Similar to how the financial services sector used to operate until recently, the insurance industry is, for the most part, still using traditional business models and processes. Most of these models, however, are beginning to feel a little outdated, especially when they have to satisfy the needs of young, modern consumers. These aspects make the insurance industry ripe for innovation, especially when new and disruptive technology arises at every step.
However, factors such as legacy standards, compliance requirements, and regulations also need to be taken into consideration, and often they are the ones slowing down the innovation train.
By now, many of you may have heard about fintech, which is short for financial technology and comprises all new tech that is used to improve and automate the use of financial services. Fintech has evolved into a complex industry for some years now, and it was only a matter of time until it started dividing into multiple subsidiaries. This is the case for insurtech, a relatively new fintech sector, which focuses on innovations in the insurance sector.
Seventy-four per cent of legacy insurance companies believe their business is partially at risk due to continuous changes in the industry, but would we be able to evolve without disruption? In order to fuel innovation, we need to be open to change and accept it as an absolute necessity.
Below, we will be exploring the origins of insurtech, methods by which it continues to disrupt the insurance industry, and what insurers should be expecting in the next decade.
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How was insurtech born?
Insurance has been around for more than 2,000 years, since the times of merchants and traders. At first, it was developed to manage financial loss risks, but now it has evolved to include nearly all activities of our business and personal life.
To assign prospective insurance buyers a risk category and group, insurers used actuarial tables, which helped them determine if the policy was profitable or not. This, together with many other traditional business processes, has become outdated and time-consuming in the fast-paced era of digitalization, meaning it was only a matter of time until technology would come to change things around.
Insurtech uses technology to increase efficiency and reduce costs in the current insurance industry and is considered a sector within the fintech industry. Both domains share multiple similarities, including:
- Changing outdated business models that favor institutions instead of consumer satisfaction;
- Increased customer demand for better features and access to customized services; and
- Using new technology to optimize existing business frameworks.
Shopping for insurance is not exactly the most pleasant experience, and it is certainly not something consumers are looking forward to. Most of the time, the process is viewed as dreadful, counterintuitive, and full of aggressive sales tactics deployed by commission-thirsty agents. The insurance industry has many pain points that need to be tackled, but insurtech has the potential to solve three major ones:
- Accessible and convenient coverage: comparing insurance options can be challenging and time-consuming, but through new tech, people could be able to conduct their research, get quotes online and purchase some of the cheapest life insurance, for example, more efficiently. This saves consumers time and ensures they are able to find a policy that suits their needs.
- Lower costs for policyholders and insurers: through Internet of Things technology, insurers can gather real-time data, which can be used to assess risks more accurately and adjust prices based on these risks.
- Faster application process: the application process can take days or weeks to be finalized, and for someone on a deadline, time is very important.
Challenges fuel innovation
The world is changing at a very rapid pace, and there are many factors outside the insurance world that are influencing the market as we speak. These constant disruptions marked by new technological advancements and changes in consumer lifestyle need to be anticipated fast and responded to, in order to keep a competitive edge. This prompts insurers to look beyond legacy processes or standards and start exploring new options.
Some examples of challenges that, even though outside of the industry, are changing the insurance sector are:
- Shared economy: Car-sharing and short-term property rentals have become very popular, and insurers have quickly picked up on that. To keep up with changes and consumer demands, they need to focus on alternative options aimed at cultivating existing relationships with customers.
- Self-driving: Over the next decade, self-driving and driver-assisted cars are expected to become mainstream. When drivers are going to be able to choose between driving the car themselves and letting the AI do it for them, insurance companies will have to take a different approach at assessing risks.
- Risk reduction: As technology evolves, there will be more and more methods to reduce accidents, resulting in lower coverage prices. For example, Google’s autonomous car has a rate of approximately 0.7 accidents per million vehicle miles traveled, which is less than half the U.S. average of 2.0.
Potential insurtech challenges
The insurance industry is one of the oldest sectors in the field of financial services, an aspect that often makes it resistant to change. Established insurance companies have a tendency of remaining as traditional as possible, avoiding collaborations with startups and brushing innovation aside. That often happens because of restrictive regulatory standards, which continue to limit the impact insurtech could have on the industry.
Consumers don’t view insurance as something exciting to shop for, but rather as a burden. This happens especially in the life insurance sector, where insurers have a very hard time attracting young customers, simply because the younger generation does not have the time to start comparing options and quotes.
A decade of change is on the horizon
As innovations continue to disrupt the insurance industry, legacy companies won’t have any other choice but to stop swimming against the current and embark on the change train. In the following decade, technologies such as the blockchain, artificial intelligence, automation, shared services and smart cars will continue to compel insurance companies to accept help from startups and help the insurtech industry grow.
