Over the past two years, FinTech has emerged as one of the most active deal arenas for insurers around the world. Competition for the latest financial services technologies has become fierce. FinTech financing rose fourfold to $12 billion in 2014 alone, as banks and insurers battled Private Equity and Venture Capital houses to secure the “next big thing.”
The rapid introduction of new technologies, such as telematics and the importance of data and analytics, also demonstrated to insurance executives just how quickly the market could be disrupted by a “good idea” or nontraditional competitor. Technology suddenly topped the insurance business agenda, and FinTech—long the darling of the banking sector—quickly became the new “must-have partner” for innovative insurers around the world.
Yet, the approach to driving innovation through FinTech partnerships is far from unified. Indeed, many of today’s more innovative insurers take a variety of approaches—often simultaneously—to secure the right portfolio of FinTech innovations.
Incubating innovation
Against a backdrop of strong competition and rising prices for new technologies, some insurers are taking matters into their own hands and developing technology “labs” or venture capital funds. For example, AXA established the AXA Lab in Silicon Valley in 2013 to accelerate the groups’ digital transformation and in 2015 launched a €200-million Venture Capital Fund to foster entrepreneurial discovery in insurance and improve customer experience. Allianz’s Digital Accelerator initiative (also launched in 2013) is focused on building new business models that can ultimately better serve and build value for their customers.
This approach seems to indicate that both organizations recognize that their current capabilities and existing corporate culture may not be conducive to generating new and more radical ideas. In fact, in our recent survey of more than 280 insurance executives globally, 74 percent said they lack the internal core skills to drive innovation.
This approach seems to indicate that both organizations recognize that their current capabilities and existing corporate culture may not be conducive to generating new and more radical ideas. In fact, in our recent survey of more than 280 insurance executives globally, 74 percent said they lack the internal core skills to drive innovation.
- Invest in cross-industry innovations;
- Test new ideas in health care and wellness;
- Promote digital culture; and,
- Work with early stage companies on Big Data, mobile, social media and sponsorships.
Group-level labs can help reduce some of the usual disruption that accompanies the introduction of new ideas into the insurance sector, thereby overcoming the “back book inertia” that tends to drive insurers toward prioritizing the existing book of business over the need for long-term change.
Another key benefit of elevating labs to the group level is that organizations are freeing their innovation capabilities from the (often short-term) financial pressures of the business, giving their development process greater flexibility and autonomy. The lab
approach can be very appealing for entrepreneurs who want to keep some level of control over their new ideas.
Sharing risks and benefits
While Allianz and AXA are taking a more independent approach, other insurers are creating their own models for benefiting from FinTech innovations. For example, the Ergo Insurance Group partnered with Axel Springer, a Berlin-based technology accelerator, to focus on “innovation in new technologies” and encourage new start-ups in the FinTech sector. The Talanx Group teamed with Mercedes-Benz and Bosch in an initiative called Start-upbootcamp to share not only new ideas but (presumably) also the associated costs and risks.
Sydney’s Stone and Chalk hub demonstrates that many insurers believe that competitive collaboration can lead to strong commercial outcomes. The endeavor is funded by some of Australia’s largest financial institutions. In 2015 AXA linked up with Niantic Labs (an internal Google start-up) to use the AXA logo in its reality game Ingress. The relationship has allowed AXA to reach millions of new potential customers.
Taking the optimal approach
With so much activity in the FinTech sector, insurance executives are now starting to rethink their “optimal” approach to investing in outside innovation. Many of our client conversations center on finding the right model or models to maximize returns from FinTech investments. While, once again, there is no simple “one-size-fits-all” solution, the choice of ownership structure most often comes down to what insurers are trying to achieve with their investments:
Purchase: Those seeking to create a new customer-interaction process will likely want to exercise tight control over things like customer outcomes and service levels. Outright purchase of the technology or company might work best.
Partnership: Those looking to tap into a highly technical or niche FinTech innovation may prefer to select a partnership or outsourcing model that provides access to the new technology without requiring significant up-front development costs or risks.
In-house, purchases and partnerships: Initiatives that impact the core of the underwriting decision capability may need to be developed fully in-house or by leveraging a combination of purchases and partnerships.
Monogamy not required
As insurers seek to build partnerships and alliances in the FinTech sector, they must be willing to explore multiple strategies and opportunities at once. In fact, many of the leading organizations combine strategies to maximize investments and reduce risk. For example, we work with one insurer who is pursuing an M&A strategy to lock down specific technology solutions to support their target operating model; develop partnerships to improve their distribution and sales models; and employs in-house developers to bring new ideas for their core underwriting engine. The reality is that the marketplace is always changing, and good ideas may emerge from different sources. Putting your investment dollars and efforts into one or two initiatives, or tying your future to a specific investment model, may limit your flexibility to adapt to new market conditions in the future. A multipronged strategy is critical; ownership is only one solution and may or may not be the best option, given some of the potential challenges. We expect to see insurers take a variety of approaches going forward to maximize their potential to succeed.
The right model for the right strategy
Questions to consider when developing individual FinTech investment strategies:
Strategy development
- What are you trying to achieve?
- How much control do you require over the technology?
- What is your long-term vision for the technology or innovation?
Partner selection
- Which organizations currently have the capabilities or technologies you require?
- How will you prioritize partner identification and selection?
- What is the right way to approach the new partner?
Due diligence
- Do you know exactly what you are investing in and what you will receive in return?
- Have you assessed all third-party risks?
- Have you created key performance indicators and metrics to monitor progress?
Valuation
- How will you value the
investment? - What are the associated
implementation costs?
Post-deal considerations
- What changes are required to your operating model to embrace and maximize value from the investment?
- How will you integrate the potentially very different cultures ?
- Who will own any new innovations or technologies that emerge?
- What Transitional Service Agreements may be required to integrate the operations?
5 key takeaways
Understand the reason:
Rather than buying the next big thing, take time to carefully consider what technologies will best respond to shifting consumer patterns and operational objectives.
Consider the ownership requirement: Insurance executives will need to balance their need to control the technology against the benefits of nurturing a more entrepreneurial approach.
Don’t put your eggs in one basket: The FinTech sector is fast-moving and always changing; spreading your bets across multiple horses may pay out better over the long term.
Run multiple models: Incubators, labs, alliances, acquisitions and joint ventures should all be on the table and capable of running simultaneously and collaboratively to maximize investment.
Watch the market carefully: The most successful insurance organizations have their fingers on the pulse of the FinTech sector—some are now based in Silicon Valley—to track new trends and potential disruptors.
The article was taken from KPMG’s special publication, entitled The power of alliances.
R.G. Manabat & Co., a Philippine partnership and a member-firm of the KPMG network of independent firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.
For more information on KPMG in the Philippines, you may visit www.kpmg.com.ph.