From Babylon to Bots

Transferring or distributing risk in monetary economies can be traced back as far as 3000 BC to Babylonian traders. Though of course mutual aid goes back even further than that – you could be sure your local community of Neolithic neighbours would help rebuild your mud-brick house if it had been reduced to rubble.

Today, most people involved in financial services have heard of FinTech. Along with PropTech, RegTech, PayTech and anything else-Tech (for which we can blame Twitter, #tags and the 140 character limit). Insurance is not immune from the digitisation-trend that has resulted in InsurTech.

The current phase of InsurTech is at once breaking new ground, and also simply rekindling age-old fundamental insurance practices in the form of 0s and 1s. An insurance evolution driven by enhanced customer connectivity, data processing and risk analysis, rather than a full-blown revolution – for now.

The complexity of some InsurTech solutions and business models provide much food for thought, and not just in a legal sense. But also from commercial, ethical and social perspectives. In this context, we highlight some emerging InsurTech solutions seeking to disrupt traditional insurance models affecting all stages of the insurance value chain.

Peer-to-policyholders

New hybrid platform insurers offering peer-to-peer (or P2P) and traditional insurance like Friendsurance and so-sure are based on a model that combines micro-pooling with traditional insurance policies. Small networks of consumers settle smaller claims within their group from a community pot (your contributions pay to fix my mud-brick house) or receive claims-free bonuses – sharing both risk and reward. The traditional insurer is then only involved for settlement of larger claims – this reduces the risk premium for the policyholders, as well as the insurer’s claim management costs and exposure to fraud.

This new type of social insurance is likely to affect underwriting processes, policy administration and claims management, and become subject to increased regulatory scrutiny, due to the interaction between consumer, micro-pool, platform and insurer. This prompts questions of the following type:

  • Is the community pot actually insurance for regulatory purposes?
  • Who is providing the insurance?
  • Who has responsibility for product disclosures?
  • How do you ensure transparency of process and fees?
  • What is the effect on dispute resolution?

Insurance brokerage – from chatbots to social brokers

Spixii is a chatbot startup that promises to be the automated insurance agent that makes “insurance quicker, easier and more personal than ever before" through simple conversation – no form filling, no jargon.

Spixii is still awaiting authorisation from the UK’s Financial Conduct Authority, so whether it flies or falters remains to be seen, though any brokers adopting new ways of selling insurance will have to be mindful of distribution requirements, such as under the EU’s Insurance Distribution Directive or MiFID II. Especially, how to ensure digital distribution channels comply with obligations to act in a customer’s best interests and make sure marketing communications are fair, clear and not misleading.

There are also social considerations which come into play that go to the heart of insurance. New brokers, such as Cuvva are enabling consumers to cover a specific risk for shorter periods of time – hours and minutes, rather than days and months which may suit customers in a move towards the gig economy and short-term contracts. This model avoids some consumers subsidising other consumers’ insurance premiums. But, as initial users of this new business model see their premiums reduce, later users would perhaps see their premiums increase and lead to individuals becoming uninsurable. What does this mean for those who represent a higher risk, without the means to afford cover?

Underwriting and the data conundrum

A number of insurers have been on the big data path to improve risk modelling and pricing for some time – with the increasing use of telematics, gamification and soon data stored and gleaned from the Internet of Things and distributed ledgers, the trend is only set to accelerate.

Underwriters will see an influx of real time and recorded data, which will enable better estimation of risk and targeted underwriting. From a commercial perspective, insurers are all too aware that they need to be in a position where they can harness new technology quickly without compromising their governance procedures – with the potential for embarrassing and costly cybersecurity breaches.

Other innovations include more effective and seamless access to personal data which originates from third parties (for example through open application programme interfaces). This could involve obtaining data from social media, which infers a consumer's health and lifestyle, or from a bank or credit card provider to create risk models based on spending habits.

Insurers will have to be careful not to contravene the higher standard of data protection under the General Data Protection Regulation which requires specific and informed consumer consent to use of their data. The difficulty of implementing these new data solutions, without breaching data protection laws or consumer confidence, is highlighted by Admiral’s failed launch for new car insurance using customer’s Facebook posts to price the risk and premium.

Collaborative innovation

InsurTech growth is set to continue worldwide and, although more slowly than other parts of the financial services sector, the industry is investing in and developing its own digital opportunities.

To ensure the impact of unintended consequences from innovation does not stifle it, the insurance industry will need to collaborate with respective regulators and the rest of the insurance community – much like Babylonians and Neolithic neighbours.