The big trend in financing is the vast amount of money being poured into insurance tech start-ups or "Insurtech", as its known in the jargon. According to a report by accountants KPMG, the big sums are being raised by firms in the US healthcare sector, accounting for three of the ten biggest venture-capital deals so far this year Oscar Health, Clover Health, and Bright Health. In total, 45 insurance start-ups have raised $650m in 2016, led by the $400m raised by Oscar. Expect the trend to spread. Technologies developed for health care can quickly be adapted for other forms of insurance.
It's not hard to see why insurance is ripe for disruption. As with peer-to-peer lending, the internet is good at cutting out middlemen and there are few industries with more of those than insurance. At the same time, the traditional players are stuck with old-fashioned business models. It doesn't quite run on ledgers in the back of Lloyd's coffee house any more, but it has not moved on a great deal. Worse, it is a business with no brand loyalty. No one cares who their insurer is and if you thought banks were unpopular, just ask someone what they think of their insurance company.
The start-ups are attacking the industry from different directions. Some are exploiting the web to cut costs or improve customer service. Some are experimenting with peer-to-peer models Warren Buffett has invested in Lemonade, a New York start-up aiming to do exactly that. Others are aiming at web-based brokerages that can be faster and cheaper than established networks. A few others are using data mining to improve risk-assessment. As in any industry, there will be lots of failures, and most of the new companies will stumble. But a few will succeed.
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That is a big threat to the City. Insurance can easily be overlooked because it rarely makes the headlines, and it doesn't pay million-pound bonuses, but it is a huge industry for London. It accounts for a fifth of the City's overall turnover, and 300,000 jobs. With the Lloyd's market at its centre, and dozens of firms and brokers spinning off from that, it is a huge export earner and provides a big part of the infrastructure that makes the City such a successful financial centre.
What should the City do about it? There is no point fighting it. The big, established firms will start out trying to ignore the upstarts, and once they can't do that any more, they will try and regulate them out of existence we can expect to hear lots of stories about how they are financially dangerous, and how customers can't trust them, and how there should be controls to stop them growing too fast. That is what big companies threatened by new players always do. It might delay the rise of new competitors but it won't stop it. If the start-ups have a better product, sooner or later they will succeed.
Instead, the City should be trying to make itself the world hub for Insurtech, as well as financial technology in general (fintech). What does that mean in practice? The regulators should make London the most tech-friendly regime in the world, licensing new players with a light touch, and allowing new ideas to flourish. The established players should set up incubators and seed funds to take stakes in emerging businesses if Google is investing in Insurtech, as it is, there is no reason why the old insurers shouldn't. And the big players should be pressured by shareholders to rip up old models and copy the new ones even if it means sacrificing some short-term profits. The City is spending a lot of time worrying about Brexit. Technology is a far bigger threat in the longer term.
Nice work if you can get it
Matthew Lynn is a columnist for Bloomberg, and writes weekly commentary syndicated in papers such as the Daily Telegraph, Die Welt, the Sydney Morning Herald, the South China Morning Post and the Miami Herald. He is also an associate editor of Spectator Business, and a regular contributor to The Spectator. Before that, he worked for the business section of the Sunday Times for ten years.
He has written books on finance and financial topics, including Bust: Greece, The Euro and The Sovereign Debt Crisis and The Long Depression: The Slump of 2008 to 2031. Matthew is also the author of the Death Force series of military thrillers and the founder of Lume Books, an independent publisher.
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