Insurance has always been a business based on data analysis, but new technologies are elevating the quality and quantity of data insurers can use to manage risk. Sofia Lotto Persio reports on the sea of opportunities – and challenges – insurers face.

The wave of innovation that has engulfed the banking sector has reached the insurance shore. Technological advancements in the collection and analysis of data are key drivers for the evolution of a sector that is based on data processing. Insurance technology, or insurtech, is growing rapidly, with investment in tech companies targeting the insurance space growing threefold between 2014 and 2015, to US$2.6bn.

Four of the 25 biggest fintech deals in 2015 listed by KPMG concerned insurance start-ups, with US-based Oscar Health Insurance receiving a whopping US$400mn in series-C funding. Health and driving insurance are two areas that have majorly capitalised on data analytics, cloud computing and modelling techniques to create more affordable, efficient and transparent products for consumers. The whole insurance industry, however, can benefit from technology solutions aimed at optimising processes, increasing collaboration and reducing claims fraud.

The industry’s growth and high premiums over the past two years make the insurance market an appealing one. McKinsey’s Global Insurance Pools database, a proprietary knowledge asset of the firm, shows that in 2015, total insurance premiums continued their upward trajectory to surpass €4tn globally. This was the second year in a row premium growth (6.5%) surpassed nominal GDP growth (6.3%), although the pace was slightly slower than in 2014.

Like banking, insurance is an industry often labelled as “ripe for disruption”: some of the sector’s leading companies are over 100 years old, with legacy systems that slow down their processes and lower appetite for innovation. According to an Accenture study, most insurers still base their business models on pooling risk, calculating average pricing and generating gross premium income. The advance of digital technologies such as wearable devices, smart objects and connected cars are threatening that model, but also offering new opportunities to collect and analyse data, automatically assessing and pricing risk individually and in real time.

For example, wearables such as activity trackers used for fitness purposes can provide a whole new real-time set of data on the health of a person, and ‘smart cars’ can collect information about the habits of their drivers that can help reduce the premiums paid by younger insureds.

In the same way, sensors placed inside containers could update insurers and other parties involved in the trade of the goods they hold, particularly the more perishable ones, with real-time information on the state of the cargo transported. The increase in quality and quantity of the data collected and the automation of core insurance functions should improve the underwriting process and customer experience, and ultimately cut costs for both insurer and insured.


Growing awareness, slow adoption

Despite clear opportunities, the pace of innovation in the insurance sector is slower than that witnessed in the banking sector. One of the reasons is that while innovative banking technologies firstly relied on mobile or internet connections, insurtech is driven by more recently-developed hardware and software technologies.

But with growing customer demand for more transparent, trustworthy and user-friendly propositions, insurers are starting to jump on the bandwagon. “Everyone wants everything at their fingertips,” said Rashee Pandey, marketing and communications manager at Bankable, speaking about the rise of insurtech at London Fintech Week 2016 in July and how innovation is needed to attract customers who are underserved by, or uninterested in, the traditional insurance sector, such as the younger generation.
When looking specifically at how insurers are handling the innovation challenge, a certain disconnect between heightened awareness of innovation and willingness to take action emerges. A PwC survey of the industry indicates that while 74% of its 544 respondents predict disruption of their business in the next five years, only 43% say they have tech at the heart of their strategy. In terms of collaboration, less than a third are exploring partnerships with start-ups and even fewer have invested or supported incubators.

“It is increasingly important to be seen as innovative, so a lot of insurers are pushed very much externally to drive up the innovative perspective of the organisation,” explains James Dickerson, programme director at Accenture’s fintech innovation lab. “There are also a lot of organisations doing a lot of really good things, but they’re not talking about it because they are transforming themselves internally,” he points out.

In fact, while the spotlight may be shining on innovations such as data trackers or slick user interfaces, there is a lot that insurtech can offer to optimise back-office processes. “Some of the technological innovations aren’t customer-facing, but are about streamlining processes, not very visible, but could transform the cost of insurance,” says David Thomson, director of policy and public affairs at the Chartered Insurance Institute (CII).


Start-up collaboration

Start-ups looking to disrupt the insurance industry face a somewhat harder challenge than those targeting specific segments of the banking sector, as insurance tends to be more complex in both processes and regulation. Those innovators who venture into the industry can have a somewhat rude awakening to its complexity and timeframes.
Cameron Shearer, chief executive at Digital Risk, a start-up offering insurance against technology and digital risk to small corporates, can hardly hide his frustration at the 18 months spent getting ready to launch his business. “It’s ridiculous: nine months were about getting approved as an intermediary, and underwriters won’t deal with you until you have the regulation in order. It’s not an attractive environment for innovators who want stuff to happen quickly,” he told the audience at London Fintech Week 2016.

These kinds of hurdles are likely to redefine the expectations of the start-ups that want to take the industry by storm. “There is some sentiment around disrupting incumbents, however these players will face the same challenges the fintech challengers do, like customer acquisition for example,” says Dickerson. According to him, collaboration is going to be a more likely path of co-existence between incumbents and challengers. “You will see the pace of adoption in incumbents accelerating, acquiring these innovations into their businesses rather than being disrupted by them,” he tells GTR.

The few insurers who have made a move towards working with start-ups through accelerator or incubator programmes realise that the pace of change and technology adoption in the industry can be frustrating for newcomers. “We’re an over 100-year-old industry. It moves slowly and there is frustration if you come from a different culture in which you think quickly. It is a work in progress for us,” says Parul Kaul-Green, head of UK strategy, M&A and innovation at AXA.

One of the misconceptions causing frustration for start-ups is the idea that insurers are able to innovate the moment a solution is presented to them, when actually big organisations need to invest a lot of time and resources into rearranging themselves so they can engage with a tech start-up. “A lot of start-ups approach negotiations with corporates thinking their price tag is a core consideration, but in reality the effort needed internally to adopt some of these innovations dwarfs the financial consideration,” says Dickerson. “When larger organisations want to work with smaller players there’s typically some friction in the process; many players are now looking at how they are redefining these vendor management processes or are creating ‘fast-track’ processes for them.”

Communication is also key in bridging the cultural divide. Sabine Van Der Linden, managing director at Startupbootcamp Insurtech, an accelerator programme for tech start-ups targeting the insurance space, thinks that understanding how to communicate among diverging groups and agreeing communication practices is crucial to a fruitful collaboration.

“Sometimes opposites attract. [Incumbents and challengers] are dealing with a massive dichotomy that affects the way they work together and communicate to achieve common goals and objectives,” she tells GTR. “Corporates want to work with start-ups to solve big problems or enter new markets, and also to change very stiff environments into more flexible and fluid ones, creating a culture of thinking and innovation, to build resilience in a fast-changing digital world.”


Areas of innovation

Insurance companies looking to innovate do not need to reinvent the wheel entirely, as there are plenty of solutions developed with finance in mind that have an application for insurance. “Real-time payments [to speed up claims processing and disbursement] could be an area of fintech-insurtech collaboration. It’s a key trend I’m seeing, along with artificial intelligence to automise pricing strategy,” says Pandey.

The peer-to-peer (P2P) model that is emerging as an alternative source of finance can also find use cases in insurance, particularly for retail products. “There are start-ups modelled around mutuality, which is interesting because it goes against some of the views that pool risk is going to be a thing of the past,” says Thomson. “What you may start to see is a smaller version of pool risk, but amongst community groups.”

Just like in banking, the technology that can help bring innovation and cost reduction is blockchain. “I think things like blockchain will have a huge impact on trade and commercial insurance and I think that’s coming. Last year, hardly anyone knew what it was; it is the fastest-growing part of the fintech story,” says Thomson.

In a paper analysing blockchain applications in insurance, McKinsey defines it as “a distributed register to store static records and/or dynamic transaction data without central co-ordination by using a consensus-based mechanism to check the validity of transactions”. The study goes on to describe how blockchain applications to the insurance industry could increase transparency and credibility for customers, improve effectiveness in fraud detection and pricing and reduce administrative cost.

The distributed ledger technology first developed to underpin bitcoin transaction has recently come under the spotlight. Its decentralised validation system, guaranteeing immutability to a transaction, can find applications in various aspects of asset transfers and identification processes. One of the most promising solutions in this space is Tradle, which aims to automate know-your-customer (KYC) processes.

Preventing fraudulent transactions on a variety of goods is the focus of other start-ups, such as Everledger. The company specialises in using blockchain for diamond certification and related transaction history, but it is expanding into the wider luxury goods space, including watches and fine art. It first received support from Barclays’ TechStars accelerator when it launched in 2015, but has recently joined Allianz’s accelerator, planning to expand the use of blockchain technology to combat insurance fraud – an example of fintech/insurtech crossover.

Blockchain is also the preferred platform for smart contracts, which are written as computer programmes and capable of automatically enforcing themselves without an intermediary. These can offer several use cases to the insurance industry, for instance automating claims handling, creating payout mechanisms for the customer, and enforcing contract-specific rules. InsurETH, for one, is working on a proof of concept that will allow smart contracts to automate insurance claims and refunds in the case of flight delays or cancellations.


Future impact

When presenting their solution at the London Fintech Week Hackhaton, the InsurETH team pointed out that only four out of 10 passengers delayed while travelling claim compensation, whereas with a smart contract the number of claimants could increase. This is one example of how tech solutions can increase the accessibility of insurance products to a wider market.

“The digitisation of much of this landscape will mean that a new customer segment will either have access to new products, as these will evolve to targeting them, or existing product lines will open to customer segments that had previously been excluded, like the SME segment,” says Dickerson.

Technology solutions can also ensure a more direct engagement with customers. “Every insurer is thinking at how they look at customers in a much more insightful and engaging way, in a way that adds more value to that relationship, and in turn the customer will win,” says Roy Jubraj, managing director for digital and innovation at Accenture.

According to him, insurers will also need to work with new risk emerging from new technologies. “You will see an intent and a need for the industry to shift a little bit and be more responsive to a set of new risks that are coming about, understanding how they can assess and underwrite them,” he says.

The increased adoption of technology solutions will present both challenges and opportunities to the insurance industry – all incumbents need to do now
is decide whether to sink or swim.