Beyond InsurTech: How Successful Reinsurers are Embracing Open Innovation
By Matt Connolly
Reinsurance News, February 2024
The insurance landscape is undergoing a profound transformation, and for many, it’s changing at a pace that is a little too quick.
Risks are evolving; they’re becoming more complex and interconnected. As these risks evolve, so should the tools and techniques to manage them. Add in the changing role of the insurer from one of “protection” to “prevention,” and being a reinsurer isn’t what it used to be.
This article explores the importance of innovation for a reinsurer. In fact, it doesn’t. When writing this, my assumption is that it’s a given, and there’s been enough content published on the topic.
What I’ve focused on is just how reinsurers are responding to these shifting market dynamics. In particular, I’ve unpacked the strategies behind those that are innovating successfully, and I’ve narrowed in on the one play that seems to be paying off—open innovation, or, in other words, the collaboration between reinsurers and startups.
The Innovation Options
Innovation isn’t simple and forgive any illusion that my style of writing might suggest otherwise. But equally, it can be, and often is, hugely over-complicated.
When innovating, one of the first considerations is what path to choose. You can purchase innovation, build it yourself, or partner with innovation that’s already in the market. Each of these has differing pros and cons, and, to be honest, that’s a whole article in itself.
To summarize years of experimentation and hundreds of millions of invested (and mostly wasted) dollars, the strategy that appears to be working for most of the mature incumbent players is the partnership route. Identifying innovators that are open and able to collaborate, that can solve a problem or help create a new opportunity. Simple. Or maybe not so simple.
Moving from Passive to Active Open Innovation
In the not-so-distant past—and we’re talking just three to five years ago, the reinsurance industry was accustomed to a more “passive” approach to innovation.
Reinsurers would welcome, often with open arms, an inbound inquiry from an InsurTech. Especially an InsurTech that was either well-capitalized or able to demonstrate strong credentials having worked with similar reinsurers.
It’s worth noting; reinsurance wasn’t unique in this. Most of the industry was doing the same.
Let’s remember the misconception at the time was to draw a direct line between InsurTechs and industry disruption.
Roll forward a few years, and what has emerged is an understanding that the vast majority of InsurTechs are, in fact, designed to work with insurers and reinsurers as enablers rather than challengers. And the broad acceptance is that to create genuine, meaningful change, it’s necessary to embrace the startup ecosystem and explore how it can be used within established businesses.
An interesting observation is how the successful reinsurers, when it comes to innovation at least, have shifted from this passive exploration to an active, more mature strategy. They no longer wait for InsurTechs to approach them—whether directly or through their network. They now actively scout for innovation and are ruthlessly focused on those startups and scale-ups aligned with a pre-identified business need or qualified business opportunity.
What is of interest is how they go about doing this and how they ensure they’re selecting the right partner.
Navigating the Vast and Nuanced World of Insurance Innovation
The scope of innovation available to insurance companies today is both vast and complex. At Sønr, we’re actively tracking over three million companies alone.
It’s worth calling out at this point that focusing on InsurTech is irrelevant for many. I’d go so far as to say the term itself is now somewhat obsolete.
The innovation required by reinsurers today extends far beyond the traditional realms of risk assessment and encompasses cutting-edge technologies, business models, and new ways of thinking. The difficult thing is it’s not always so easy to find it.
While the startups are up and running, have “product-market fit,” decent profitability, and are even doing a great job at marketing themselves to their audience, they may be operating entirely outside the world of insurance. To the extent they may not even have considered the applicability of their company to our industry.
As a reinsurer, how on earth do you find the innovation that helps you create solutions to remain relevant and drive growth?
This is where market intelligence platforms like Sønr and others can play a pivotal role. These types of companies track data across all industries worldwide identifying those already operating in the insurance industry and those who could be brought in.
And it’s this data that can provide you with the critical insight into emerging trends, risks and opportunities, and the ability to identify and select those innovators that are best aligned with your needs.
Need Breeds Action and Results
So, you have decided to be more active in your innovation scouting. And you know the data is out there on potential partners. Now comes the challenge of making sure you’re looking for the right opportunities.
Going back to the fundamentals of why some companies innovate successfully and why others don’t, it’s often rooted in need. Need drives action, and if the need is great enough, the resilience to pursue action until the need is met.
For many, especially when starting out on their innovation journey, this means looking at near-term business problems. Find a problem that can be clearly articulated, has a significant commercial impact (growth/cost savings), and one that has the interest of someone senior and influential within your or your client’s business.
Do this, and you’ll at least have a chance of success. Fail to do this, and it doesn’t matter how great the innovation you unearth is; it’s unlikely to work out.
The tricky thing here, as a reinsurer, is understanding the need of a client in sufficient detail to source an innovation partner and create a meaningful solution. More on that to follow.
The good news is once you’ve been through this a few times and demonstrated innovation can make a material impact on your clients, the easier it becomes to scale this way of working, and you can start to look further out to new, emerging, and depending on your appetite for risk, possibly even more exciting opportunities.
From Longlist to Short
There’s a need. You have access to data on innovators. What’s next? And how do you find the right startup to collaborate with?
To effectively address a need, it’s essential to thoroughly understand what has and hasn’t worked to date, what good looks like, and what measures of success can be put in place. This process helps in the startup scouting process to determine a long list of potential candidates.
A frequent benefit of this scouting exercise is how it often opens minds to a broader innovation set that could be applied to solving the business need. In turn, this can lead to a more creative and valuable perspective on how the need could be solved and the approach that could be taken.
After compiling the list, working closely with the business owner simplifies the selection process, focusing not just on choosing candidates but also prioritizing them strategically. Depending on the situation, direct conversations with startups may be necessary for a deeper understanding of their business or product offering. Once a preferred vendor is identified, the next step is to validate their ability to meet specific needs and ensure there’s a cultural compatibility for a successful collaboration. And to do this at pace with minimal overhead.
1+1=3
One of the key steps that are overlooked when exploring partnerships is a planning and chemistry workshop.
These are one-day sessions designed to achieve two things:
- Define a vision for what a genuine collaboration could look like. Ideally, one that’s greater than the sum of its parts.
- Put structure around what a proof of concept (PoC) could look like.
They’re also a great way to see if you like the people and want to work with them. And don’t forget, this cuts both ways! Run the session like you would a partner (as opposed to a supplier). Listen to their ideas; their approach to solving the problem. You might be surprised by what they can bring to the table.
But getting to a point where 1+1=3 isn’t always easy. In the room, you need the person who owns the need and someone who is an expert in the subject matter it relates to. This will often mean you’ll need commitment from your clients—a big ask at an exploratory phase but critical for success down the road. And from the startup side, make sure you’re engaging with the senior, creative people.
By paying for their attendance, you can give them a sense you’re valuing their time and the project; it’s important to you. And, more often than not, it ensures the most senior people attend.
As for outputs from these sessions, what we find to be most effective is something akin to a pared-back business case for why the PoC should take place—the structure of which I recommend being pre-agreed with your internal budget holder and client in advance of the workshop.
Therefore, don’t leave the room until you have a detailed picture of what a PoC activity entails—the activity, the cost, and resources needed to deliver it, and what target metrics define success.
It’s also worth saying that it is both valid and totally acceptable to come out of that one-day session and decide you’re not going to take things further. It’s better to decide now than after you’ve committed a chunk of time and money.
Test and Learn. Quickly and Cheaply
Rapid experimentation is critical for innovation. Gone are the days of one-year-long PoCs costing the best part of one million USD. Push for rapid, iterative PoCs.
My advice, having facilitated hundreds of planning and chemistry workshops over the years, is to keep them short, lean, and super-focused on the problem at hand. I believe pretty much everything can be validated in a three-week PoC window. For sure, some data might need to be prepped ahead of time. Or you might have to wait a month or two for some key personnel to be available or legals to be sorted. But once it’s all squared away, contain the active PoC time to a minimum—it’ll be better for you and the startup.
From the finance side of things, it shouldn’t need more than $25–50k put against it, and possibly much less. And, if you have clearly defined, pre-agreed KPIs, you’ll be able to quickly and easily validate whether you take the PoC further. Or not. All very straightforward (on paper!).
The last point on this is the importance of managing expectations. As a reinsurer, you have a number of stakeholders—your colleagues, your client, and the startup team. The odds you’ll take a PoC forward are slim. One in three at best. And it probably ought not to be more. It’s all opportunity validation. A key enabler of that is being able to say no early. If you fail to articulate this upfront, it’s guaranteed your experimentation will be perceived negatively and seen by many as failing, no matter how successful one or two PoCs might later turn out to be!
Conclusion
The rapidly changing market demands reinsurers to take a proactive stance toward innovation. In particular, open innovation.
No longer can companies afford to passively adapt to the latest trends; they must actively seek out innovations that align with the specific needs of their clients. More still, they need to predict needs and build solutions for them in advance.
Market intelligence plays a crucial role in navigating the complex landscape of innovators, helping reinsurers identify and engage with startups that hold the key to rapid transformation and innovation.
The process of collaboration, testing PoCs, and unearthing new innovation is never a linear path but a dynamic and iterative one. The objective is not just to identify a solution provider but to co-create solutions where the combined efforts of the two companies result in something far greater than the sum of their parts.
In embracing proactive strategies for open innovation, reinsurers have the opportunity to position themselves at the forefront of an exciting industry, ready to meet the evolving needs of clients and drive positive change. The future of reinsurance belongs to those who not only understand the power of innovation but actively harness it to unlock new possibilities.
Statements of fact and opinions expressed herein are those of the individual authors and are not necessarily those of the Society of Actuaries, the newsletter editors, or the respective authors’ employers.
Matt Connolly is a serial entrepreneur and the founder and CEO of Sønr. Matt can be contacted at matt@sonr.global.