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The InsurTech industry continues to make waves within the insurance world, yet oftentimes the terminology around these new businesses can be confusing. That’s why we put together this insurtech glossary for you. Read through the terms below, then download a copy of the Insurtech Glossary for extra terms not included below.
So, what is InsurTech exactly?
InsurTech: At its core, InsurTech is “technology designed to increase the efficiency and efficacy of insurance companies,” explains G2.
There can be many different types of InsurTech businesses, some of which may offer policies directly to consumers, and others that work directly with carriers and agents to improve operations, distribution, and other areas of insurance.
Many of these businesses involve areas of technology that are unfamiliar to those who focus on other insurance duties, so this glossary will look at some common technology terms used when talking about InsurTech. And since many of these businesses are startups, there’s often a lot of financial lingo used that may be unknown to those outside of the investment industry, so we’ll also explore some of these terms.
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Key Insurance Technology Terms:
InsurTech can span many areas of technology, but you’ll often find words such as the following that keep popping up:
Algorithm: An InsurTech solution might be powered by an algorithm, which is: “A list of steps to finish a task. A set of instructions that can be performed with or without a computer. For example, the collection of steps to make a peanut butter and jelly sandwich is an algorithm,” according to another InsurTech glossary from Insurance Thought Leadership, as published by the National Association of Insurance Commissioners.
Typically in InsurTech, an algorithm involves the use of a computer to follow a set of instructions, such as to process data.
API: Many InsurTech solutions use an application programming interface (API) to connect information from one source to another. For example, Wheelhouse uses APIs to feed policy quotes from multiple carriers into one platform, rather than requiring users to go to each carrier separately to generate this information.
Artificial Intelligence: Many InsurTech companies use artificial intelligence (AI) in their solutions to automate insurance functions, such as processing claims. “AI can be defined as the ability of a computer to perform functions and line of reasoning typical of the human being,” explains InsureUP in its own InsurTech word index.
In other words, InsurTech solutions that use AI can help insurers get more done without needing more staff. It’s not just a matter of, say, using an AI tool rather than hiring an extra employee. Some AI solutions can process more data than a company could ever reasonably handle with humans.
Computer Vision: Part of the broader AI field, computer vision is what allows some InsurTech solutions to “see,” such as to assess property values via pictures.
As IBM explains, computer vision “enables computers and systems to derive meaningful information from digital images, videos and other visual inputs — and take actions or make recommendations based on that information. If AI enables computers to think, computer vision enables them to see, observe and understand.”
Machine Learning: While often used interchangeably with AI, machine learning is technically part of the larger AI umbrella. As TechTarget explains, machine learning “allows software applications to become more accurate at predicting outcomes without being explicitly programmed to do so. Machine learning algorithms use historical data as input to predict new output values.”
In InsurTech, a solution might use machine learning to get better at predicting what marketing activities drive renewals, for example.
SaaS: Many InsurTech solutions fall within the category of being Software as a Service (SaaS) solutions. As Cisco explains, SaaS “is a delivery and licensing model in which software is accessed on the web via a subscription rather than installed on local computers.
In the old days, you would often physically buy a software program that you load onto your computer through a CD-ROM. Today, you can easily purchase software online, and a huge advantage of SaaS is that you can access the solution from anywhere since it’s not stored on your device. Plus, as InsurTech evolves, a SaaS provider can push out updates, rather than you needing to buy a new version of the software.
Key Financial Terms
In addition to tech terms found in this glossary, you also might encounter financial terms that relate to how InsurTech companies are growing. Many InsurTech businesses are relatively new, so they fall within the startup world and are often gaining investment money from outsiders. Or they may be more established but still privately owned. So, you might encounter terms such as:
Angel Investor: Before an InsurTech business starts taking on investments from big investors, such as existing insurance carriers, they might receive support from a so-called angel investor to get their feet under them when starting out.
“An angel investor is a high net-worth person who provides capital for small startups or entrepreneurs, usually in exchange for equity in the company,” explains Indeed. This investment could be either one-time or ongoing support “to help the new company in its early stages.”
IPO: As an InsurTech business matures, they might have an initial public offering (IPO), which is when they go from being a privately owned company, where only certain people have access to investing in them, to one that is publicly traded within the stock market. IPOs typically mean that early investors and founders get big payouts since they’re selling part of the company to the public.
Private Equity: In contrast with public equity investments, which can involve anyone buying stocks that are publicly traded, private equity (PE) investments are made in privately-owned companies (though a private equity firm could theoretically buy a public company and take them private). As Pitchbook explains, PE “is a form of financing where money, or capital, is invested into a company. Typically, PE investments are made into mature businesses in traditional industries in exchange for equity, or ownership stake.”
Oftentimes a PE firm will buy an entire company or acquire a majority stake. These firms typically manage money on behalf of other investors, and after several years they will often sell an investment in a company to another buyer or perhaps bring the company public through an IPO. So, an InsurTech business that has already gone through some funding rounds may eventually get bought by a PE firm.
Seed Funding: InsurTech founders might initially start their businesses with their own money, but often they need external support, so they sell part of the company for seed funding. “Seed funding is the first official equity funding stage. It typically represents the first official money that a business venture or enterprise raises. Some companies never extend beyond seed funding into Series A rounds or beyond,” explains Investopedia.
Series A, B, C…: After the initial seed funding, a startup may have additional rounds of funding, starting with Series A. Each successive round is a new letter, and usually involves larger amounts of money raised. Many companies stop raising money after Series C, notes Startups.com, though they could go further. From there, the company might decide to undergo an IPO or stay private.
Venture Capital: You may hear about an insurance carrier that launches a venture capital arm to invest in InsurTech startups. Like private equity, venture capital generally involves investing money, typically to obtain an ownership stake in a company, while it’s still privately owned. Generally, venture capital is considered to be part of the broader private equity umbrella, but venture capitalists usually acquire slices rather than whole companies, and they may invest earlier in a company’s growth.
“Technically, venture capital (VC) is a form of private equity. The main difference is that while private equity investors prefer stable companies, VC investors usually come in during the startup phase,” explains the U.S. Chamber of Commerce.
A venture capital fund may manage these investments using money from other investors, but a larger company might fund its own venture arm.
As one example, the insurer Nationwide has a venture arm, Nationwide Ventures, that “seeks to invest in founders and startups that are shaping the future of insurance and financial services,” the company says.
InsurTech Continues to Grow
The InsurTech industry remains an exciting part of the overall insurance industry, and as it grows, new terms may become more prevalent, particularly as technology evolves. For now, however, knowing these key technology and financial terms will help you gain a solid baseline of understanding, and you can continue to learn about the industry as our insurtech glossary grows.