Insurtech. That’s a word a lot of financial professionals and investors are talking about or have heard floating around lately. If it’s not yet in your vocabulary, it’s time to start paying attention. Why? Because it’s the way the financial industry is headed, it’s the future of money and provides a new investment opportunity for investors who want to put their money into the technology and innovation sectors.
What is Insurtech?
Insurtech is the movement of the insurance industry towards technological advancements. Insurance has traditionally been a very conservative, paper-and-pen industry. However, the introduction of insurtech, also known as insurance technology, aims to change the way companies offer products and how clients receive service. Insurtech firms are insurance companies that sell insurance direct to consumers online or through an app. Of course, you can always contact a real live person by telephone on the customer service line, but who wants to do that? (For more, see: Who Will Disrupt the Insurance Industry in 2017?)
Think about how you bought your last book, piece of clothing or even your last household item. Was it online? Even though the financial industry, especially the insurance industry, is traditionally a handshake kind of business all that has to change. If insurance companies want to continue to be profitable, grow profit margins and reach new clients (or maintain existing clients) in a world where people are always connected (referred to hyper-connectivity) they will need to rethink how they offer products and educate the consumer as well as acquire and service clients.
Through insurtech there are no insurance agents who will come visit your house, sit down at your kitchen table and explain your home, auto and life insurance policies to you. It’s all done via technology with algorithms and it helps keep costs down. That’s why Geico can save you “hundreds of dollars” because they cut out the middle man - insurance agents.
The financial services industry has undergone a digital transformation, into what is now known as fintech, over the last few years with mobile banking apps and online-only financial institutions offering banking services. It was only a matter of time until the insurance industry followed suit. Nowadays people want to receive information outside of traditional 9 to 5 working hours and on-the-go, technology helps meet this demand. (For more, see: Could Fintech's Insurance Innovations Disrupt the Industry?)
Therein lies the question: Is putting money into insurtech companies and start-ups a good investment strategy?
How to Invest in Insurtech
As insurtech is still relatively new to the investment world, there are two immediate ways investors can put money behind the innovation. If the company is publicly traded investors can purchase stocks through an investment broker or through an online discount brokerage account such as E*Trade, Charles Schwab Corp. or TD Ameritrade. Current publicly-traded insurtech companies include Geico, which is a wholly-owned subsidiary of Berkshire Hathaway (BRK.A), and Progressive Corp. (PGR).
Investors who are looking to make a larger investment and put their own money directly into the company can do so through a venture capital firm. Venture capital investors provide financing to start-up companies and small businesses that are believed to have long-term growth potential. Risk is typically high for investors.
The Bottom Line
Is insurtech the right investment for you? The answer to that question depends on your tolerance for risk as well as the need to diversify your investment portfolio. If investing in forward-thinking companies aligns with your goals, insurtech could be a viable investment option. If you’re comfortable investing in concepts that may not yet be proven and smaller companies outside of established blue chip corporations, then the answer may also be yes. (For more, see: How Technology is Quickly Disrupting the Insurance Industry.)