Vishal Tulsian, Managing Director, PT Bank Amar Indonesia, CEO, Tunaiku
Will the insurance industry remain the same or be disrupted? Will all players in the value chain face similar disruptive forces? Can incumbents take any steps to protect themselves or grow even further due to the disruptive force—insurtech? The following discussion attempts to provide answers to these questions based on the analysis of the industry and technological advancements.
Insurance as a product
As a product, insurance has primarily remained the same since our grandmothers' time, literally. People save some money—insurance premium determined by the process of underwriting—for an unexpected event, pool it together, and distribute to the ones that faced unfortunate event/s. Major changes in the product are not expected, though some features of it would change. The process of underwriting has been changing as more sophisticated data analytic models powered by big data are already being employed at various places. As the industry will gather more data from the internet of things (IoT),) the process will go through further changes.
Insurance as an industry
Players in this industry’s value chain are mainly reinsurers, insurers, underwriters (part of insurers or third parties), and insurance distributors including brokers. Insurtech will not have any impact on reinsurers but mainly on the distributors and underwriters/insurers. Biggest threats and at the same time biggest opportunities are for insurers. As it is explained later in the section that the insurers who can move swiftly could use current technological innovation to their advantage while the ones who will be slow to respond are likely to face an existential threat.
Problem with the business model
An insurance company’s revenue is primarily the difference between premiums collected and claims paid. Lower claim payments translate to higher income. This is the biggest problem with the current business model as it incentivizes slower claim payments, which in turn results in many customers being dissatisfied with the claim process. Customers think insurers do not pay out claims while insurers think some customers are misusing the system to claim extra amount.
The future belongs to insurtech as it will disrupt the three-party historical insurance model of broker, insurer, and reinsurer
How technology is affecting the insurance value chain
Reinsurers are the dominant force in the industry and are expected to maintain their positions without any disruption by technological changes.
Distribution Disruption: Companies in the insurance distribution industry are likely to be the first set of companies to be disrupted by insurtech. They will face a challenge from insurers offering their policies directly, also from startups offering comparisons, and from companies that are offering their own policies and also the policies by other providers. One such example is Worry+Peace, which provides users a place to have visibility of all the insurance policies even if they were not purchased through the company’s platform. Another example is Brolly, which has in-built AI to recommend to users if they are over or underinsured. Along with the above mentioned service a user can also buy a policy from the platform. Legacy player Aviva has launched MyAviva, where customers can directly buy their policies, which is against what the company has ever done in the past.
Underwriting Disruption: Companies in this segment of the value chain will face threat from two sides— reinsurers and startups with technological advantages. Reinsurers such as Munich Re have already partnered with various tech companies—Trov, Neos, Simplesurance, getsafe, SliceLabs, among others—in the space that could enable the company to cut insurers out of the value chain. At the same time, underwriters are best placed to tie-up with insurtechs to improve their underwriting and claims management. Insurtechs can use the latest technology to analyze data, which in turn, helps insurers to underwrite more accurately. Insurers could take the benefit of the latest technology-based insurtechs to reduce fraudulent claims without badly affecting the customer experience. For example, Ageas is working with an insurtech, Tractable, to scan claim details, damaged vehicle images, and provide an AI-based estimate for cost and time.
Rise of Insurtechs: Insurtechs are removing various pain points of the consumers due to which they are rising to become a formidable force in the industry. Few examples are as follows: Cuvva allows consumers to purchase auto insurance by the hour. Traditionally, consumers are required to buy such policies for a year. By providing the policy by the hour cash flow burden on the cash strapped consumers reduces significantly. Also, such policies are preferred by occasional drivers. Trov and Dinghy provide similar on-demand insurance models for different products and services. Lemonade is quite popular amongst insurtechs. It uses fully automated processes, enabling cheaper policies than incumbents. One of the most remarkable differentiations offered by Lemonade is its commitment to distribute any leftover premiums at the end of the year to charity, thereby, addressing the business model related problem as highlighted above.
The future belongs to insurtech as it will disrupt the three-party historical insurance model of broker, insurer, and reinsurer. Each segment will try and reach to the customers directly, accessing and analyzing their data while better underwriting the risks.
Another disruptive wave in the near horizon is IoT, which is a topic for a separate discussion in itself.