Insurtech: The Unchartered Potential

ABSTRACT

Insurance is a means of protection against a financial risk that could occur against a contingent or an uncertain eventuality. The insurance sector in India works on a mainstream business model that includes risk pricing, huge capital requirements as well as customer retention strategies. The incumbents in the business have been hesitant to changing or modifying their business models which has given a window of opportunity to the insurtech startups. Hence this has led to a surge in the number of evolving Insurtech startups which are constantly focusing on integrating technology into the business.

With the advent of technology in the Finance sector (FinTech), the sector was largely disrupted by new technological tools like Big Data Analytics, Machine learning and Blockchain. A similar potential is contained in the insurance landscape as well. The insurtech startups have been aligning themselves towards technology to tap some new channels, consumer segments and innovative provision of services. They are also trying to personalize the insurance policies by analyzing consumer behavior and lifestyles and certain patterns that are significant in determining the premiums to be paid by the consumers. This paper broadly discusses the types of technologies that can be adopted and used by the Insurtech startups, types of physical tools like wearables, telematics etc. that can be used for developing patterns and trends and the way ahead for the insurtech startups and the incumbents.

LITERATURE REVIEW

In 2016, a research was conducted by Volosovich Svetlana, Professor, Doctor of Economics, Professor of Finance at Kyiv National University of Trade and Economics. The research covered a broad overview on what are the key challenges and development perspectives in Insurtech. The predominant basis of the research stated that Blockchain has led to the technological innovation in the insurance market. It has hiked operational efficiency by automation of the claims handling process as well as transparent payment mechanism systems.

Alexander Braun and Florian Schreiber have explored the insurtech potential in their book: The Current Insurtech Landscape: Business Models and Disruptive Potential. This book has gauged the Insurtech landscape to greater depths by doing a retrospective study of Insurance business models and patterns. The book also talks about insurtech being a disruptive innovation and the extent of its disruption for the insurance incumbents. All the studies and conclusions have been backed by various empirical analyses by conducting international surveys targeting primary insurers, brokers, venture capital firms, incubators, accelerators and insurtech startups.

In 2017, Infosys had published an article on the changing face of insurance industry. The article stated how technology and business trends pose to be a challenge as well as an opportunity for the insurance sector. It also stated that Insurance industries should invest more in the computive technologies like blockchain, Internet of Things, cognitive computing, digital analytics, digital distribution channels etc. the article posed a conclusion that alongside investing in technology, insurance companies should always look forward to acquiring or partnering with insurtech startups and connecting with customers at a personal level so as to enhance their insurance experience. This would help to retain the existing customers and generate new leads by giving financial security and protection against uncertain losses.

INDIAN INSURANCE SCENARIO

The Indian insurance landscape has seemed very promising in the last decade. The total insurance market has mushroomed from US$23 billion in FY2005 to US$84.74 billion in FY2017 giving an annual compounded growth rate of 41%.  The total premiums have increased at a rate of 11.48% CAGR over the same tenor. The life insurance sector is being dominated by LIC with a staggering market share of 71.07% whereas the following players are ICICI prudential, HDFC, SBI Life with single digit market shares. The non life insurance sector has a similar growth story with the market blooming at US$19.6 billion in FY17 at a rate of about 10% CAGR. The major players in the market are ICICI Lombard, Bajaj Allianz, HDFC Ergo, TATA-AIG, Reliance, Cholamandalam etc.

With the advent of new technology and some alternate enhancement factors, the insurance industry shows promising growth. All the processes having been taken online has led to increase in operational efficiency of insurance companies. The incumbents have started adapting to new ways of customer engagement through NBFCs, Bancassurance, online web portals and Insurtech. But along with a promising future, there are a lot of challenges that these incumbents face.  The majority of life insurance policies are sold in the last quarter which gives an irregularity in the sales pattern. Insurance is also merely perceived as a tax saving instrument. This sentiment in the minds of the consumers has been a barrier to the sales of insurance policies. The strategies for distribution channels have also never been quite impressive sided by poor data collection and management.

The rural insurance sector is highly untapped by private players. The micro insurance industry shows high potential in the rural areas. The insurance companies, apart from LIC, do not show any interest in such areas thereby neglecting the establishment of any satellite branches. The lack of literacy in terms of insurance also plays a major role in not letting people purchase insurance policies. On the foundation, some do not know of such schemes while some others lie on the below poverty line where the basic necessities like food, clothing and shelter themselves are not fulfilled.

There has been an apparent drop in persistency ratio as well. Persistency ratio is defined as the percentage of all existing policies that are renewed by the insurer annually. In 2017, the persistency ratio for 1 year has been as low as 61%. This means that out of 100 policies purchased in a year, only 61 of them were renewed in the following year. This ill phenomenon leads to high costs for the insurance players in the market as well as for the customers since the amount of premium paid in the first year is higher than that in the following years. The drop in the persistency ratio has been attributed to the lack of communication of insurers with customers regarding the renewal of policies.

Insurance penetration, the ratio of annual gross insurance premium to the gross domestic product, is around 3.4% as compared to the global average of 6.2%. Insurance companies in India not only provide risk cover for various objectives but in some cases, they give some additional benefits as well, for example, a source of long term debt and equity for infrastructure projects. Insurance Regulatory and Development Authority (IRDA) regulations require insurance companies to invest more than 15 percent of their funds in infrastructure and social sector.

Yet 80% of Indian population is without life insurance cover subjecting themselves to weak social security and no old age income. However, the advent of Insurtech might be able to trigger these weak spots and lead to the overall development of the whole sector.

INSURTECH- INTRODUCTION

Insurtech, a subset of FinTech, refers to several segments of the new technologies that are disrupting the insurance sector through smartphone apps, claim acceleration tools, consumer activity wearables, individual consumer risk development systems, automated compliance processing and online policy handling.

Insurtech has been broadly categorized by CrunchBase (CB) insights into 8 categories, namely: (i) healthcare (ii) automobile/P&C insurance (iii) life insurance (iv) Peer-to-peer insurance (v) small business (vi) insurance software (vii) product insurance (viii) mobile insurance.

Insurtech follow a different approach as compared to what the incumbents do. Insurtech consider auto insurance as cash cows since the insurance are recurring in nature and their pricing depends on car characteristics and the experience of the driver. These cash cows can provide finances to the insurtech startups to chase customers differently than how the incumbents do it. Although Insurtech are smaller and younger companies, they try to target a new base of customers which are at the bottom of the pyramid whereas the incumbents are managing the existing customers. The incumbents also tend to provide simpler functionalities through their products whereas the Insurtech try to avoid competition from incumbents by competing in a different sector altogether. Insurance companies do not innovate and try to focus on existing business models. On the other hand, Insurtech innovate and try to gauge future consumer needs, hence this gives them additional leverage to become powerful in the future. Insurtech initially are smaller in size and hence have very little to lose whereas for the incumbents, it’s a tradeoff between innovation and the current operations of the business.

Insurtech are also trying to take the customer experience to “phygital”, which is a mixture of physical and digital. Examples of phygital medium can be a video calling session which is partly physical and partly digital. India shows huge market potential for insurance industries, owing to the demographic dividend. The average Indian age by 2020 will be 29 years as against 40 years in the US, 46 years in Europe and 47 years in Japan. Even as the labor force declines by 4 percent in the industrialized world and by 5 percent in China in 20 years, it could increase by 32 percent in India.

Insurance companies and insurtech have also tried and tested a number of Distribution channels. A number a distribution channels have been discussed below:

Channel- Agencies: Insurance agents have deeper networks to penetrate the retail and SME businesses and they have a better understanding of the minute details of the products. But agents as a distribution channels generally yield lower margins and are not perceived to be profitable by the companies.

Channel- In-house: Such a distribution channel provides a front-end advantage to companies since the employees and internal agents have a better understanding of the product than an external agent would have. One of the limitations of internal agents is the lack of penetration into the rural areas and the lack of understanding of the ecosystem and cultural norms of consumers at the bottom end of the pyramid.

Channel- Brokers: A broker would have an expertise in attracting commercial consumers and can also deliver complex products with a wider reach in the commercial space. The brokers are held back by the limitation in growth rate of commercial products. Also the commissions for brokers are highly negotiated due to the advent of virtual selling channels. This puts a cap on the profitability of the brokers as individuals.

Channel- Bancassurance: Insurance companies scope the clients of the banks in order to cover a wider area of clients that would be interested in integrating insurance products in their portfolio. However, the bank tellers might not understand the intricacies of the insurance products and are hence the quality of service provided by the bank tellers might be compromised.

Channel- Referral system: The expansion of consumer base depends solely on the quick reach to and by the customers among themselves. This helps the insurance companies avoid the sensitivity involved in sharing the databases with other channels. Such distribution channels are held back because of absence of volume obtained by referral systems and hence such a distribution channel depends solely on the consumers with minimal investment.

Insurtech has attracted negative criticism as well. In some of the developed economies like Australia, Insurtech has given rise to a number of fraudulent practices. This highlighted the need for regulations in the insurance market. Insurtech have also not proved to reduce the operating costs either on absolute basis or percentage of gross revenue from sales. Some early birds have adopted technology in their businesses while the other ones are merely following suit. This is leading to the development of same type of technology and there is no differentiation to become a unique selling point (USP) for insurance companies. The investors are more confident about the FinTech rather than the Insurtech startups. This makes the FinTech companies grow exponentially faster than the Insurtech startups. Insurtech has not yet solved the industry problems of unpaid claims, advisor’s fee, declining profitability and low customer trust. Also, because of the established IT systems, the insurance companies are not yet ready to replace them by new technological advancements.

CLASSIFICATION IN INSURTECH SEGMENTS

The Insurtech startups till now have largely tried to use technology and digital solutions in the supply side vertical. Some of the untapped insurance specific verticals are the reasons that the insurtech startups have not been able to attract investments to a larger magnitude. According to the study conducted by Oliver Wyman, the three segments that can be largely tapped from the insurance industry perspective are:

1. The proposition segment, although being a very small segment comparatively, shows a wide gap between the most active insurtech startups and the startups with greater potential but lesser activity. The startups which are not quite active are perceived to be the ones that depict true innovative solutions on how risk coverage is presented to the consumers.

2. The distribution segment does not have any mismatch between the potential and level of activity in the startups. However, the potential explored has been quite limited because of a crunch in resources available or very little opportunity for differentiation.

3. The Insurtech have done fairly well in the operations segment. The next phase in these segments would be to step up and make the processes more efficient and consistent such that they would help companies in the insurance sector produce long term sustainable profits.

INSURTECH TOOLS

The insurance industry is about to go a long way with an amplification in the operational efficiencies guided by technology and other trends. Some of the recent trends that have been seen in the insurance industry are:

1. Smart contracts: A smart contract is a computer protocol intended to digitally facilitate, verify, or enforce the negotiation or performance of a contract. A smart contract works on Blockchain technology for transparent and flexible claims management. The amplitude of the insurance premiums to be paid by the customers would be determined by a mathematical algorithm according to a risk based model. Likewise, the insurer can select the insurance policy which is feasible to him/her. Smart contracts allow the performance of credible transactions without the involvement of third parties.

2. Telematics: Telematics is the branch of information technology which deals with the long-distance transmission of computerized information. Telematics is commonly used by insurers to study the driving patterns of the customers. On the basis of the study patterns, the insurers give a rating that eventually determines the customer’s premium. A telematics device can be plugged to the car or even an app can help to transmit the data. The telematics device can also reach out for help in case of an emergency or can automate toll payments too.

3. Wearables: Wearables are smart electronic devices that can be incorporated into clothing or worn on the body as implants or accessories. Wearables allow the companies to capture data related to the subject on a close monitoring system. Wearables can provide for some serious data like the cholesterol and glucose levels in a human body that cannot be found otherwise without a formal medical checkup. This would also reduce healthcare costs for humans. Some of the famous examples of wearables are Oura rings, which is a ring to be worn on the finger of the subject. These rings study the sleep patterns as well as heart beat rates of the subject which can prove to be a substantial piece of data for the insurers. Another famous wearable was a smart T-shirt worn by Ralph Lauren at US Open in 2014. This t-shirt studies the heart beat rates, breathing patterns, the number of calories lost while playing or while working out. Some serious concerns with wearable technologies are: 1. It is an unchartered territory where we do not know how a human body would react to such wearables over our body all the time, 2. We might not be very comfortable on providing personal data of such magnitude to our insurers, 3. The security threat in terms of technology would always persist where a hacking of such a wearable can be disastrous.

4. Bancassurance: Bancassurance is an arrangement in which an insurance company and a bank form a partnership so that the insurance company can sell its products to the bank’s client base. Banks gain from this partnership since they earn extra income from the commission from sale of an insurance policy. They also benefit since they get to add one more product to their portfolio of products while selling services to the customers. Insurance being a long term product can also help in customer retention for the banks. On the other hand, insurance companies can get high market penetration rate by getting access to the bank’s client base. Also the employee cost reduces since bank tellers become a point of contact for sale of insurance policies. Hence this becomes a win situation for the banks as well as the insurance companies.

TECHNOLOGIES USED IN INSURTECH

The technology is being driven by the following fundamental pillars that would give an additional thrust to the insurance sector:

1. Blockchain: A blockchain is a digitized, decentralized, public ledger of all cryptocurrency transactions. Blockchain is a decentralized system wherein multiple parties share and update information thereby increasing operational efficiency and reducing time. Blockchain can convert the insurance ecosystem into a multi-dimension process where all the insurers are at once notified about an approaching calamity through data transmitted by sensors across regions. Thus, Blockchain will minimize human interaction giving rise to smart contracts and eventually leading to reduction in process time. Blockchain will also eliminate risks in the system by identifying customer profiles, validating claims and avoiding duplication of transactions. This would boost the efficiency in KYC management and fraud detection.

2. Machine Learning: Machine Learning helps in finding patterns in data in an automated manner using complex algorithms. All the multitude of available data can be captured from new data sources using Internet of Things, telematics and external data sources. This empowers the machine to think and tries to capture a specific trend in the data and predict the future outcomes of similar occurrence of the event. Machine learning analyses the unstructured data and starts making sense of dissimilar datasets. Although machine learning has its own disadvantages like initial cost of IT infrastructure, non-readiness of adapting to new systems by the employees, regulatory issues and the fraud and security.

3. Robotics: Robotic Process Automation (RPA) is a collection of tools like machine learning, virtual agents, natural language classification and computer vision. RPA can deal with the real time data, automation of claims in a structured manner without human intervention, flexibility in claim settlement channel, integration of data and precision. The biggest concern with robotics is the encroachment of human jobs by robots. Although the unskilled jobs will take an immediate hit, new jobs like coding, monitoring, risk analytics and pattern recognition will be discovered.

4. Artificial Intelligence: Artificial Intelligence (AI) is changing the operational patterns of insurance companies drastically. It plays a huge role in the underwriting process by using deep question answering techniques so that the underwriters can attribute the risks associated with a certain policy through an enhanced mechanism. It can also use predictive models of risk assessment with the aid of simulation modeling for commercial and life products. AI also changes the claims management experience with the help of robotics to identify the bottlenecks in the system and make the processes faster. It can also tap social media to keep a check on patterns of frauds in claims.

It is estimated that only 10% of all insurance players will have an algorithmic business strategy by 2019 thereby giving an early bird advantage to those insurance players who would step in sooner and integrate technology in their processes. Regulations are a huge concern going on with Insurtech all around the globe. Although various governments appreciate that consumers are open to using technology and saving their premiums, the use of technology is moving all away all the risks from the insurer’s end to the consumer’s end. A regulatory framework named Solvency II was introduced in Europe in 2016. This framework demanded certain parameters to be held by the Insurtech startups, namely, High capital requirements where a startup needs to build up insurance reserves from the scratch such that in case of immediate settlements of multiple claims, the startup does not go bankrupt and holds up due to the excess insurance reserves in the chest. Another requirement in the minimum SRC (Solvency Risk Capital) where the insurance startups are expected to own additional amount of own funds on top of the insurance reserves.

Cybersecurity poses another threat to the establishment of the above mentioned automated digital systems. It is known that about 40% of the Fortune 500 companies are insured against the threat of cybersecurity. However, the insurance cover is not sufficient to claim the full exposure due to the loss.  There is a lack of underwriters in case of cyber risks and they rely on the underwriters of other verticals. With new types of cyber-attacks being discovered each year and the level of sophistication of cyber-attacks, the risks and exposure of businesses across the globe keeps on increasing day by day. The roadblock that lies against the defense from such cyber-attacks is that the businesses are not well educated in the terms of cyber security. A couple of countries have taken huge hits on their respective GDPs (ranging from 0.5%-1.5% of their GDP) due to the rise in such attacks. Hence a need for higher investments in cyber security has been an alarming call for varied businesses all over.

FUTURE OF INSURTECH

Indian insurance landscape has not embraced technology yet. The reason for being hesitant towards technology is that the insurance incumbents do not have confidence in the continuity of the startups and hence investing in startups becomes a dicey job for incumbents as well as the investors. Another concern is the security of data. A number of cases have occurred in India where the data is accumulated from the consumers and then sold to third parties at cheaper prices. This has also led to mistrust between the consumers before sharing personal data with any company. Also, since Insurtech has not been tried and tested in India yet, insurers are not sure about the potential of Insurtech and the value addition that they can provide to the insurance sector.

Insurers and Insurtech startups should come together and try to use each other’s strengths to their advantage. They can try to create synergies by entering into a Joint Venture or by acquisition or mergers. Insurers would benefit by gaining the expertise in technology of the Insurtech startups and the insurtech startups will have access to capital, experience and a large consumer base leading to a win-win situation for both of them.

Insurance companies should also target the bottom level of the wealth pyramid. The rural areas of India have been hardly chartered. The rural insurance market shows huge potential and customer base to tap. It has depicted a CAGR of double digit since the last couple of years and this shows an enormous growth potential.