The race to rethink insurance

Insurtech is a bubble waiting to burst. But that doesn’t mean it won’t shake up the industry.

Money is being poured into tech startups in the hope of finding an insurance version of Uber or Airbnb. Roughly $6 billion was invested in insurtech ventures between 2011 and 2016 (most of it in the past couple of years) by venture capital funds that see insurance as a $4.5 trillion industry ripe for change: inefficient, out of date and unloved.

But it might be harder to disrupt this business than many would like to think. It’s difficult to rewrite the rules of such a heavily regulated industry, where new players need a licence and plenty of capital before they can set up in business and must then abide by strict rules about what they can offer customers.

Roughly $6 billion was invested in insurtech ventures between 2011 and 2016 by venture capital funds that see insurance as a $4.5 trillion industry ripe for change: inefficient, out of date and unloved.

Also, while a lot could be done to improve the customer experience, the basic insurance product is pretty good. Fires, floods, earthquakes, storms and terrorist attacks have provided ample proof of concept (to use the Silicon Valley jargon), which might explain why, despite the hype about reimagining insurance, no startup has so far come up with anything that it is fundamentally different from, or better than what square, old-fashioned insurers have been providing for years.

The Internet of Things has been hailed as a technology that could revolutionise insurance, by using the data from sensors placed in homes or businesses to help prevent accidents from occurring. It could eventually offer a leap forwards in the way risk is managed, but for now, packaging the smart technology with an insurance policy at a price people are willing to pay remains a work in progress.

The brains behind these startups are often tech entrepreneurs with limited insurance experience beyond knowing how frustrating the process of buying a policy can be. They regard their ventures as being tech firms not insurers, whose mission is to make buying insurance online as easy as booking a car ride or finding a place to stay.

That means they approach this industry from a completely fresh perspective, which is good. But it also means they’re more likely to make the same mistakes that insurers have already committed. Many startups learn the hard way how tough it is to make money in this business and are forced to become more careful about who they insure, push up premiums and look twice at some claims before paying them – in other words, they become just like the established rivals they set out to beat.  

What happens after it goes pop?

The insurtech bubble will inevitably burst at some point. That doesn’t mean that new technology doesn’t present huge opportunities to shake up the insurance industry: it could revolutionise the way in which we engage with customers as well as slash costs in an industry where as much as one-third of premiums are eaten up by expenses. It’s just that a lot of companies are investing a lot of money in fads and gimmicks, while new ventures are trying to shoehorn their new technology into insurance, where it simply doesn’t fit.

Companies need to adopt a consistent strategy about the way in which they approach insurtech. At Hiscox we have, after a few false starts, set clear objectives about the kind of pilot initiatives we will get involved in: they need to be related to our core business and have the potential to move our company forwards.

A lot of companies are investing a lot of money in fads and gimmicks, while new ventures are trying to shoehorn their new technology into insurance, where it simply doesn’t fit.

But the real prize is for the company that rethinks insurance for a growing market of customers who do everything digitally. They might visit an online insurance platform where a robo-broker asks them a few questions about themselves and their risk and then uses an algorithm to choose the most suitable policy from a range of providers. Or they might simply ask Siri or Alexa: “Find me an insurance policy”. Either way, insurers have to redesign their policies for the digital age.

The digital dilemma

Insurers can’t simply put their existing products online – they’re not fit for purpose in the digital age. Potential customers are made to do a lot of the legwork in the buying process: after answering long lists of questions they’re left baffled by small print and are often forced to talk to someone before completing their purchase.

Insurers need to create digital interfaces that enable people to buy simple, affordable cover that suits them, rather than what insurers are willing to offer. That means the buying process will need to be equally concise, whether through clicking on a website or a conversation with a digital voice assistant.

Insurers need to create digital interfaces that enable people to buy simple, affordable cover that suits them, rather than what insurers are willing to offer.

Big Data and analytics could eventually glean much of the information insurers need, from sources ranging from open government databases, to mapping databases like Google Street View, to social media. Not only would this reduce the amount of information a customer is asked for, it offers a far more accurate means of assessing risk and educating customers.

A proper digital insurance policy also requires everyone from underwriters and actuaries, to wordings experts, claim handlers and marketers to work together to fundamentally redesign the product, where the prime focus is on creating a seamless and frictionless journey for the customer. That most online insurers already in the market are making slow headway shows how difficult it is to get that right.

Established players might have a head start in data and experience but new ventures have the technology to collect and process vast amounts of data, which could also provide new insights into consumer behaviour.

The race is on to create the ideal digital insurer. Established players might have a head start in data and experience but new ventures have the technology to collect and process vast amounts of data, which could also provide new insights into consumer behaviour. Evidence also suggests companies must move quickly to adapt to change, as digital technology can swiftly break an industry’s established business model, as has been seen in the book, music and travel trades.

The prize for the winner is a glittering one: it could corner the future insurance market. That’s a big incentive to innovate. 

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