Alex Duffy of Menzies LLP, looks at how the ever-increasing exposure to a range of risks is driving demand for predictive data analytics in the insurance sector
Allowing insurance companies to minimise losses by more accurately forecasting potential threats, and adjusting premiums accordingly, UK-based tech businesses developing such solutions could be in a good position to secure investment and capitalise on this emerging market opportunity. So, how can they make themselves stand out and where should they turn to for advice?
Global factors such as climate change, which is increasing the frequency of natural disasters, and the growing prevalence of cyber-attacks and fraud, have opened up a gap in the market for analytical systems, which can help insurance companies to reduce their risk exposure by predicting the likelihood of claims arising.
Already widely used within sectors such as retail to help businesses anticipate and react to market trends, insurance companies are increasingly using such technologies to identify where, and when, risks are likely to occur, allowing them to adjust premiums accordingly. With a reduction in risk of just 0.5% likely to represent a significant uplift in profits, investing in the right software now could help them to bolster their margins in the long term.
In order to secure a slice of the available capital and before embarking on a costly product development exercise, tech businesses should ensure they have a strong knowledge of the target sector and the challenges it faces. This should include a consideration of what their ideal customer looks like, and what solutions are needed to improve their risk position. With a clear understanding of where such gaps in the marketplace exist, they will be in a better position to develop solutions.
To facilitate this process and improve their credibility among potential investors, tech companies should consider recruiting specialist expertise. For example, a climate change expert might be required when developing predictive flood analysis software, or a former fraud prevention officer for an app predicting this type of criminal activity.
With a successful concept under development, which has received industry approval, tech companies will be ready to launch an investment round. The two main pools of capital available to start-ups are funding from angel investors, individuals who provide capital for business start-ups in exchange for convertible debt or ownership equity, private equity firms and venture capital trusts (VCTs). Run by a fund manager, VCTs can provide tech companies with the cash injection needed to scale up quickly, whilst providing insurance companies with a tax-efficient means of realising a start-up’s potential for rapid growth.
It’s important to bear in mind that each of these investment options bring their own unique challenges, and may also require companies to be registered as Enterprise Investment Scheme (EIS) eligible investments. As such, before embarking on a funding round, businesses should seek expert advice from an adviser who can explain the qualifying criteria for EIS and SEIS, and guide them through the often complex process of registering. Advisers will also be able to support the funding process by helping the business to make the right connections and present company information in the best possible light.
In order to attract potential investors, tech companies should be able to clearly articulate their USP and be prepared to explain how their solution can help insurance firms to improve margins and reduce their risk exposure. Referring to early client case studies will also be beneficial.
To set themselves apart, tech companies should also thoroughly research the marketplace and any rival products on offer. This will allow them to clearly explain how their product offers certain advantages.
The process of preparing their business for an investment round should also include ensuring that all company information is up-to-date and well presented. For example, is their corporate governance on point and are agreements with customers and suppliers organised on file? Management reports and accounts should also be clearly presented, highlighting key performance data and early trading achievements.
With the range and scale of risks facing insurance companies continuing to grow exponentially, UK tech companies developing predictive analytics systems and software-based solutions should seize the opportunity to secure investment capital to fuel their growth plans. By understanding the funding options available and ensuring they stand out for the right reasons, companies can help the insurance sector to reduce risk whilst scaling up.
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