A buzzword in the insurance world for a few years now, InsurTech is an emerging area of interest. But what is it?
Many have heard about FinTech, but I find that awareness about InsurTech is rather low.
Insurance + Technology = InsurTech
This is a very broad term and can refer to a wide variety of applications. Here are some of them.
Insurance Incumbents with improved Technology
Broadly speaking, traditional insurers move quite slowly with technology compared to other industries. This is due to several reasons, including legacy (in other words, very old) systems which are costly/difficult to update, strict regulatory requirements, difficulty of integrating new systems with the old legacy systems, lack of in-house tech talent (caused by the other reasons mentioned), lack of funds and unclear/uncertain upside from investing in new tech.
There are some, especially in the General Insurance sector who move faster. Typically they can do this because they are new to the industry and thus have less legacy to worry about, or they have investors with very deep pockets.
When insurers adapt new technologies, either building it in-house or using third-party technologies, they can claim to be in the InsurTech space.
They can incorporate technology into many parts of the value chain, including on-boarding of clients, sales management, illustration software, servicing, claims notification and processing, database management, analytics, regulatory & compliance (which is a sub-field called RegTech), and others.
Adapting technology, when done effectively, should reduce costs over time, improve efficiency, lead to more satisfied clients, and lead to increased revenues as well.
But the up-front investments can be enormous, especially if the insurer tries to do all of this by themselves.
Software as a Service (SaaS)
Relating to the same points above, most of the time it is not possible for an insurer to keep pace with the latest technology and build it all in-house. Retaining top tech talent will also be difficult for an insurer, simply because insurers are not built to be technology companies.
Hence, this has led to the growth of the SaaS industry. The benefit of SaaS providers is that they get to focus in-depth in developing up to date tools that fit into the various parts of the value chain mentioned earlier. Often different SaaS providers (aka software vendors) focus on specific aspects of the value chain. Some focus on front-end tools for client onboarding and sales illustrations. Some focus on back-end database management tools. Some focus on providing solutions for the core systems (i.e. the back-bone system of the insurer that houses the information about the clients, their policies, their benefits, and processes various transactions). There are specialised actuarial software providers. And so on.
They provide software solutions together with the services of maintaining it to insurance clients, getting into (very lucrative) multi-year contracts with the client.
The insurer's role is to ensure they select the vendors most appropriate to their needs (often a difficult and long process), and to administer certain aspects of the tools in-house with the vendors' support.
SaaS providers are also participants in the InsurTech space.
Insurance as a Service (IaaS)
IaaS providers can be seen as disruptors or collaborators of traditional insurers, depending how you look at it.
They partner with captive markets/groups/platforms/marketplaces, and provide insurance and/or service/warranty offerings (which may or may not be classified as insurance based on the country) to the clients of that partner.
They take over processes such as product offerings (which could be AI driven), client on-boarding, customer service and claims processing (depending on regulations), from the traditional insurers. But they usually partner with insurance companies to get the underwriting support - because they may not register as an insurance company.
Usually they may have an agency or brokerage license.
IaaS providers are usually very tech-heavy. They often have in-house tech teams and build proprietary technology solutions. The quality and efficiency of the tech provided is very crucial for the IaaS to scale. But of course, InsurTech includes Insurance as well, so having the right insurance talent and strategy is important to steer IaaS providers in the right direction.
IaaS focuses on small sized insurance offerings which are small in cost. It fills in a different niche, but it doesn't quite replace the role of traditional insurers, as the comprehensive insurance solutions are very important for clients.
Peer-to-Peer (P2P) Insurers
P2P insurers may also be known as crowd-funding solutions, risk-pooling etc. The concept itself is not new, as it uses the risk pooling approach instead of risk transfer as used by traditional insurers (see my post on the Poverty Premium for an explanation of risk pooling vs risk transfer).
The key benefit of risk pooling is the social aspect where each member commits to helping another (and is not trying to maximise the value out of the insurance premium by claiming more).
Risk pooling has already been in place for a long time, through mutual insurers/discretionary mutuals, captives and others. The key difference here is the heavy reliance on technology to administer all aspects of the journey.
Risk pooling and P2P insurance works for high frequency & low severity type of claims (i.e. high likelihood of occuring, and reasonable claim sizes), and can work for some types of general insurance risks (eg house rental cover) and medical expenses.
It doesn't work well for low frequency, high severity claims, such as Life Insurance, fire insurance, marine/cargo insurance etc.
It also doesn't work so well for risks where there's a high possibility of everyone in the group being affected at the same time (eg flood insurance). In this case, no one will have the means of helping another.
Aggregators
Aggregators are insurance marketplaces which display and compare products from a wide variety of insurers.
For each insurance need, a customer can see the various options available and compare the benefits, features and price. The aggregator gets a lead referral fee from the insurer for each purchase coming from their site.
As this is mostly a self-service portal, the types of products available on aggregators are simple and straightforward. These can include term life, medical insurance, and car insurance products.
Complex products which require advice and education are usually not suitable for this platform.
Will InsurTech Disrupt Insurers?
Honestly, we have been bandying around the term "disruption" in insurance for quite some time now. Yes, the insurance landscape is changing with InsurTech players, but it seems like InsurTech is complementing and enhancing the landscape rather than disrupting traditional insurers.
Some insurers may get disrupted, but that is more likely due to issues with strategies, financial situations, regulatory concerns and poor leadership, rather than InsurTech per se.
Traditional insurers have their space, and so do InsurTech players. There is plenty of room to grow and innovate in the insurance world, and my hope is that this leads to a richer insurance ecosystem and better outcomes for consumers.
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