Rising inflation and market turmoil have exacerbated the struggles that insurers were already facing due to high commoditization and competition. That said, legacy players are well equipped to combat these challenges—and even capture new opportunities.

Unlike the more established insurers, disruptor brands may have difficulty overcoming current challenges—including receiving less funding and lower valuations. In Q1 2022, insurtech funding fell 58% quarter over quarter to $2.2 billion, the lowest level since Q2 2020. 

We’ll share the short-term issues that have transpired for insurers and insurtech companies and what shifts expect each to face for the long term.

Short-term changes

Insurers will seek to optimize tight ad budgets

Some property and casualty insurers—including Progressive and Hartford—already started cutting advertising and marketing ad spend back in Q1. We’ll see insurers continue to reign in their advertising spending for the remainder of 2022. 

In addition to tightening their belt, insurers will take steps to ensure they get a higher return on their investment. For example, insurers will prioritize segmentation and targeting precision to reach the right clients at the ideal time to achieve maximum profitability.

Insurtechs will target the customers with the greatest ROI potential

Despite having a reputation for underwriting superiority, insurtechs’ loss ratios are often greater than incumbent companies. Insurtechs can benefit from analyzing historical data—such as past claims—to gain more insight on customer segments and focus on those with the greatest potential for return. 

We could see insurtechs eliminate costs by cutting marketing budgets and staff numbers, or they may shift from a B2C strategy to a B2B or B2B2C model. Regardless of these efforts, some of these companies may still be pushed out of the market in the next few years.

Incumbent insurers will purchase insurtechs looking for an exit

We may see insurtechs’ exit behavior continue over the next two years, as lack of funding causes them to lose steam in the market. Incumbent insurers will be more than happy to acquire these companies to leverage their technology. For example, American Financial Group bought Verikai to use their personalized predictive risk tool to optimize their underwriting.

Long-term changes

Lower-cost distribution models will thrive

To save on distribution costs, legacy players will invest in direct sales channels. For example, Allstate has built a low-cost digital platform with broad distribution to boost and expand its direct sales capabilities. Over the next five years, we expect direct sales to accelerate in the insurance industry at the expense of the more pricey exclusive agent channel. 

Insurers will also start to experiment with embedded insurance. This model bundles coverage or protections within the purchase of a product so that the insurance is provided as a native feature, rather than sold to the customer on an as-needed basis. As cross-industry players continue to seek new revenue streams, there will be more opportunities moving forward to embed insurance in third-party platforms.

Consumers will opt for usage-based products to cut costs

As the cost-of-living crisis worsens, we expect there to be a greater demand for usage-based insurance—a type of auto insurance that tracks mileage and driving behavior through telematics data received via plug-in on-board diagnostics. UBI programs allow drivers to save anywhere from 10% to 50%, depending on their driving performance. 

Currently, most UBI policyholders receive a flat preliminary participation discount at the point of sale and can only access a premium after an often-extended monitoring period of their driving behavior. However, in the next five years, insurers will start to take advantage of the enhancements in driving behavioral data to further extend their offerings. 

Building brand trust will become a top priority for marketers

While insurtechs have historically channeled a majority of their marketing budget into targeted  customer acquisition campaigns, they may start to invest more in brand awareness campaigns that boost the recognition and credibility of their brand. This allows them to compete with the greater trust US adults often place in legacy players. 

While this trend may no longer be relevant once insurtechs slash their marketing budgets over the next two years, the insurtech companies that outlast the recession will have to make marketing investments that help them build a credible and resilient brand.

How can the insurance industry plan for an uncertain future?

Continue to be agile with marketing spend

The insurers who can remain flexible with the timing of their marketing investments may be able to benefit from the shift in competitor spending due to these ongoing market changes. For example, Allstate pulled marketing dollars forward in Q1 to benefit from reduced marketing costs in a traditionally busy shopping period.

Make usage-based offerings stand out

While UBI programs may be the best fit for competent drivers, legacy companies will have to find ways to stand out from the other players who offer UBI products. For example, they can partner with third parties to embed messaging within relevant customer journeys, such as the purchasing of a vehicle online.

Pivot digital strategies to get close to customers

While insurers will have a harder time retaining customers as they look to cut costs, they can improve conversions by tailoring product recommendations to different prospect segments and improve settlement speed via digitization to win and maintain customer loyalty.