Insurance finally jumps on the FinTech bandwagon
This week is London Technology Week and Innovate Finance has launched its own series of complimentary events, focusing on FinTech. Our second event, Insuring the Future of FinTech, brought together incumbents and startups to discuss the trends and opportunities in the space — connected devices to digitalisation, the potential is huge.
The arrival of the FinTech unicorns, or billion dollar-valued companies, has been widely publicised. There are 36 of these FinTech unicorns globally, however, only three of those companies fall into the insurance space. Whilst peer-to-peer lenders and money transfer startups threaten incumbent banks, large insurers have remained largely unchallenged. Thunprecedented turnout at our insurance event, suggests that things are about to change. In fact, 2015 is already the biggest year on record in terms of investment in the insurance technology space, with $831 million invested so far in the US across 20 deals.
So what has sparked this change? And will it actually make a difference?
Innovation in the insurance space will be and has largely been driven by the availability of data-driven insights. Not only are insurers becoming better at interpreting data, but the availability of data is rapidly increasing, for example, due to the Internet of Things (IoT). The lines between our digital and physical worlds are being progressively blurred. Smart devices, from wearables, to home sensors and vehicle telematics, are expanding our insight into and control over the physical world, promising to transform the insurance industry forever. The data which these connected devices gather is allowing insurers to refine risk and redefine their products, revolutionising customer relations. Rather than receiving a premium based on aggregate demographic considerations, data-driven insights can, for the first time, allow insurers to offer their customers bespoke products.
As noted by our participants, this is already taking place in the auto insurance space, with new models based on vehicle telematics. FinTech startups such as InsureTheBox and Drive Like A Girl, as well as established players such as Aviva already use metrics such as how customers drive or how often they hit the brakes, to personalise premiums.
Similar models are beginning to be applied in the health insurance sector. John Egan, Director at Anthemis, noted that above 50% startups in the insurance space are now focusing on wearables and health. One could foresee a future in which wearable devices will allow insurers to reward individuals who exercise regularly and eat healthily via lower premiums. Likewise, John imagines a consumer ordering a plate of fries and a beer at a restaurant and subsequently being penalised with a higher premium.
With everything connected, what could go wrong?
Although the IoT and the subsequent customisation of insurance products should be perceived as a positive step forward, Wern Ding from Swiss Re rightly pointed out that these developments will undoubtedly give rise to privacy concerns, “there will always be a question mark in terms of the value an individual places on his or her privacy.” Consumers will have to balance premium discounts with the fact that the company owns their data and profile. The key for insurers, in this case, will be to notify individuals about how their activities are being assessed, give them the choice of ‘opting in’ and explicitly share with them the choices of actionable information at the decision-stage.
Another barrier to the adoption of IoT in insurance is the cybersecurity issue of sharing multiple devices and networks. It has been said that 70% of the most commonly used IoT devices contain vulnerabilities, as devices and networks can be hacked. This represents a huge barrier for insurers who will sooner or later depend on the data extracted from those networks and devices to provide a more personalised service.
But the biggest risk of all might be if insurers miss the opportunity on IoT altogether and merely use data from connected devices to tweak their product offering. With devices connected to businesses, homes and cars, organisations are going to begin to offer solutions that have the IoT connected and services tied to that. This opens up an opportunity for those organisations, perhaps digital giants such as Google or Amazon, to manage the customer relationship, customer loyalty and the customer experience, with insurance just being a small part of that offering. For instance, one can foresee a future where connected thermostats monitor the humidity levels of homes so as to detect potential mould and will be sold with specific housing insurance tied into them. So for insurers to stay relevant, it is vital that they consider these new business opportunities.
A final note on digitalisation
Clearly, IoT is a vital part of the conversations on the future of insurance, digitalisation will play an equally important role in this moving forward. James York, founder of Worry + Peace, pointed to the fact that individuals have become accustomed to seamless user experiences and have come to base their expectations for insurance on their interactions with services such as Uber or Spotify. Customers want to be able to use a channel most convenient at that moment, whether that’s a website, mobile app, call centre or video chat with a broker. Similarly, insurers could be taking social media more seriously, recognising its value as a relatively inexpensive marketing tool and a means to engage with and influence skeptical, digitally-savvy younger consumers. Addressing this digital challenge is a matter of survival, as those insurance companies that act too late, or stumble through the transition will undoubtedly lose consumers and market share.
Whilst many incumbents have identified digital and IoT opportunities, a host of new startups, some of which were present at our insurance event, are beginning to break into the space. Gaggel, for instance, aims to make insurance fairer and more transparent and has introduced an element of risk sharing amongst a consumer’s chosen peer group. Likewise, Worry + Peace markets itself as the new personal insurance destination for the modern digital shopper and has recently launched an own-brand Gadget Insurance product. Bought By Many offers another interesting solution by inviting groups of people with specific insurance needs to club together and then negotiates better policies on their behalf.
Whether one of these FinTech startups will be the next unicorn, has yet to be seen. However, given the discussion which took place at our #Insurance Knowledge Hack, there is no doubt that the next few years will see the rise of more billion dollar insurance startups.
Got an idea of who could be the next insurance unicorn? Think you know which innovations and trends will drive the insurance industry forward? Let us know in comments or tweet @InnFin using the #IFWEEK hashtag.