Role of Insurance Technology (InsurTech) in the transformation of the Insurance Industry

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by Ramesh Koovelimadhom, December 23, 2016

Insurance companies as typically not viewed as technological pioneers. The relationship between an insurer and its policyholders is infrequent, fleeting, and transactional, and a financial interaction. As a result, insurers have not needed to be at the leading edge of information technology.  In this age of mobile and cloud solutions, insurers remain some of the largest users of mainframe technology. But change is on the way. A new wave of insight, or interactions, and value is bringing insurers and their personal and commercial customers closer together.

As in many other industries, innovation is fueling sweeping changes. Insurance companies understand the need to become more customer-focused, easier to do business with, and more responsive to customer needs and expectations. They continue in their quest for more data to make better decisions and to reflect risk accurately while simultaneously driving costs lower.

Leaders in the marketplace are inventing new ways to link real observations with identification of risk:

  • Telematics monitors automobile speed, acceleration, and overall driving safety to provide drivers and insurers insight into truly high-risk—and low-risk—behaviors.
  • The Internet of Things (IoT) will likely soon provide even more insight to how we live our lives in and around our homes, allowing for personalized service offerings.
  • Wearable devices that track our physical activity and caloric intake can make us more aware of the daily decisions we make and its impact to our health.

The interconnectivity between insurance technology and consumers’ lives is increasing rapidly. Insurance policies can be complex, and not all policyholders understand all the fees, coverages and riders included in a policy. According to a Morgan Stanley/BCG consumer survey, nearly 50% of policyholders have one or less interactions per year with their insurers, and less than 60% of those who made the contact are satisfied with the experience.

Underwriting and closing a policy may take several days, even several weeks. Once the policy is underwritten, claims management and customer service are cumbersome due to the insurer-centric and paper-based structure. The commission structure of the status quo is such that agents and insurers make the process a misalignment of interest between the insurers and policyholders.

In spite of these challenges these insurers have their competitive advantages. Incumbents have the consumers’ trusted brand perception and existing coverage network, regulator’s policed compliance and licenses, as well as the most analytical actuarial talents.

The last few years has seen many startups exploring the link between technology and insurance to provide a better customer experience, while not diluting the need to improve profits and reduce risk. And this slumbering industry is waking up. Funding for these insurtech companies has reached new heights, with 2015 seeing close to $3 billion in funding. These startups are finding leaner methods to underwrite costs, manage claim expenses, invest better and improve the customer experience, thus building trust and eroding into what has kept the traditional insurance companies in business – trusted brand perception.

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The insurtech universe – Based on a graphic by Venture Scanner 02/01/16 (click image to enlarge)

The world’s biggest insurtech startup  Zhong An, valuated at $8 billion , has opened new segments of insurance which traditional insurers did not touch: Zhong An partnered with Alibaba for coverage on returned goods’ delivery charges and even drone/mobile phone damage policies tailored to the new digital economy. Besides tackling the new digital frontier, Zhong An is essentially innovating on distribution, with a more integrated sales channel embedded as part of the e-commerce shopping process rather than depending on the traditional third-party agent distribution model.

Anthemis-backed Trov creates customization of home insurance by allowing coverage of individual key items rather than a predefined set with an average payout. An app-based mobile platform helps easily collect information about the things users bought through photos, market values, receipts and other product details.

With Trov, users can always see the total value of the things they own and have stored on Trov and track their value over time. With detailed records close at hand, it can be used as information to decide on the level of insurance coverage with Trov’s partnered insurers serving in the backend. A one-stop shop like this is able to add more value with protective insurance products.

Insurtech such as Friendsurance, Guevara and the stealth Sequoia-backed Lemonade are working with P2P insurance models. Using a sharing economy approach, users are invited to form small groups of policyholders who pay partial premiums into a pool to use for small claims. Policyholders are able to get back the remaining pool of money at the end of the year, after claims. Claims-free policyholders are able to obtain higher cash back, which is a clear financial benefit for fair behavior to reduce fraud and claims expenses. These P2P models are rethinking how to make short-term liquidable investments on the pooled money and higher returns bet on other premiums.

SaleMove brings in-person customer experience online by offering website surfers an option to talk to live representatives via video, which aims to give potential leads more meaningful information than just poking around randomly. It also allows insurers to mitigate the effects of not having the human touch in `insurance sales, and tailor products for possible completion of micro-insurance online.

The core competence of insurance is ready for a big leap, thanks to all sorts of new technologies, such as machine learning and data analytics. AdviceRobo solutions make use of a machine learning platform that combines data from structured and unstructured sources to score and predict risk behavior of consumers. For instance, it provides insurers with preventive solutions, applying big behavioral data and machine learning to generate the best predictions on default, bad debt, prepayments and customer churn resulting in individualized risk assessment.

There are going to be more insurers leveraging IoT devices, such as fitness tracker Fitbit and environment sensor uHoo. Perhaps the speed and ease with which self-automating smart contracts could be changed could see more insurance policies that reflect actual personalized risk in a real-time manner. However, the industry has to make good strides in not creating sub sectors of the society that can’t buy insurance due to big data rendering them as less attractive risks.

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