiency of product delivery, underwriting, claims and other administrative functions. It remains to be seen whether enhanced efficiency will drop to the bottom line for incumbents, get delivered to customers or fund third party solution providers, but it is difficult to identify or quantify disruption within incremental innovation resulting from these investments. Less than 10% of InsurTech investments to date have flowed into start-ups targeting full scale value chain disruption. This trend is magnified in the results of our (re)insurer innovation survey, which includes responses from nearly 600 (re)insurance and investment professionals. 75% of respondents believe their company is “moderately” to “extremely” at-risk of disruption, even as 72% of company innovation resources, on average, are devoted to incremental technologies (instead of disruptive or radical ones) and nearly half of respondents describe their company’s innovation philosophy as “ad-hoc,” meaning their company is neither explicitly a first mover or a fast follower. Most respondents believe customers and employees are valuable internal sources of innovation, while only 20-30% recognize and prioritize substantial innovation contributions from external talent pools, such as accelerators/incubators and venture capital. Henry Ford once said, “If I’d asked customers what they wanted, they would have told me, ‘A faster horse.’” Third party venture capital money in InsurTech is betting on something else. Leading VC fund Andreessen Horowitz sees new technologies differently, stating: “It has to be a radical product. It has to be something where, when people look at it, at first they say, I don’t get it, I don’t understand it.” External capital entering the industry is searching for potential unicorns, funding disruptive ideas and breakthrough technologies that may seem crazy at first. New Capital Bets on High-Growth Products Our Transaction Spotlight feature highlights an example of a significant bet on fundamental changes to (re)insurance sourced from outside of the industry. Guidewire’s $275 million acquisition of Cyence marks a technology company’s entrance into an attractive niche market which may represent one of the most compelling growth opportunities in the (re)insurance sector. Today, cyber attacks are estimated to cost more than $1 trillion per year, more than three times higher than economic losses from natural disasters in 2017, the third most expensive year in history. To date, the (re)insurance industry’s response to cyber threats has been mixed; amidst limited product penetration due to a lack of experience data, global cyber premium is estimated at just $3 billion in 2017, though selected incumbents are working hard to advance their cyber products, modeling capabilities and underwriting and claims handling infrastructure. It is interesting that one of the leading cyber risk modeling firms has been acquired by a technology vendor, and not a (re)insurer. 1 willistowerswatson.com

Quarterly InsurTech Briefing Introduction Who Benefits from Modularization? Our Thought Leadership feature further focuses on the InsurTech sobering phenomenon and the associated growth of incumbent interest in technologies addressing their back-office needs. With technology moving forward at an unprecedented pace, incumbents are increasingly electing to outsource functions to highly specialized new entrants, renting evolving modules of technology that can be tailored to suit their individual needs. Though this approach may be more cost effective, it further fuels the question of whether incumbents will allow value in the industry to shift towards new entrants. In time, market participants will come to understand which module in the chain generates the most value. It is plausible that automation in distribution will shift value towards efficiency of internal processes that support cutting-edge modeling and underwriting engines. Who Were The Winners In 2017? Our (re)insurer innovation survey shows that innovation does not necessarily correlate with geography, size or even underlying product. Four companies voted to be most innovative: Munich Re, Lemonade, AXA and Swiss Re vary in size from the hundreds of millions to over $30 billion, focus on personal or commercial lines products, insurance or reinsurance and have global or local platforms. Hundreds of InsurTech startups are looking for their place in the insurance value chain. To summarize the year, we cataloged 100 companies to watch into four categories, including the top 25 companies in product & distribution, business process enhancement, data & analytics and claims management. We believe that these categories represent the current frontiers of innovation in insurance. Over half of InsurTechs target distribution and product design, with data & analytics and claims management representing relatively smaller segments. We expect the business process enhancement category to grow based on the current level of incumbent focus on this area. Incumbents Fuel Investment Momentum in Q4 $697 million of InsurTech funding in Q4 rounded off 2017 at a total of $2.3 billion, a 36% increase from $1.7 billion recorded in 2016 and the second highest total for any year to date. (Re)insurers, directly and through corporate venture arms, are increasing their activity in the sector and expanding their focus to invest in a broad range of technologies with potential applications to their core (re)insurance businesses. 35 private technology investments by (re)insurers in Q4 and 120 private technology investments by (re)insurers in 2017 are the highest totals recorded in any quarter and year to date, respectively. I want to thank you for all the comments and guidance we received during the year. We are very grateful for the positive response to our Quarterly InsurTech Briefing to date. We want to continue to improve it, and as ever, we welcome your feedback and suggestions. Transformative Value New Products & Services New Value Chain External Capital Playground Incumbents Rarely Win Market Focus Sobering of InsurTech User Focus Incumbents Always Win Improvements to Legacy Systems Customer Centric Solutions Incremental Value Quarterly InsurTech Briefing Q4 2017 2

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