THE FINTECH REVOLUTION – WHAT IT MEANS FOR THE INSURANCE INDUSTRY
There was massive growth in “FinTech” (the integration of finance and technology) last year, especially in Australia, which has lagged behind Europe and the United States in the FinTech space. Global investment in FinTech ventures was more than AU$10 billion in 2014 and is predicted to be AU$20 billion in 2015. However, only a very small proportion of this FinTech activity was insurance related. So what does this mean for the insurance industry? Some say that the insurance industry is ripe for disruption and that FinTech startups will be the key disruptors. According to the World Economic Forum, the most imminent effects of disruption from FinTech will be felt in the banking sector, but the greatest impact of disruption is likely to be felt in the insurance sector1 . However, it’s not all bad news for the insurance industry. It is also widely recognised that FinTech presents a real opportunity for the insurance industry.
FinTech: What is it and who’s doing it?
FinTech is the term used to describe technology startup companies in the financial services industry (which includes insurance). FinTech companies provide services in all areas of financial services, including payments, peer-to-peer lending, crowd funding, investment advice, blockchain technology, capital markets and insurance. FinTech is not just a buzzword; it is truly changing the landscape of the financial services sector. Just as Uber and Airbnb have resulted in changing consumer attitudes to taking taxis and booking hotels, FinTech will change the way consumers use financial services, including insurance. There are many examples of leading FinTech companies. Here are just a few:
- Stockpile – A company that has revolutionised the investment world through selling gift cards that are redeemable for shares.
- Acorns – A financial services company that automatically invests a customer’s small change by rounding up every transaction to the nearest dollar and investing the change into a diversified portfolio that is in line with the customer’s investment goals and risk profile.
- Fastacash – A global social payments platform that allows users to transfer value (such as money) through social networks and messaging platforms.
- goHenry – A company that provides a pre-paid debit card and app with unique parental controls, enabling children to spend safely in the increasingly cashless and digital world. Parents can set up automatic pocket money payments or make one-off transfers into their child’s account, as well as set the rules for spending and spending limits.
There aren’t nearly as many examples of FinTech companies that have ventured into the area of insurance, which is perhaps surprising given that the insurance industry comprises approximately a quarter of the whole financial services sector. However, there is a general consensus that there will be increasing infiltration of the insurance sector by FinTech startups. In the insurance industry, examples of leading FinTech innovators include:
- Knip – A digital insurance manager that provides users with an overview and analysis of existing insurance policies and is designed to automatically detect insurance gaps and recommend essential insurance.
- Friendsurance – A company that brings peer-to-peer finances to the insurance sector. It allows small groups of people to anonymously combine their premiums and, if no claims are made, up to 40% of premiums will be returned.
- PolicyGenius – A highly tailored insurance checkup platform, where users can discover gaps in their coverage and review solutions for their exact needs.
- ZhongAn – Rated as number 1 in KPMG’s “FinTech 100” Leading Global FinTech Innovators Report 2015, ZhongAn (a joint venture between an e-commerce company, an online gaming and social networking company and Ping An Insurance) is an online property insurance company that uses big data technology to assist with product design, automatic underwriting, auto claims, precision marketing and risk management.
Investment in and support for FinTech startups
There is increasing support from the government for FinTech innovation. The New South Wales (NSW) Government supports Stone & Chalk, the not-for-profit FinTech hub that opened in Sydney in March 2015. The federal government recently released its Innovation Statement, a AU$1.1 billion package designed to boost economic growth and jobs through driving an “innovation boom”. The package provides investors in start-ups with a 20% tax offset and capital gains tax exemption. In addition, Australian Securities Investment Commission (ASIC) is providing support to FinTech startups through its Innovation Hub, which has the objective of helping FinTech startups to navigate the Australian regulatory system.
This level of support from the government will assist in driving innovation, as will involvement and investment from large well-established companies in the financial services industry including banks and insurers. It has been said that “FinTech is so much larger than just the banks, and involvement by insurance companies, retailers, industry bodies, etc would go a long way towards accelerating innovation even further” (Fran Foo, “FinTech start-ups become hot property”, The Australian, 14 April 2015).
How are things changing in the insurance industry and what does the future hold?
We are already seeing FinTech startups in the insurance industry, and we can expect to see disruption in the industry in the future. Insurers can minimise the risk of disruption through collaborating with startups, partnering with third parties, for example technology companies, and creating innovation from within.
We are already starting to see significant developments taking place in the industry and we expect there will be rapid development in these areas over the next few years. Here are some examples:
- The Internet of Things – The use of internet-connected devices such as smartphones, personal wearable devices such as Apple watches and Fitbits, connected car devices and connected home devices by insurers in order to access new datasets will be more widely adopted. This has the potential to revolutionise the insurance industry. It will give insurers the ability to personalise insurance in a way that has not been possible in the past, by assessing risk and pricing insurance based on actual behavioural patterns rather than probabilities. For example, health insurers and life insurers may make use of Apple watches and Fitbits to access personalised data about an individual’s lifestyle and risk of illness or injury. Similarly, the use of telematics (such as telecommunication devices) enables motor vehicle insurers to monitor a driver’s behaviour and price premiums according to the risk. We can expect the use of such devices to extend to other areas of insurance, although the extent of this will depend on the willingness of insureds to share this personal data.
- The use and challenges of “big data” – Insurers have been accumulating vast amounts of data for many years, but the rate at which data is now growing is unprecedented. This presents both opportunities and challenges. If big data is used effectively, it has the potential to drive growth and innovation and gain a competitive edge. At the same time, this presents challenges. One challenge faced by insurers is how to effectively and efficiently analyse and make use of the ever increasing data available to their advantage. The use of big data also brings with it the difficulties and challenges associated with protecting data, such as complying with privacy laws, protecting personal data and cybersecurity risks.
- Changing consumer expectations – Digital technologies have resulted in consumer attitudes and expectations changing. Consumers are increasingly better connected and better informed. With easy access to policy comparison websites, consumers and businesses are less reliant on intermediaries and loyalty is declining. Consumers and businesses will be very receptive to new ways of doing things, which presents insurers with the opportunity to drive the change that consumers seek.
There’s a lot happening in the insurance industry now and we will see many developments in the next five to ten years. Changes happen quickly and for those that drive the changes and innovation, there will be many opportunities. In addition, there will also be a continuing impact on the intermediary sector due to online access to insurance. Brokers will have to continue to innovate to stay in the game. With the potential for so much change, it’s an exciting time to be part of the insurance industry.