What is genuinely innovative about today’s insurance sector? Perhaps little – but that is beginning to change.
For the past few years we have seen innovative ways of selling products – such as search engine aggregators – at the distribution end of the retail market. Yet with the majority of costs borne by insurers falling at the underwriting end, rather than the distribution end, there is surely space for significant change.
There is a buzz in the market with leading participants agreeing that the insurance industry is “ripe for disruption”.
Why has it not yet been disrupted? Insurance is a unique market. That may be why we are yet to see the explosive growth of FinTech-style technologies (“InsTech” or “InsurTech”). Many of the approaches taken through FinTech simply won’t work. To give an example, risk – the heart of the insurance industry – by its nature cannot sensibly be priced as debt and bid up or down, so current crowdfunding platforms are inappropriate for selling insurance.
So how can the insurance industry be truly innovative? Innovation beyond the distribution end of retail insurance will require some clever thinking. And there is plenty of it. Ideas which are currently being thrown around the industry include:
- Artificial intelligence. Much of the life insurance sector is based on automated underwriting – but it is far less automated in other sectors. Improvements in AI will allow computers to do more than just push data through algorithms. It will be possible to move beyond rules-based computing to “cognitive” computing – which could mean teaching computers to think like specialist risk underwriters.
- Big data will allow for more accurate pricing of risk but – and more importantly – create records on a wider range of risks, allowing consumers and businesses to selectively insure those risks most relevant to them.
- The internet of things. Insurers can be provided with data in real-time on – for example – how healthy the lifestyle of the insured is, allowing for better pricing of risk.
- Improvements in telematics (think black boxes in vehicles and fitbits on people) will provide more and better data on anything that can be measured – one’s driving style and health, the condition of a vessel and so on.
- “Living” contracts – contracts which change automatically throughout their term – will be able to keep pace with changing risks, rather than waiting until the next renewal period rolls around.
- New forms of insurance to tackle new risks, such as cyber insurance and parametric insurance for natural catastrophes.
- The use of distributed ledger (or “blockchain”) technology to – for example – maintain an incorruptible record of a ship and its history.
How might this innovation take root? Barriers to entry in insurance markets are high – the regulation alone is daunting. What we may see is a series of partnerships between the big established players in the market, who can overcome these barriers, and entrepreneurs operating on a small scale, developing innovative platforms, products and processes. It is less likely that a new market player will appear almost overnight.
This “partnership” model happened (and is still happening) as the banking industry increased its involvement in peer-to-peer lending. It has begun to happen in insurance. A number of insurers already have venture capital arms. Others are developing and refining products in-house.
In short, we don’t yet know what shape innovation will take, but it is clear that there are a huge number of possible directions for the industry to go – and the industry knows and wants to pick up the pace of innovation too.