Could we see Insurance-as-a-Service?
If you had to compile a list of the “most exciting” industries, insurance likely does not make the cut for many people. It certainly did not for me when I was looking to start my career graduating from college. Yet over my 7 years working in insurance, I grew to appreciate that the transfer of risk and the protection of assets are a vital part of our financial wellbeing. Whether it be protecting cars against damage, jewelry against theft or loss, or replacing your income in the event of a disability, it is essential for all of us to carry insurance to guard ourselves against adverse events. With so much at stake when covering potential liability, it is in the best interest of both policyholders and insurance companies to make processes as efficient and cost effective as possible.
Insurance is a long-standing and profitable business — this makes the industry ripe for technological disruption. Younger and nimbler insurtech startups are not subject to the legacy IT systems or products of incumbent insurance companies, and can utilize the newest technologies to create custom solutions quickly. Insurtech startups are becoming more common and venture capitalists are taking notice. According to Crunchbase News, global venture capital investments in insurtech companies reached $7.3B across 548 deals in 2019. Consumer sentiment towards insurtech is improving as well; according to McKinsey only 7% of customers would consider buying insurance from a technology company in 2016, by 2020 that figure had grown to 44%.
Similar to fintech, a sector which arguably gains more attention, insurtech companies focus on specific portions of the value chain instead of building out complete end-to-end solutions. The following graphic from McKinsey shows how insurtech companies are being minted across different lines of insurance such as property & casualty, health, and life. The graphic also shows how innovations focus on different stages of the value chain such as product development, distribution, and claims.
We have seen this type of value chain specialization in the fintech space with the emergence of Banking-as-a-Service (BaaS) where third parties connect to legacy bank systems through API’s to provide newer services and more efficient processes. This open banking ecosystem has led to more transparency in the banking sector and more product offerings for consumers. Just as technological improvements have created BaaS we may see innovation in the insurance industry develop into “Insurance-as-a-Service”.
Insurtech companies are also utilizing new technological developments originating in other sectors to differentiate themselves from the traditional insurance market. Big data and machine learning can be applied for actuarial analysis and underwriting, gamification can be used to amplify the customer experience, and usage-based insurance, or a “pay only for what you use” model optimizes customer value and behavior. Innovative technologies such as blockchain ledgers will also most certainly play a part in the new insurance ecosystem. According to McKinsey, by exploiting ever sophisticated analytics tools and digital automation the average insurer will have reduced costs by 25%. Savings amongst the top quartile of insurers may reach up to 40% in the next 5 years.
As insurtech firms specialize on specific portions of the value chain, I doubt we will see a technology startup grow to become a full-service insurance company controlling everything from underwriting to distribution and claims. Rather, insurtech startups working in conjunction with incumbent insurance companies will make improvements in their specific area of focus. Efficiencies from this “Insurance-as-a-Service” model should improve the customer experience, reduce costs for insurance carriers, and ultimately lead to customer savings on premiums.
Every step of the insurance value chain is susceptible to improvement through technological advancements. From more efficient underwriting through AI and machine learning, to monitoring customer behavior to develop usage-based insurance coverage, there is still plenty of value to be unlocked in the insurance industry. Incumbent insurance companies, the growing insurtech sector, as well as venture capitalist would do well to focus on these trends.
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Sources:
https://www.investopedia.com/terms/i/insurtech.asp
https://www.insiderintelligence.com/insights/banking-as-a-service-industry/
