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By Arturo Pallardó

Breaking down ‘Insurtech’: A useful Q&A

Published November 21, 2016

Going straight to the point: 1) what does ‘Insurtech’ stand for? Well, the term is a combination of the words ‘insurance’ and ‘technology’ and it serves to encapsulate the new startups and technologies that are bringing innovation to the insurance industry.

But wait a second, 2) isn’t this part of the wider Fintech ecosystem? I guess that if we consider insurance as a part of financial services, it should be classified as another Fintech vertical, similarly to payments or loans. However, since the main ‘Insurtech’ players under disruption are not banks – as in many of the other Fintech verticals – and the insurance industry moves huge amounts of money annually, the innovation in the sector has got its own denomination. And since there is no self-respecting Somethingtech without its own diagram with the different categories found inside, here it goes:

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Next question: the disruption in this industry derives from the new digital framework that also affects Fintech. 3) Do they face similar challenges and opportunities then? Definitely. Insurtech also aims at using new digital channels to provide better customer service, especially in terms of user experience, to bring transparency to the market and to create new tech-driven products and solutions. Just think about the much-hyped millennials, who feel much more comfortable taking out insurance through their app than through an agent. We’ve got to remember that, as Lemonade CEO Daniel Schreiber puts it, people don’t like insurance companies, and most don’t trust them to pay up when the day comes.

But, 4) is every Insurtech startup trying to become an insurance company? No siree. I like the distinction (regarding the health sphere) that I found in Vladislav Solodkiy’s presentation “33 Insurtechs to know”:

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We could also include a third category of analytics firms that could help incumbents to keep up with the big data revolution (which, as we’ll see, has major repercussions for this industry).

And related to this, you should be thinking, beyond the need to improve the user experience, 5) aren’t insurers’ business models under stress too? Of course. And this is perhaps the real concern in the medium term for incumbents. Similarly to banks, traditional players have not only legacy systems and legacy people, but more importantly, a legacy business culture. This means that although they may even have great, innovative ideas, they are too big (and too slow) to implement them and scale them up. As I’ve noted elsewhere, changing to a model concordant with the digital age implies many other things apart from a willingness to innovate and the allocation of huge resources to tech (and of course goes far beyond designing a mobile app). In the words of Vivek Garipalli, CEO of Clover Health: “There’s a big difference between spending a lot of money on technology and being a technology company.” (I found the quote in the article “Five New Types of Insurance: From Revenge Porn To Drones”, which is totally worth reading, btw).

But due to the idiosyncrasy of the insurance business, 6) technology is also deeply challenging the basic, underlying logic of the industry. How? Mainly due to the change from “relatively reactive protection models to a more sophisticated approach based on prediction and prevention.

OK, but what forms does this actually take? I mean, it seems obvious that the new data boom will help insurers to better select whom they insure, but 7) why is prevention becoming more and more important? Mainly because new and traditional firms have new devices and analytics tools at their disposal that may help their clients to ‘improve their conduct’, which they can also then incentivise through rewards, so the number of claims they need to compensate decreases too. One typical example is telematic usage-based insurance (UBI). I liked explanation in her article “IOT is Disrupting Insurance”:

This [UBI] is insurance where the performance of a driver is monitored through a device installed in the car or an app installed on their phone. This UBI technology can change how customers interact with insurers by giving them a constant and more interactive relationship over the current system where they only really interact during a sale, claim or renewal. 

 

Insurers can make the most out of these trends by offering clients a little more than just coverage prices based on their driving metrics, such as their speed and ability to brake and turn. They could also get some additional value out of real-time connection to GPS tracking by offering things such as safety and maintenance warning and geo-fencing for elderly and teenage drivers to keep track of where they are. They can also offer discounts on products and services offered by outside partners.

If you are interested in how Insurtech is a game-changer for motor insurance, you should definitely check out Matteo Carbone’s presentation:

Of course, this is just the beginning. Imagine for example how driverless cars may threaten (or not) insurers’ earnings. Or how ‘smart’ homes and businesses can provide insurance companies with tons of information that may help them to better evaluate the risks they’re covering.

There’s a whole new chain of value created when a device connected to the IoT detects that a small part of a large piece of equipment in an even larger company is about to break down.

It’s also important to highlight that, apart from the disruption coming directly from the application of new technology, the fact that digital transformation is taking place in many other industries (think of the emergence of the Airbnb and Uber models) also has an (in)direct effect on insurance. So, 8) what is the impact of these new shared-economy business models on the sector? As you may imagine, many of the traditional insurance products do not fit into these collaborative environments.

And here another very interesting point enters the game: reputation. Being rated by other users (i.e. the ‘number of stars’ you give each other) is an incentive that did not exist in many traditional models, which brings new challenges and possibilities to the table. As Carlos Herrera, a Data Scientist at Traity (btw, I highly encourage you to read about what the Traity guys are doing in connection with reputation and insurance) asked the audience at one of the very interesting BBVA Innovation Center panels, would you prefer to insure a  towel from an Airbnb listing or one from a hotel? The answer is the Airbnb one, since people will refrain from stealing it just to avoid bad ratings and comments. This kind of incentive is not present in the case of hotels, and this paradigm shift may have a significant impact on the insurance industry.

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Since I don’t want to make this post super-long, I’ll leave the question-answering there. But be aware that there are many more topics at stake, like: 9) What about cybersecurity?; 10) Is P2P insurance a game-changer or a mirage?; 11) How will insurance and blockchain meet?; 12) How AI Can Be Applied to InsurTech?; and many more. 

Extra bonus track for those that are still reading: Meet Lemonade and Oscar

I think it is a good idea to end this piece with some examples.

Opening up the insurance market to competition is bringing new ideas that go even beyond technology innovation. This is the case of Lemonade, a property and casualty insurance company that, besides transforming the relationship with the client, has set out to transform the incentives involved in the insurance business model and address the conflict of interest at the heart of the traditional model: namely, the fact that most insurers make money by denying claims since every dollar that the company pays out to a client for a claim is a dollar less on its bottom line. “Unlike any other insurance company, we gain nothing by delaying or denying claims (we take a flat fee!), so we handle and pay most claims instantly.” (Lemonade FAQ)

Perhaps the best-known example is Oscar, a new kind of health insurance company that is radically transforming the healthcare experience, trying to “fix healthcare”. I’m not going to go into the details of their business model here since it has very specific features and solutions that are intimately linked to the singularities of the US regulatory landscape. But still, you need only briefly browse their website to realise how they are transforming the traditional customer relationship.

And if – apart from being interested – you have some free time, you should definitely watch both the Oscar CEO Mario Schlosser explaining why health insurance companies don’t care, and Lemonade CEO Daniel Schreiber discussing the future of Insurtech on CB Insights’ Future of Fintech Conference. Very insightful.

 

For a greater (and quick) overview of different Insurtech firms, you could check out Vladislav Solodkiy’s presentation I mentioned before: “33 Insurtechs to know”:

And finally, here is a list of videos from last month’s SVIA Insurance Disrupted Conference that you may also find useful (as you can see, the role of analytics is quite predominant):

 

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Let me know in the comments section whether you think I left out any important points or resources and I will update the article as soon as possible.

You can also engage with us through Kantox’s twitter (@Kantox) or through my account (@BankingUnion_EU)

Cheers!

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