“the insurance-specific branch of fintech that refers to the variety of emerging technologies and innovative business models that have the potential to transform the insurance business” - International Association of Insurance Supervisors
Drivers of Insurtech
One key point in understanding insurtech is looking into what the main drivers behind it are. Seeing as insurtech is the insurance-specific branch of fintech many aspects that are driving it may be the same, however there are many differences as well.
In February 2017, the IAIS published a report which looked into technological development within the the insurance industry. This report identified six factors which the IAIS argues are the main drivers behind insurtech. The six factors were divided into two separate categories; “push” factors which refer to factors impacting supply of new technology for insurers and/or policyholders, and “pull” factors which refer to those factors impacting consumers and/or insurers demand for new products. The push and pull factors identified by the IAIS are as follows:
Increased investment through leveraging the fintech ecosystem:
Most of technological investment has focused on the larger banking sector and many fintech technologies would not be of use within the insurance industry. However, due to the existing fintech ecosystem there already is a heightened level of investor and tech company engagement geared towards the use of new technologies in the financial sector. This has led to an increase in supply of capital investment in the financial sector and in turn for insurtech as well, seeing as insurance is a sub-sector of financial services.
Entrepreneurs expanding on opportunities:
Due to the increasing amount of competition within the banking industry due to insurtech, some entrepreneurs see insurance as a less tapped into and more lucrative industry to found their start-ups. Additionally, as the insurance industry can be considered to be more ripe for disruption, many entrepreneurs see weaknesses in the business models of incumbents which could potentially be taken advantage of easily.
Increased availability of data and analytical tools:
Due to advances in data capturing technologies for example in the field of IoT and wearables, the ability to capture data is greater than ever before. This is one factor which opens a plethora of innovations, particularly within the insurance industry.
Societal changes impacting type of product and how it is consumed:
As catering for millennials becomes more of a priority, the insurance industry requires consideration for an increased need in mobile usage on behalf of its consumers, the sharing economy and generally simplified on-demand type products.
Technology is being viewed as way to expand the amount of consumer interaction, particularly by incumbents who are seeking to go beyond the typical yearly renewal request and by doing so improving customer loyalty. Additionally, technology is also being seen as a way to improve and differentiate incumbent’s offerings.
As insurance has become highly competitive throughout the world, many incumbents are looking for ways to improve their back-office efficiency and reduce costs. One of the main ways incumbents are doing this, is through the use of technology, for example by the digitization of certain processes therefore reducing human involvement.
When looking at insurtech especially how it will develop in the future, it is pivotal to understand what the key technologies are which are being used to innovate in the industry. Not only currently but over the short to long-term as well. The IAIS identified eight technologies which they consider to be the most important drivers behind innovation within insurance, looking at both the current and future market. The eight technologies and how they are influencing insurance are as follows:
1. Digital Platforms (e.g. internet, mobile technologies); short-term/already in use
Already in use are various initiatives which seek to improve the customer experience or service through the use of internet or mobile technologies which allow for digital platforms.
2. Internet of Things (IoT); medium-term
IoT entails the connection of a range of items such as devices, vehicles, buildings etc. through the internet thereby making them “smart”. Through the embedding of electronics, sensors, actuators and network connectivity these smart devices can collect and exchange data.
3. Telematics/Telemetry; short/medium-term
As a more specific use of IoT, telematics involves telecommunications, sensors and computer science which allows sending, storing and receiving data via devices while not affecting or in control of the object being monitored. Telemetry involves the transmission of measurements directly from the point of origin to the computing location, also without affecting the control of the object being monitored.
4. Big Data and Data Analytics; already in use/short-term
Big data and data analytics can be and are already starting to be used in various processes such as product offerings, risk selection, pricing, cross-selling, claims prediction and fraud detection. One example of this would be to offer customized products which allow for automated underwriting.
5. Comparators and Robo-Advisors; medium-term
Automated online services which can provide algorithm-based product comparison and advice without the need of human intervention.
6. Machine Learning and Artificial Intelligence (AI); medium-term
Both machine learning and AI enable various insurance industry processes to use real-time data and predict events accurately (e.g. health issues, weather events). This translates to not only better risk-pricing but improved fraud prevention, claims handling and preventive counseling.
7. Distributed Ledger Technology (DLT); long-term
Essentially an asset database that can be shared across a network, multiple geographies or Institutions. The database boasts of enhanced security and accuracy due to the ledger being maintained cryptographically using keys and signatures to control who can do what within the ledger.
7.1. Blockchain; long-term
A decentralized version of the distributed ledger, comprising of unchangeable, digitally recorded data in the form of packages otherwise known as “blocks” which are stored linearly in a chain.
7.2. Smart Contract; long-term
One of the benefits of distributed ledger technology is that in addition to serving as a database, it also allows for rules to be put in place regarding transactions that are tied to the transaction itself. Smart contract is the term used to describe the facilitation, execution and enforcement of an agreement through the use of distributed ledger technology.
8. Peer-to-peer (P2P), Usage Based, On Demand Insurance; short-term
Emerging technologies are resulting in the introduction of new business models in insurance such as:
8.1. Peer-to-Peer insurance
A business model which allows for customers to pool their capital and organize their own insurance. Although not radically innovative, this can offer a great amount of benefits if implemented on a broader scale.
8.2. Usage based insurance
Recently being introduced in the context of car insurance, this business model allows for closer alignment between driving behavior and premium rates.
8.3. On-demand insurance
A business model which specializes in covering risks for a specific moment or period of time which the customer can chose as well as activate and deactivate as pleased.
Through the use of the technological innovations mentioned above and the new business models that come from them, changes in both the relationship between insurers and policyholders as well as the kind of risks which are to be covered, are to follow. As a result of this, various strategies are emerging in the insurtech space. The three most notable of these are the following:
The aggregator model:
This strategy is the one being followed by companies which are focusing on user interaction and the front-end of the insurance process. It provides several options from one or various insurance products to meet a specific need.
The integrator model:
Companies following this strategy aim to meet specific user needs where the insurance product is a component of the offered solution.
The “game changer” model:
These are entirely digital insurers focusing on niches or specific audiences and P2P insurance.
European Insurtech Landscape
Having now looked into what exactly insurtech is and what are the main drivers of insurtech, it is of importance to gain an overview of the insurtechs that are using these drivers to impact user experience. Figure 1 shows the current landscape of insurtech companies in Europe sorted by where they are impacting user experience most.
Figure 1: The EU Insurtech Landscape Sorted by Customer Activity
As can be seen in figure 1, IoT and P2P focused insurtechs are placed along the entire user experience process as they are technologies which are completely reshifting user experience itself and therefore affect multiple parts of the user experience. Additionally, it can be observed that various insurtechs are focusing on using technology not only to change the way a customer purchases insurance, but how it is used as well.
Insurtech Investment Activity
As the fintech market matures, diversification in investment follows as innovators look into new areas within financial services to disrupt, such as insurance. This diversification can be observed by the fact that in 2014, insurtech companies received USD 800 million whereas in 2015, this amount more than tripled increasing to USD 2.5 billion.
All the elements have been set in place for insurtech to truly become a wave of innovation to be reckoned with. There are as many opportunities as there are threats for the incumbent insurance companies. It is to them to decide how they will deal with the new kid on the block.
Thibault Dubois hold a master degree in general management from the Vlerick Business School and a master degree of business economics with a specialization in finance and business strategy from the University of Leuven. He his consultant for Initio since 2017.
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