The emergence of insurtech has been fueled by new digital capabilities and Internet of Things (IoT) devices that are reducing costs, changing systems and processes and enhancing the consumer experience. All financial services providers will learn from the insurance industry's experiences in 2017.
Similar to the word fintech, insurtech is a portmanteau of the words “insurance” and “technology”, referencing the digital innovations and devices transforming the insurance industry. Steeped in tradition and burdened by outdated systems and paper-based operations, the insurtech space has emerged as one of the largest innovation ecosystems globally in 2016, with $4.74bn (470 deals) invested in the space since 2011, according to CB Insights.
It has taken a while for banks and insurance firms to embrace insurtech innovation fully, thanks to the amount of legacy systems in place, the heavy dependence on historical data and the low risk appetite for new insurance-related products at most traditional firms. However, rapidly changing customer behavior, the availability of smart devices and innovation ecosystems achieving scale have provided the industry a much needed push in 2016 to adopt insurtech in a big way.
Looking at the hundreds of insurtech startups that launched in the past year, along with the investments from traditional banking and insurance firms, we see some clear trends emerging for 2017. Many of these are correlated with financial technology trends for the coming year.
1. Micro-Insurance to Handle Usage-Based Needs
As with all financial services lines of business, insurance providers are leveraging sophisticated data and insights to provide highly personalized products to meet consumers’ increasingly specific expectations. The sharing economy demands niche products, and only those products that are relevant to users’ usage and behavior patterns will remain successful.
This evolution has led to one of the most interesting developments in insurtech – firms enabling insurance only when it is needed. Insurtech firms are now enabling drivers to pay insurance only for the actual miles or the hours driven, airlines will charge different insurance rates for different aircraft, and customers can reduce their premiums on days they go running.
Micro-insurance is also acting as a form of micro-financing, offering affordable insurance in small chunks that can be applied for rural healthcare. This is likely to continue being one of the largest areas of insurtech innovation due to the increasing availability of data and analytics tools to make this happen.
2. New Devices and Channels
While the banking industry is still testing the water with Internet of Things (IoT) devices, one of the largest emerging areas within insurtech in 2016 was telematics, sensors and IoT devices supporting insurance brokers and carriers. Firms like Cocoon have used smart technology and home sensors to reduce the cost of home insurance. Similarly, Roost, August Home and Mobileye are providing smarter alarms and advanced automobile warning systems.
Healthcare insurance offers are also heavily driven by devices, with fitness trackers, smart watches and other wearables. More importantly, there are new ways to handle claims and risk management – digital agents are replacing inspector site visits and drones are supplementing or replacing manual evaluation of damage from natural disasters.
With the proliferation of technology firms focusing on Internet of Things, smart sensors and automation of processes, this sector is set to see a huge boom in supporting banks and insurance firms with the most relevant data that can reduce costs, provide customer as well as insurer efficiencies, and create a consistent experience across all touch points.
3. Emergence of Blockchain as a Key Driver
Similar to digitizing back-office paperwork in banking, smart contracts are emerging the ideal way to automate highly manual processes like claims management and underwriting. This has the potential to create billions of dollars in savings in the medium to long term.
Firms like InsureEth enables airline insurance payouts automatically on cancellations or delays. There are also several firms like BlockVerify and Everledger that reduce fraud by storing provenance data on the blockchain.
Healthcare records, once on the blockchain, will also be one of the potential areas where financial service firms can obtain accurate data about a customer’s health. The amount of manual intervention is drastically reduced in cases where data from multiple ecosystem participants can be stored on the distributed ledger. This also offers the customer a level of transparency that has never been attained before in this industry.
The B3i consortium, launched in October 2016 as a partnership between Aegon, Alliaz, Munich Re, Swiss Re and Zurich, will be one of the groups to watch out for in 2017 as they continue to identify and develop use cases for blockchain in insurance.
4. Collaboration Between Legacy Firms and Insurtech
As we saw in the fintech revolution, most fintech startups got some of their earliest support and interest from traditional banks. This trend continues with insurtech, with the top insurance companies being the biggest investors in early stage insurtech initiatives.
At Burnmark, we looked at go-to-market and investment partnerships formed with insurtech startups by traditional insurers, banks and re-insurers and we found five to ten deals every month in the past year. The segment of focus of these partnerships is diverse as well – with these firms partnering with startups offering predictive recommendation platforms, mobile comparison apps, auto insurance products, e-documentation support and smart home devices. The largest amount of interest shown in data & analytics and blockchain startups.
5. Emergence New Product Lines
The insurance industry and customer needs around insurance will undoubtedly be different in 2017. Cybercrime and terrorism have evolved as some of the largest new spaces in demand for insurance in the last couple of years. In fact, the economic cost of not insuring against cybercrime is over $500bn.
Insurers also started segmenting their existing portfolio to cater to niche areas – for example, Munich Re started offering an inland flood insurance product in the US and Metlife started offering an accidental injury cover product to complement its life insurance products. Future Generali in India started offering a cancer protection plan under its health insurance portfolio and Alliaz UK launched an online marine cargo product specifically for small businesses.
Insurtech firms are coming up to offer and enable many more niche products, as carriers and brokers. There are also insurtech firms now specifically catering to certain demographics, like Jetty, who offers apartment insurance products for urban Millennials. This trend is expected to continue in 2017, with more segments and sub-segments being created to offer a completely new set of verticals, product offerings and service channels to targeted segments of the population.
Innovation in insurance is highly regional – wearables and devices innovation is largely in the US; healthcare insurance innovation is the focus in Asia. Some insurtech companies have found success with peer to peer underwriting and risk management in some countries in Africa, but not elsewhere. However, this presents one of the best landscapes for insurtech innovation, with the number of players and the amounts of investment expected to surpass those of fintech very soon. It definitely looks like 2017 will be the year of insurtech!
The key bankers, insurers, wealth managers and others in the financial services industry. It is the best time to learn from each other and potentially combine learnings for a better integrated financial portfolio experience on behalf of the consumer.
You can read the Burnmark report on insurtech here.