Fintech is big business, estimated to be worth nearly US$ 25bn globally in 2016. And just as technology has impacted finance, it now looks set to have similar influence on the insurance market. Welcome to insurtech.
A few years from now, our sector will look quite different. More and more new businesses are positioning themselves as challengers, with US$ 1.7bn of investment going into insurtech startups last year alone. This is happening on a global level – with firms such as Friendsurance in Germany, PeerCover in New Zealand, and Oscar healthcare in the US, all changing the game. This niche for startups has appeared because the established insurance industry has been slow to catch on. It is partly due to reliance on legacy systems that are difficult to change overnight. But more than that, a recent industry digitalisation survey found that three-quarters of respondents feel the sector is reluctant to show leadership in digital innovation. When asked whether they had a dedicated chief digital officer, one-third of life insurance professionals not only answered no, but said they weren’t even considering it.
Still, there is a flicker of recognition. According to PwC, nine in ten insurers fear losing part of their business to insurtech firms, and more than two-thirds of insurance industry players are now engaging with insurtech in some way.
With that in mind, let’s now look at the some of the trends that are starting to change the insurance industry.
Big data – changing the way insurance is bought
As technology progresses, the way we buy insurance evolves as well. Big data – the ever-increasing amount of digital information collected about our behaviors and habits – is having a major impact. It is helping firms to analyze trends and make predictions, allowing them to personalize services and, in future, provide real-time pricing.
Buying insurance is a time-consuming and frustrating process for the consumer, and the use of big data is helping streamline it. Companies like Brolly in the UK are starting to unleash artificial intelligence to help identify gaps in customers’ insurance, while helping them to avoid buying what they don’t need.
According to KMPG, 2017 will be the year that existing providers really start to catch up, investing to capture more data and to engage meaningfully with insurtech firms.
Responding to commoditization
Ever since comparison sites came along, making it easier for customers to shop around, there’s been a growing sense of insurance being ‘commoditized’ – something to be bought off the peg, rather than assessed and built. Through online aggregators, consumers can compare insurance deals easily and quickly, though with less in-depth understanding of what they’re buying.
This year, Accenture surveyed nearly 33,000 insurance customers in 18 markets and found that competitive pricing is the biggest driver of loyalty in both motor and home insurance. It has become a race to the bottom as consumers put price first, while quality and suitability suffer.
The way to break out of this mindset is through differentiation. The Accenture survey found that 56% of customers would like personalized advice on reducing the risk of loss or injury, 80% would value notifications to family in a health emergency, while 64% of motor insurance customers would be interested in notifications when they enter accident black spots. Certainly, there seems to be appetite for the kind of innovations that insurtech could bring, providing a big opportunity for providers.
Major changes to motor insurance
Sticking with motor insurance, many insurers now offer ‘telematics’ or ‘black box’ insurance, where an installed device feeds back real-time information to providers, who then use the data to build an accurate profile of a customer’s behavior and the likelihood of accidents or theft, enabling customized pricing of risk and premiums.
The British Insurance Brokers’ Association (BIBA) found that there are now almost 455,000 live policies using telematics technology, compared to 323,000 in 2014. They also noted that drivers using this technology can save up to 25% on their premiums. Telematics can also be used for early warnings and breakdown prevention. But what happens when there’s no driver, or the driver is theoretically infallible? Mercedes, BMW, and Tesla have launched, or are readying, self-driving features on their cars and Google and Uber have been testing them too, with varying degrees of success. Business Insider predicts that 10 million self-driving cars will be on the road by 2020.
On the face of it, this will make driving safer – in the UK, 90% of road traffic accidents are caused by human error. But as driverless initiatives take off, there are important implications for insurance companies. For example, in an accident, there are questions that need to be addressed around establishing who was in control, who (or what) was to blame, and how to prove it. This year, the UK government has begun the process of working out these difficulties with the Vehicle Technology and Aviation Bill. And it is possible that, instead of premiums being reduced by the elimination of human error, they will rise in the first instance, because the Department of Transport is considering ‘two-in-one’ insurance policies, whereby both the driver and their robotic companion will need cover. Whatever the outcome, big changes are on the way, which insurance providers will need to respond to nimbly and decisively.
Insuring a new generation
By 2025, approximately 75% of the global workforce will be from generations X and Y – people born between 1980 and 2010. These generations look at their experiences holistically and expect their digital and offline worlds to be seamlessly integrated. It is perhaps unsurprising, then, that one-third of this demographic group expects to buy their insurance from technology companies such as Google.
Accenture also found that the most opportunistic customers in this group – who they labelled ‘nomads’ – are not tied to traditional providers and are happy to use Amazon or Google for financial services. These customers value digital innovation and want new ways of accessing service and advice. For example, many are receptive to peer-to-peer insurance, based on customer pools organised around personal or professional groupings. Accenture found that 55% of nomads would consider this approach for life insurance, 38% for motor insurance and 32% for household insurance.
The technology now exists to make personalization a reality, and people are actively seeking it. Take ‘pay-as-you-go’ insurance as an example, built around specific usage rather than fixed periods, Accenture found almost half of the ‘nomads’ group were interested in cover for temporary needs, and that 82% of them would be interested in adjustments to motor insurance based on usage. In other words, there is less room now for what is known in the investment industry as the ‘set and forget’ approach. The new generations of consumers want living, breathing insurance provision that can respond to their needs.
Cyber insurance and risk
Rising to the challenge of growing cybercrime isn’t a trend. It is a necessity, engendered by a moving target. Being reactive won’t be good enough, for either consumers or insurers. A 2015 report from the Insurance Information Institute noted that protection against cyber crime will be one of the biggest areas of growth in coming years.
Health insurance records are one of the most vulnerable areas. In 2015, a major data breach at health insurer Anthem compromised the private records of more than 78 million customers. In the same year, according to the US Department of Health and Human Services, hackers found their way into more than 100 million health records. In terms of cost, cyber security stalwarts McAfee and CSIS put the annual cost of cyber insurance at US$ 445bn.
These huge numbers and the growing cyber security threat are another reason for insurance providers to move with the times.
Reaching critical mass and beyond
Perhaps it is artificial to look at these trends separately. They are more an unrelenting forward march of a brave new interconnected world, an ‘omnichannel’, which will see the synchronization of data across multiple connected devices.
Some insurers are already investing in this approach, but not everyone. Of the two thirds of insurers that PwC observed engaging with insurtech firms, only 43% claim they have it at the heart of their corporate strategies. Yet these developments are changes to embrace, not advances to fear. They create opportunity for providers to differentiate, and to add value by building more personalized services. As is the case across the fintech sector, collaborating with insurtech will surely pay better dividends than competing with it.