Fintech and the Insurance industry
Last week I wrote about the cashless world and how new payment rails will influence the payment industry. This week, I’ll discuss the Insurance industry and how value chain disaggregation and connectivity will change this financial service.
Some people say that the insurance industry has been the slowest to adopt innovation. But over the past decade or so, many incumbents have adopted digital channels as well as process automation. As the industry becomes more consumer focused, many emerging technologies will pressure the insurance value chain, pushing towards disaggregation.
But how exactly will this disaggregation of the value chain occur? The usual Insurance value chain can be divided in (i) R&D and Product Development, (ii) Distribution, (iii) Underwriting, (iv) Claims and (v) Risk Capital and Investment Management. The areas in which disaggregation might hit the hardest are Distribution and Underwriting.
In distribution we have the online aggregators (that allow you to compare insurance prices) and the entry of huge tech players in the market such as Google and Amazon. Why this is relevant? Because traditional brokerage firms and distribution channels are being replaced by these new online tools that are easy to access. In this sense, the direct dealing with the customer could move hands. With price comparison and moving around from one insurance company to the other getting easier, customer retention and engagement become increasingly important.
Moving in that direction, companies such as Lemonade and GetSafe are setting a different path ahead. The user experience? You download the app, discuss your preferences with an Artificial Intelligence (AI) bot that gives you a new policy in minutes. If you make a claim, another AI analyses it, evaluating the chances of fraud. For Lemonade, 30% of claims are solved instantly, while the remaining 70% are handled by human analysts. The excess profit goes to charity causes of your choice.
The second trend in terms of disaggregation of the value chain comes from the fact that many of the assets that are currently insured will evolve in their ownership model and usage. Therefore, underwriting (the evaluation of risk and exposure) will need to evolve. Sharing economy is changing our relationship with our home and our cars, two of the major insurance products nowadays. In that sense, the risk assessment and pricing of insurances will need to evolve from the single-ownership model to something different. Also, the advent of self-driving vehicles will likely reduce the risks of being on a car. Added to ridesharing, the insurance model for vehicles might move from the driver/owner to the manufacturer, who builds the self-driving vehicle, or even to the operator that gets the asset into usage in a ridesharing platform.
Finally, Blockchain (yes, here it comes again) is now bringing scale to a different type of insurance: Peer-to-peer. How does it work? A group of people with common interest and risk profiles get together to cover their potential losses. In the advent of a claim, the group or the entity behind the group analyses the claim and decides how to proceed. Blockchain is empowering this way of getting insured because it reduces significantly the costs related to the process and therefore reduces premiums. If there are any leftovers, the money is returned to the group or even passed to charity.
Connectivity will change the insurance industry in a different way. Data will allow higher personalization, price accuracy, transparency and, consequently, engagement. As an example, your health and behavioral data will be accessible to your insurance company through the many apps and wearables available. Your medical profile will be accessed in order to facilitate personalization and forecast. Through AI and machine learning an insurer will be able to crunch all this data to get you a personalized insurance plan, with the right price and even tell you how many exercising hours per week are necessary to reduce your yearly premium (engagement). It will be easier for insurers to spot fraud and, consequently, overall price tends to reduce.
The same (adding sensors and measuring) can be done to your home, vehicle (if you decide to own one), and other assets to understand more profoundly how you live. This data aggregation will bring the industry to a telematic insurance model but will require insurance companies to work together with device manufacturers and other ecosystems players to build the kind of network required to fully connect insurance.
Next week I will address the deposits and lending markets (banks) and how technology is working its way in that field as well.
See you!
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