The 2009/10 financial crisis hit insurers much less than banks. Challenger banks such as Monzo, Revolut, Starling Bank and N26 took advantage of the increasing scepticism and dissatisfaction of customers. With their promise of "no bullshit banking" they met the expectations of the younger generation and quickly recorded high growth rates.
By now, many challenger banks are valued with several billion dollars. To become a unicorn in just four or five years is an impressive achievement that has silenced many critics who doubted the sustainability and longevity of challenger banks.
But the coronavirus crisis is now also revealing the weaknesses of the business model. Many challenger banks have grown rapidly – perhaps too rapidly. They have extremely high marketing expenditures; at the same time, their revenues are still low. Especially when people tighten their belts, it can be difficult to monetise the freemium model. Instead, their revenues mainly come from card payment fees which are paid by merchants. With consumers buying less, the activity-based revenues decline.
In the world of insurtechs, there are fewer unicorns. Therefore, they often stand in the shadow of their older fintech brothers and sisters. But the coronavirus pandemic is demonstrating the strength of challenger insurers too. Their business model is designed to grow with customers over the years; customers pay for the service from day one. While people often have several bank accounts and credit cards, they only have one liability or household contents insurance – and in times of crisis, they are even more likely to keep it.
The longevity of the insurance industry is one reason why challenger insurers are better off right now. The second reason lies the the system’s inertia: while the financial crisis forced bank to restructure and modernise, this was not the case for insurance incumbents. The average insurance customer is between 40 and 50 years old and will continue to pay premiums for another 30 or 40 years. There was no urgent need for insurance to change.
This is the greatest danger for insurers – and the greatest opportunity for challenger insurers. Their ambitions are high – but the radical upheaval of the market is still to come. What we’re seeing is not a loud revolt against the established corporations, but a creeping revolution in installments. And yet the disruptive potential of insurtechs is in no way inferior to that of fintechs. Quite the opposite.