The promises of financial technology, or fintech, have dominated many discussions about innovation in the banking industry. The insurance industry, meanwhile, has found itself far behind. But this appears to be changing. In the not-so-distant future, we think “insurtech” could significantly alter the business models and competitive landscape of the insurance industry.

Recently, insurtech has garnered increasing attention from venture capitalists, startups, and insurance companies. According to CB Insights, insurtech startups raised US$2.65 billion in 2015, an increase of 3.5x from a year ago . Oxbow Partners estimates that there are currently more than 1,500 insurtech startups . Advances in technology and data analytics can improve and transform the entire insurance value chain, from customer acquisition and product development to underwriting and claims management.

Insurers Lag in Innovation

Insurance – a US$4 trillion of total premiums  per-year global industry – is a complex business that involves sophisticated risk pricing, large capital requirements, and stringent regulations. High barriers to entry and a relatively long payback period make the business a rather unpopular choice for new entrants. Unlike in many other industries, the internet has, so far, resulted in little disruption to the insurance industry. For many insurers, business models have remained largely the same during the past 30 years.

Even though the industry is mature, insurers face significant opportunities for growth.

Many areas of the world remain underinsured; Swiss Re estimates that the mortality protection gap in the Asia Pacific region alone amounts to US$58 trillion . In the UK, one-third of households have no home contents insurance, and only 12% have income protection insurance . While accessibility and income levels affect insurance penetration, the homogeneity of risk-pricing models often results in less affordable insurance solutions, particularly in low-income economies where insurance needs are arguably the greatest. However, recent advances in insurtech have the potential to dramatically improve insurance penetration in the long term.

The Disruptive Forces of Insurtech

The advent of the Internet of Things (IoT) has the potential to significantly improve risk pricing, which lies at the core of every insurance business. Connected devices – telematics, connected homes, and wearable devices, to name a few – can generate large amounts of data that result in more accurate risk assessment of each individual policyholder. The falling costs and rising prevalence of these connected devices can reduce information asymmetry and drive major changes in insurers’ risk-pricing models. With more accurate and targeted risk assessment, insurers can offer products and solutions tailored to each individual customer’s needs and risk profile.

For health insurers, wearable devices help collect a wide variety of biometric data, including physical activity, stress level, and cardiovascular health, that can be linked directly to health insurance products. A number of health insurers are already offering premium discounts tied to fitness level. The attraction for health insurers is simple: active people are generally healthier, so they likely make lower-risk (and more profitable) customers. The collection of biometric data can result in more accurate assessments of health risk and lead to customized health insurance products.

Improved data availability and targeted risk assessment could also generate potentially profitable opportunities for insurers among higher-risk, often underinsured customer groups, such as individuals with pre-existing medical conditions. And new insurance products could be created to serve innovative businesses such as Airbnb and Uber.

Insurtech could accelerate the disintermediation of traditional distribution channels. Currently, around 10% of life and property and casualty (P&C) premiums in China are sold through online channels. Meanwhile, a large portion of insurance businesses is still generated through insurance brokers, whereby insurance companies have little direct interaction with end customers. Innovative online platforms and apps could become a powerful distribution channel by offering greater transparency in pricing and product options. The development of tailored insurance products for individual customers will foster more direct interaction between the insurer and end customer, resulting in further disintermediation of the traditional distribution channels.

Opportunities for Incumbent Insurers

Incumbent insurers could be a major beneficiary of insurtech. In addition to product development and risk pricing, insurtech could improve the cost and efficiency of customer acquisition and engagement, the underwriting process, fraud detection/ prevention, and claims management. Many insurers recognize the need to innovate and adapt to the latest technological advances, and a number of insurers have already invested in insurtech initiatives and partnerships.

While insurtech has allowed startups to grow market share in certain product segments, incumbent insurers still have an enormous advantage. They have well-established brands, capital, business infrastructure, and a vast customer base.

With stronger understanding of the insurance market and existing customers, incumbent insurers can better capitalize on insurtech to grow and expand current businesses. The large incumbents can readily offer novel insurance products once these products prove to be viable, and then they they are better positioned to develop and popularize the concept of customized insurance solutions.

Insurtech will likely have a long-lasting impact on the competitive landscape of the insurance industry. Competition from insurance startups could result in pricing pressure for lower-risk customers in certain products such as auto insurance. More accurate risk assessment and customer segmentation could open up new market opportunities in previously underinsured customer groups. The potential emergence of customized insurance solutions could spur greater demand from both existing and new customers. While an expansion of the insurance market and deepening of insurance penetration should benefit both incumbents and startups, competition will undoubtedly intensify between the innovative startups targeting niche product segments and the well-established incumbents embracing insurtech to expand its revenue opportunities. The biggest competition will likely come from the well-capitalized incumbent insurers that can best adapt and capitalize on the growth opportunities made available by this new technology. Meanwhile, the biggest winner of insurtech should be the end customers, who will benefit from better user experience, more personalized insurance solutions, and possibly improved pricing, through cheaper premiums.

Identifying Innovation

The global insurance industry could evolve in countless ways in the near future, though one could be quite certain that the entire industry landscape will be a lot different in five to 10 years. For instance, some insurance startups may become listed on stock exchanges, expanding opportunities for investors.

And while the development of insurtech holds great promise for the insurance industry, it also brings plenty of uncertainty for investors.

The rapid development of insurtech and the resulting changes in the insurance industry will have significant implications for global investors. We think the best way to distinguish among the hundreds of stocks in this large sector is through vigorous bottom-up stock research to identify innovation. And while many investors tend to focus on traditional short-term assessments, we think identifying longer-term competitive advantages (which few insurers are likely to have) is key to investing in this market – now more than ever.