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As excitement grows about the potential for technology to transform the insurance industry, large insurers and innovative startups are racing to develop new “insurtech” solutions. Many seek way more than incremental improvements with existing infrastructure and business processes. They envision entirely new insurance products, vastly leaner organizations, seamless customer experience, and sometimes full-scale disruption of traditional insurance models.
Changing the industry won’t be easy. Insurance companies are inherently and necessarily conservative. They are built to last over long periods of time, and saddled with heavy regulations that ensure their stability and integrity. These regulations generally favor large incumbents that have adapted to them, and thus make it difficult for new ideas to alter the market.
Insurtech professionals understand that many customers are frustrated. Policyholders increasingly expect the same kind of seamless, speedy, on-demand experience that they get in so many other areas of the digital economy. Yet dealing with insurance companies is complex, and often seems like a time-consuming nightmare. Policies can be hard to understand and filled with hidden coverage gaps. Claims can take forever to process and are sometimes unfairly denied.
Other financial services sectors have already reached technological inflection points that bring improvements in the customer experience. Particularly in the years after the 2008 financial crisis, many “fintech” entrepreneurs developed novel solutions for payments, lending, and other financial services. As one example, companies like Betterment (whose CEO Jon Stein spoke at Techonomy NYC in 2016) use “roboadvisors” to automate wealth management and financial planning. Services like these promise to reduce costs, improve ease of use, and increase access to financial services.
Lex Sokolin, another fintech entrepreneur who runs a popular newsletter about financial technology trends called Autonomous Next, believes insurance may be at a similar inflection point. “What happened to financial advisors is now happening to insurance brokers,” says Sokolin, who serves as Global Director of FinTech Strategy at Autonomous Research, a financial research firm. “Roboadvisors won’t replace everyone, but they will allow a smaller workforce to serve many more customers.”
Sokolin expects that middle- and back-office functions will also give way to automation. New data sources and analytics tools will allow insurance companies to dynamically price risk, develop policies, process claims, and prevent fraud. Such technologies could improve operational efficiencies and ultimately reduce costs for the end user.
Other technologies like blockchain may also have impact. As entrepreneurs and technologists look for viable use cases for this mind-bending new way of securely tracking shared information, many big insurers are also testing the waters. Some are doing this through corporate innovation programs, such as the recent AIA Blockchain Challenge in Hong Kong. Others are participating in industry-wide collaborations like the Blockchain Insurance Industry Initiative (B3i).
For customers, new technologies could enable much better insurance products. In homeowner’s insurance, for example, some insurers already offer policies that are integrated with smart home systems. These can help monitor homes for potential risks, such as leaky pipes that could lead to floods, and alert homeowners before damages arise, or automatically approve claims after damage occurs.
Connected cars and mobile applications offer similar opportunity for improved risk management in auto insurance. They can also provide more dynamic and customized pricing models. Cuuva, for instance, is an Edinburgh-based insurtech startup that launched in 2014 with an on-demand hourly auto insurance policy. Offered through a mobile app, it was designed for people who needed instant coverage when borrowing cars from friends. More recently, it also launched a pay-as-you go policy for occasional drivers.
Given the heavy costs and regulations associated with becoming an underwriter, most insurtech startups focus on other parts of the value chain with relatively low barriers to entry, such as analytics and distribution. But a few are raising the capital necessary to build entirely new insurance carriers from scratch. The two most well-funded insurtech companies in the world—ZhongAn in China and Oscar in the United States—both fall into this category (Oscar CEO Mario Scholsser will be speaking at Techonomy Health on May 16).
The past couple years saw a groundswell of investment and interest in companies like these. Between 2010 and 2014, total private financing transactions in insurtech companies amounted to roughly $1.7 billion, according to Financial Technology Partners, a fintech-focused investment bank. In both 2015 and 2016 alone, that number exceeded $2 billion.
Some of that money was independent venture financing, but a lot of it also came from the venture arms of large insurance companies, many of which launched funds and innovation labs in recent years. Roughly half of large insurers believe they could lose up to 20% of their business to startups, according to a 2016 study by PwC. While total disruption may not be an imminent threat, they clearly understand that they need to innovate to remain competitive.
Innovative companies are coming up in every category of the insurance industry, from traditional lines of business like health insurance to newer ones that cover cybercrime and other modern-day risks. As new technologies collide with an old and increasingly outdated industry, many predict another breakout year for insurtech.
Will Greene is a writer and strategy consultant focused on Asia’s emerging R&D ecosystems. You can find him on LinkedIn.