How technology has the ability to make insurance trendy again?
With dozens of InsurTech startups popping up like mushrooms, it seems that the robust insurance sector is finally taking their first steps to embrace technology.
Investments in insurance technology have topped 1.3 billion dollars across 126 deals between the first and the third quarter of 2016, with 82% of deal activity going to startups based in US, Germany, India, the UK and France. With more than 1000 startups already in place, big insurance incumbents fear to lose an important share of their business. Corporate insurers are rapidly developing investment branches in an attempt to take control of the boom in InsurTech startup deals.
Drivers for change
The insurance market is characterized by its lack of innovation, holding on to ‘the old fashioned’ way of doing business. But there is strong reason to believe this will all change in the near future. A strong trend of technology implementations in insurance is causing a wave of startups building new propositions, almost daily, which are directly affecting the insurance value chain in many different ways. Significant weak spots can be identified for incumbents that form strong potential for new business opportunities, and thus trigger the need for change in the insurance sector.
First of all, still 20% to 40% of collected premiums go to costs of operations and customer acquisition costs like marketing and distribution. By embracing technology, insurers can drastically diminish these costs. Startups are building innovative ways to meet short term challenges in this context, such as sophisticated underwriting, risk reduction, improved claims management and development of cost efficiency services.
Second and most important, the current insurance branch is frequently criticized due to the absence of proper customer engagement. In the current digital age, where customer demands are increasing at fast rate, insurance companies can benefit strongly from using digital technology to improve customer experience. Key developments in today’s customer requirements are 24/7 access to insurance, ability to switch their policies on and off at any given time and personalized insurance product offerings.
Data analytics developments
Third, data analytics are becoming more and more important, with promising technologies such as Internet of Things (IoT) and Artificial Intelligence (AI) coming into play. These technologies have the potential to gather insights in customer behavior from enormous data flows that are becoming available today. These present the key for insurers to improve the engagement with their client portfolio.
Boost in innovation
Finally, the question rises how long the current conservative insurance pattern will stand in a world where change is everywhere, and all kinds of services are becoming digital. There is no doubt the insurance sector needs a boost in innovation. The opportunities are here, what is there to wait for?
In line with the key drivers for change summed, a number of disrupting technologies can be distinguished that will foster innovation along the insurance value chain, in particular Big Data, Internet of Things, Artificial intelligence, and Peer-to-Peer models.
Data analytics are hot in today’s technology driven landscape. One disrupter in this area is Big Data. While the concept is commonly known in insurance, it is nowadays mainly used in the application of pricing, while future applications would also impact marketing and sales, understanding the customer needs, improved decision making, and product development. Furthermore, Big Data can be used in personalized interactions with customers through chatbot technology when linked to a subject.
Internet of Things
Next, and most promising in changing the common business in insurance, is Internet of Things. This technology will enable devices to interconnect with one another through the internet and to collect and exchange data in real-time. So called telematics, which refers to the electronics that enable this cross-device communication, make pro-active monitoring possible and creates room for usage-based insurance models (UBI’s). There are already several used cases of startups and incumbent projects that try to use this technology in their businesses. One example is the California-based startup Metromile, which offers their clients pay-per-mile car insurance. AXA and InsurTech startup Oscar provide IoT solutions in healthcare, by offering customers smartwatches to gather biometric information about their clients thereby being able to personalize their health insurance policies. In the household insurance market, Internet of Things also provides some big opportunities, with State Farm and American Family Insurance offering discounts on policies for installing Google Nest smart devices in their homes, like smoke and CO detectors.
Although AI is still quite in its infancy, the technology can be seen as the enabler in handling enormous amounts of data. Basically, AI is an area of computer science that emphasizes the creation of intelligent machines that work and react like humans, with functions like speech recognition, learning, planning and problem solving. Smart machine learning will definitely influence the whole insurance business cycle, with several implications such as easier data capture and storage, more efficient data analytics and policy tailoring, automatically offering complementary services and/or policy extensions and hereby offering a whole new customer experience. There are a few active disrupting startups: There is Brolly, a UK-based InsurTech startup that offers an AI insurance advisory application that delivers contextually relevant insights through web and mobile apps which enables customers to make informed decisions about their insurance. Furthermore Analyze Re, an American InsurTech startup uses big-data analytics and machine learning technology to help reinsurers to improve complex reinsurance portfolios and insurers design reinsurance coverage to optimize their degree of risk exposure.
Last but certainly not least, there is the Peer-to-Peer technology, which drives insurance back to the roots by pooling people that can insure one another, without the need for a large insurance company to interfere in the process. Although P2P can be seen as a misfit with the previously mentioned developments, it enjoys great attention in the InsurTech scene. The idea offers the potential for customers to drastically lower the costs of their insurance through an increased transparency and a reduction of inefficiencies and thereby lowing the intention to fraud the system. The big advantage of this business model is that leftovers in the premium pool can be allocated back to the customers, used to reduce next year’s premiums or (in case of startup Lemonade) given to charity. Most startups implement the Peer-to-Peer feature by offering a platform where people looking for the same kind of coverage are pooled together.
Three waves of development can already be distinguished in Peer-to-Peer insurance, with a fourth on the rise. In the first wave, P2P offering insurers positioned themselves as a distributor, providing the pool of customers with policies from different insurers. Next in line was Lemonade, the first startup to differentiate itself as a carrier who is offering its own insurance policies. The latest development in this area does not even require premium payments anymore, but allows its participants to place the money in a digital wallet. Payouts will only find place in the case something actually happens that requires insurance. This is operating model of startup Teambrella. The fourth upcoming wave will totally abandon the need for a credit pool allowing private investors to back the insurance policies.
Is there any escape left for insurance incumbents?
Luckily for large insurance companies, a couple of entry barriers for new players/startups can be identified which will benefit the traditional players. One of these potential hurdles is capital adequacy. This may raise some eyebrows when looking at the enormous amounts of money circling in the InsurTech investment landscape nowadays. Therefore it is important to notice that insurance companies need a strong capital base for underwriting risk (pay claims and hold necessary reserves) in order to become operational. InsurTech startups receive investments to instrumentalize their ideas, but apart from this, they lack a strong capital stream to become independent insurance providers. Next, we identified the regulation roadblock. Governments have a complex and cumbersome legislation related to insurance. It does not only require a thorough knowledge of these regulations, but also the ability to account for regulatory requirements from the earliest stages of ideation, through design, to sustained maintenance. Fortunately RegTech (Regulation Technology) can make an impact, but in case of outsourcing regulatory expertise Insurtech companies can be driven back to the capital requirements issue. Finally we refer to the fact that the attraction and retention of customers is much more expensive (the capital problem again) and more sophisticated than in consumer goods. This leads to the observation that today’s startups have major difficulties in building a proper client base.
Although these incumbent protection barriers are quite significant at the moment, they will show itself as a false sense of security overtime. Capital has shifted and the traditional sources are being replaced. It is entirely feasible that new sources of capital will fund new insurance business models built on new tech.
The implications are two-sided. On the one hand, startups have to create an imperative for collaboration with incumbents. On the other side, incumbents need to approach InsurTech as an opportunity in allowing them to develop and improve their business and products. The new tech landscape must be understood as an incentive for collaboration, rather than competition.
InsurTech, a worldwide phenomenon
Global InsurTech activities are mainly concentrated over 3 continents: the USA, with 60% of worldwide deals since the start of 2015; Europe, taking 20% of deals into its account and finally Asia, as market with currently a relatively smaller share in the cake, but with enormous potential for future developments.
The United States represents a strong leadership position in technologic insurance advancements. Most US InsurTech startups are focused on providing health insurance solutions by developing all-in-one insurance platforms to personally manage their insurance policies, providing comparison tools to guide consumers to the right health insurance products, and offering tailored insurance options through a personalized approach. Examples of such startups are technology unicorn Oscar, Collective Health, Gravie, Castlight Health, etc.
Secondly, there is Europe, with several startups that believe in the hail of Peer-to-Peer insurance. Also, there is a strong trend in entrepreneurs that put their thoughts towards data analytics and blockchain implications. An interesting fact is that most European InsurTechs are building propositions which require them to partner with insurers while almost nobody is, so far, taking on the balance sheet challenge.
Asia can be seen as the third continent completing the series of 3. Mumbai and Shanghai are considered major InsurTech hubs, representing respectively 5% and 4% of total InsurTech activities worldwide. Hong Kong, as main financial hub worldwide, has a strong presence in the FinTech scene but there are still no real technology developments in Insurance. InsurTech startups can be expected to pop up anytime soon. It may not come as a surprise that the main interest in this area lies within distribution. Making insurance easier to buy, consume, understand and relevant is highly important for insurers in a market that is characterized by a huge customer base of 4.4 billion people that is currently underinsured. This aspect combined with the rapidly increasing penetration of smartphones and mobile data, forms a strong reason to believe Asia will be the next hot InsurTech market in the world.
Insights in future developments
Sia Partners, through its experience and knowledge, has identified different major developments and disrupting factors of which we believe will be next in InsurTech over the coming years. It important for insurers to be aware of these future challenges that imply both potential opportunities as threats for the insurance sector.
First of all, there is blockchain. Although there are already some disrupting startups that implement the blockchain technology in their business models, there is still a lot of underused potential. This mainly because blockchain is functioning as a distribution system, and, thus, its value mostly depends on collaboration with different stakeholders. Still, we believe the hype is real, and blockchain will play an important role in the future of insurance. The underlying bitcoin technology could function as the success factor in need for P2P applications. Insurers will be able to create marketspaces where individuals can be brought together based on their risk level linked to their blockchain enabled self-managed digital ID. Furthermore, smartcontracts could enormously improve the customers’ experience through real-time tailored policy offers and automated claims handling. Blockchian can also prevent fraudulent claims and reduce costs of risk assessment. Large insurers such as Mutual Insurance, Allianz, AXA and MetLife have already poured millions in to blockchain research and lots of opportunities for start-ups are left.
Data monster companies
Also, monster companies such as Facebook, Apple and Google that are provided with enormous client bases and personal data could turn insurance into simple utilities. They have the potential to take over the whole distribution process and could function as the ideal P2P platform. Furthermore, Facebook aims to introduce AI-driven chatbot technology which could fully automate the communication between insurer and client.
Another promising development might be drone technology. Although the market is still quite small, the application of Internet of Things shows potential in claims handling, has the ability to cover wide areas in case of catastrophes, and can form an alternative for sending a costly specialist to the place of delict.
With cybersecurity forming a big issue for digitalization, insurance policies are being developed to help an organization mitigate risk exposure by offsetting costs involved with recovery after a cyber-related security breach or similar event. Cybersecurity is at the moment a market of 2 billion dollar, but is estimated over 20 billion dollars over the next 10 years.
Ultimately, it is very important to notice that, together with these technologic developments, there arises also a big question mark concerning privacy. Personal data regulations are tightening all over the world, making it far less evident for companies, including insurers, to embed big data analytic tools in their businesses. Insurers need to closely follow these regulations (like the General data protection regulation) and be fully aware of the consequences for their (future technology driven) business models.
After decennia of conservative business handling, there is finally light at the end of the tunnel. Insurance can simply not ignore the rise of digital development any longer. New business models that stimulate customer centric outside-in thinking need to be developed to meet the constant rise in customer demands. The appearance of new technologies such as Big Data, Internet of Things, Artificial Intelligence and Peer-to-Peer insurance show strong potential to drastically change the way insurers do business. InsurTech startups appear everywhere, trying to fit in where traditional insurance fails short. Incumbents need to find solutions to collaborate with InsurTech entrepreneurs, as this also opens doors for enormous efficiency gains and product improvements. On the other hand, startups need to create an imperative for collaboration to overcome their current lack of capital and strengthen their customer base. InsurTech is ready for the world, with major hubs in San Francisco, New York, London, Berlin, Mumbai and Shanghai which are all constantly growing. The Asian market is becoming very attractive and is expected to experience a flood of InsurTech startups in the near future. The digital revolution has just begun, and many technology applications will follow in the coming years further stimulating the transition to the new client-based insurance business. Risk will be less and less dependent on human negligence, but more on the functioning of the underlying technologies.
At Sia Partners, we believe the question is not if, but how long it will take for technology to fully penetrate the insurance sector. Large incumbents will not disappear in this new Tech landscape, but have a legitimate interest of keeping a close look at disrupting startups as they have the ability to steal a significant part of the market share of these large established insurers.
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