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InsurTech: The Technological Disruption of the Insurance Industry

InsurTech refers to the disruption and transformation of the insurance industry by emerging technologies. For instance, insurtechs use big data, machine learning and AI, IoT and telematics and even the latest innovations in biology to disrupt the industry.

A variety of startups are disrupting the insurance industry. A set of insurtechs are transforming customer experiences and enabling incumbents improve their business processes. And there are others that are competing fiercely against incumbents with innovative products and new business models. Yet another set of companies are targeting unserved customer niches. To add to the complexity, there are TechFin players that are likely to bundle insurance with the products sold.

Failing to learn lessons from the disruption of the banking industry, insurance companies are rather slow to react. With seemingly unlimited funding from VCs and relatively lower regulatory oversight, insurtechs are all set to dominate significant slices of the insurance market.

Emerging technologies are disrupting the insurance industry

The insurance business is getting disrupted by InsurTech companies that leverage emerging technologies. For instance, technologies such as big data, IoT, telematics and machine learning and AI are transforming how companies assess risks and price them. And also, how they manage claims and settlements. In addition, innovative startups are using genomic testing and epigenetics in assessing risks in the life and health insurance businesses.

But unlike the banking industry that is making huge technology investments, exploring partnerships with fintechs and even incubating some of their own, the insurance industry seems to be a lot slower to respond. And with plenty of support from VCs, insurtechs are likely to dominate huge segments of the market.

Why is the insurance business ripe for technology disruption?

The opportunities for new insurtechs have risen because of several factors. Let’s break that down for you.

  • Lack of direct relationship with customers

    Unlike their banking counterparts, insurance companies never had direct relationships with their customers. Right from the inception of the industry, a set of intermediaries such as brokers and agents have been aggregating demand for the insurance companies. And the incumbents also use several outsourced entities like surveyors and loss assessors. This lack of direct touch with their customers puts them at a drastic disadvantage and prevents them from learning what their customers want, on a firsthand basis.

  • Huge unmet demand

    Insurance companies haven’t made enough efforts to include the population of millions of uninsured across the world. Also, they don’t protect a significant portion of the losses world over. So, there is a huge headroom in the industry for new players to cash in on.

  • Not so customer-friendly attitude of the incumbents

    Even in a good year, say, when the number of claims is fewer than expected, the incumbents are unwilling to share the extra profits with their customers. And this is true, even when the lower number of claims is a result of customers taking care of their health better or maintaining their assets better. And so, customers do have the right to feel cheated.

  • Resistance to change

    As you know, insurance is one of the oldest businesses in the history of financial services and hence, naturally, quite resistant to change. Unlike the nimble startups, the incumbents are reluctant and slow to change their traditional, bureaucratic organizational structures. With an archaic organizational climate, they are blind to new opportunities. And this is only made worse by their general unwillingness to work with new tech startups.

InsurTechs use emerging technologies to disrupt incumbents

Why is the insurance business uniquely vulnerable to technology disruption?

If you compare the insurance industry with the banking and investment industries, you will find something very interesting. The insurance industry is particularly vulnerable to technology intervention in a way banking and investments are not.

Let’s take a deep dive into this.

  • First, insurers are in the business of predicting future events. Machine learning and AI technologies can do this blazingly fast and with minimal costs. And the growing abundance of data, computing capabilities and the ability to do all this remotely with the help of cloud infrastructure – make it easier for the tech-savvy startups.
  • Second, the insurance business is ‘phygital’. This means that there is a huge real-world element to the insurance business. Insurers offer cover for real world assets and even in the case of life or health insurance, there is a physical element.

Today, it’s possible to use a wide range of emerging technologies such as IoT (Internet of Things) devices such as moisture and temperature sensors, drones with cameras, IIoT (Industrial Internet of Things) devices in insurance.

For example, you can place moisture and temperature sensing IoT devices in the agricultural fields and use drones with cameras for pre-underwriting inspection and for loss assessment.

Similarly, it is possible to install IIoT devices in expensive machinery in factories to predict mechanical failures with reasonable accuracy.

In the domain of auto insurance, telematics devices in cars can collect data. You can use this data to incentivize good driving behavior.

Similarly, health bands, rings and watches can measure biological data and help predict health risk events. A few startups are working on epigenetics and genome testing to predict the mortality rates of the insured with an order of magnitude better than conventional actuarial methods.

Hence, the incumbents face the difficult challenge of being on top of a broad range of technologies to compete effectively with insurtechs.

IoT and AI are driving innovations in InsurTech

What are the different types of InsurTech companies?

The agile, new insurtechs come at the insurance business from different angles. First, a few technology-focused insurtechs aim at improving the process efficiencies of the incumbents. And some other insurtechs make life easy for customers by offering comparison-shopping and helping them choose the policies that are best for them. Plus, a few others offer new and improved products that are not even sold by the incumbents.

Next, a new set of insurtechs operate on innovative business models. And there are others that take advantage of the emerging new markets such as the sharing economy and sell specialized products that suit them. Finally, just like the incumbents, a few startups act as risk carriers./p>

Here’s a quick rundown of each of these types with examples.

    • Startups that improve overall customer experience

      These companies offer comparison-shopping services to customers and help them choose the right policies. Also, they are not competing with the insurers; instead, they act as demand aggregators for them. Of course, they disrupt the distribution network made up of agents.

      The following are examples of this type of insurtechs.

      • Policygenius is a US-based insurance marketplace that offers comparison shopping for insurance.
      • Coverfox, an Indian insurtech, registered as an insurance broker, offers you comparative shopping for insurance policies and helps you manage the policies and even helps you with claims.
      • Policybazzar offers similar services.
    • Startups that enable incumbents

      Like the earlier set of insurtechs, these are non-competitive tech companies that work with the incumbents to help them streamline their processes and improve operational efficiencies in underwriting, claims processing and regulatory compliance.

      The following are examples of insurtechs that help insurance companies offer better services.

      • Trove offers embedded insurance solutions to any company that wants to build insurance into their product offerings and also get a piece of the insurance revenue. Slice offers a similar service too.
      • Shift provides traditional insurance companies, AI-based automation solutions that enhance customer experience and also protect against a range of insurance frauds.
      • Wrisk offers a mobile-first, robust technology platform to insurance companies that will improve customer experience.
      • Quantemplate, is an insurtech that offers a data integration and machine learning platform that helps incumbents get valuable insights from their data.
    • Startups with innovative new products

      Unlike the earlier categories we mentioned, these startups offer new products and services hitherto not available in the market. This is disruptive to the incumbents and these new players can lure away customers from the traditional players.

    • Parametric insurance or index-based insurance, is a type of insurance where the insurers pay the claim amount on the occurrence of a pre-specified event. For example, in agricultural insurance, the farmer is paid the claim amount if the rainfall drops below a pre-determined level. Or when the temperature exceeds a pre-specified level.

      For example, Climate Corporation, a startup that is disrupting crop insurance, monitors weather conditions and offers timely information to farmers. Also, this insurtech offers parametric insurance where the company settles the claim on the occurrence of a particular risk event. For example, if the rainfall exceeds a particular level, the claim gets settled automatically without the need for time-consuming risk assessment processes.

      • Startups with new business models

        These insurtechs, unlike traditional insurance companies, pass on the benefits of lower number of claims settled, to the customers by way of reduced premiums.

        The insurtech, Laka is an example of this type of startups.

      • Startups targeting new markets

        The emergence of the so-called ‘gig economy’ where millions of people are freelancing, has thrown up new insurance opportunities. Also, you probably have used the products of the ‘sharing economy, such as Uber and Airbnb. If you are either the owner or renter in this economy, there are several short-term insurance requirements.

        New insurtechs like the following offer flexible, pay-per-use insurance covers.

        • Dinghy is a good example of an insurtech taking advantage of this phenomenon. This company offers flexible insurance plans for professional indemnity, public liability and business equipment to freelancers and self-employed professionals.
        • Metromile customizes your insurance premium based on how much you drive. If you drive less, you end up paying less. The company claims that you can save up to 47% compared to what you’ll pay traditional insurers.
        • Cuvva offers innovative car insurance plans that you can obtain in a matter of seconds, right from your phone.
      • Startups that act as risk carriers

        These are end-to-end insurtechs that compete head-on with the established players. They take the insurance risks on their own books. With significantly lower costs because of the tech leverage and no intermediaries to compensate, these insurtechs have higher profitability than the incumbents. And capital from venture investors is a big help too!

        Unlike the incumbents, these insurtechs work on claim prevention by using technology to get data about the assets. They also educate customers and help them take care of the assets better and avoid a risk incident. Obviously, these activities result in fewer claims. And these insurtechs pass on the extra money saved to the customers or donate it to causes that are dear to the customers.

        For example, Lemonade, an auto insurtech company, offers the option of ‘Giveback cause’ to customers. And from the cohort of customers for a particular cause, a significant amount of savings arising from lower claims go to the charities.

    So, what is the future of InsurTech?

    As we have seen earlier, the insurance business is uniquely vulnerable to technology disruption. Also, the traditional insurance companies have left so much money on the table! As you’re already aware, millions of people around the world don’t have insurance. Plus, globally, insurance coverage is unavailable for a huge proportion of losses incurred. And on other hand, emerging technological and societal changes are bringing up new insurable interests. All these are excellent opportunities for innovative insurtechs, especially with unending capital availability from venture capital firms.

    To add to the woes of the incumbents, TechFin competitors such as e-commerce majors are likely to bundle insurance along with the products they sell. And there are several insurtechs that focus on offering embedded insurance solutions to these companies.

    Hence, with so much of action in the industry, you can bet that InsurTech is all set for a dramatic growth trajectory!


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