Behind the scenes, insurance providers use technology that customers don’t see. They have traditionally been conservative in their technology choices. But now, insurance companies openly invest in advanced insurtech. As well as the startups behind it. And it’s becoming their way to compete and give a better service.
And insurtech startups are nowhere near done. Between 2017 and 2018, the capital invested in InsurTech startups almost doubled from $1.65 billion to $3.18 billion. And over the course of five years, a total of $8.5 billion was raised by insurtech companies. Clearly we have insurtech growth for a while ahead of us.
Financial institutions only account for 12.9% of the total capital raised by insurtech startups. This is surprisingly low. Especially considering the potential changes that modern technology can mean for their industry. It’s also strikingly lower than the same statistic for fintech companies. There, corporates account for over 20% of the capital invested. The total amounts invested are also substantially higher, 112 billion in 2018.
A snapshot of innovation in the insurance industry
Clearly, we are still at the beginning of the curve. But before we look into where the industry is heading, let’s dive a little bit into where it comes from.
Firstly, insurance is big. In the US, it’s estimated to represent 2.8% of the US Gross Domestic Product. And size comes with a price. Bigger companies tend to be more fixated in their current ways of doing things.
“The biggest impediment to a company’s future success is its past success.”Dan Schulman | CEO of Paypal
Size makes corporations more risk-avoidant. After all, nobody wants to risk cannibalizing their own business. Until it’s the only option. But in the case of insurance companies, it’s also baked into their DNA. People expect them to be careful. And to understand risk better than anybody else.
Why are big insurance firms hesitant to digitalize?
Risk-avoidance adds to other common challenges that corporations tend to have. The bigger an IT systems, the more difficult to work with. Big organizations tend to work in silos. In big organizations, someone has optimized resources for everything. And with too little slack, innovation is impossible.
All these factors mean that it’s challenging to innovate and embrace digitalization fully. But not impossible. And it hasn’t stopped many insurance companies from venturing deeper into the tech space, establish innovation labs and create startup collaboration processes.
Global Trends that Will Affect the Insurtech Industry in 2019
With technology that is potentially disruptive, new players can come into the field and compete with the incumbents. Or work with them. But for that to be possible, insurance companies must be on par with fast-paced and lean startups.
But who knows what technologies with reshape the market? We don’t have a crystal ball, but we do talk with a lot of insurtech entrepreneurs and insurance companies. And from that we’ve gathered a few trends or directions that people are looking towards.
New customer touchpoints
The best insurance is the one you never have to use. Because of that, it can easily become an invisible product. And the most common touchpoints are bad moments for the customer, in which insurance needs to help or pay for something. Ironically, insurance companies have the most to win, if those those bad moments happen less. For example, your health insurer is better off if you’re healthy!
Technology opens the door for insurance businesses to take on the role of caretaker, rather than undertaker. It’s an opportunity to place the customer at the center of all processes. And in this opportunity, information can flow both ways.
Firstly, insurance companies get new data to serve customers better. Internet of Things (IoT for short) and wearable devices can provide valuable data from your customers. And that data can let you keep them healthy and out of trouble. For example, Fjuul tracks customers’ physical activity and coaches them to stay fit. Insurance companies can partner with them to make their customers healthier. And even to give discounts to people with healthy habits.
Secondly, there are more channels to build the brand of the insurance company. New technology also opens the door for new touchpoints. The caretaking role is in itself a way to increase customer satisfaction and loyalty. In the Fjuul example above, insurance companies use this technology to create more opportunities for interaction and positive branding.
Insurance companies need to consider, among others:
- Experience on different devices (omni-channel)
- Health data from wearables
- Location data
- Other smart IoT devices (smart TVs, smart vehicles, etc)
Many startups focus on small niches. Which they can be clearly superior to a bigger brand. They manage to build the perfect product for a small group of people. But one trend that has risen lately is the microniche of one. When there is enough data about one consumer, you can tailor the product exactly to them.
But there’s a problem with this story. Traditionally, insurance products take a long time to build. It requires lengthy historical data and assessments. To figure out what type of product you can offer. How can we do that process fast and for one individual?
The answer lies in a combination of data and new Artificial Intelligence / Machine Learning algorithms. We have more information about consumers than ever. And Artificial Intelligence is becoming better and better at managing complex decisions. It can help insurance make better risk management, and make offers that are more tailored to customers. Or tied to their actual behaviour.
One example is Tribe, from our portfolio. They use Machine Learning to match competing offers, and create a customer’s ideal insurance package. So much so, that this fast-product feature became part of their core offering to partner with insurance companies.
Insurance companies will have to consider:
- On-demand products (in more product categories)
- Real-time products (only active when relevant)
- Insurance for new technologies (faster)
- Niche insurance (adapted to smaller groups, or even individuals)
- Other algorithms to adapt products
Insurance has always involved the interaction of different parties: customers, hospitals (in case of health), repairs (in the case of P&C), third parties, etc. Insurance companies have always made sure this interaction was smooth for their customers.
But technologies like blockchain or cryptography are transforming interaction, and this puts insurance companies in a tricky place. Humans can communicate with each other differently. Companies can exchange data differently. And insurance companies can have a leadership role in orchestrating this interaction
In addition, there’s a hidden layer of value out of orchestrating customer experience with other parties. Which is technology itself. However big an insurance company may be, it’s unlikely that they have the best experts on all technologies. That gives an edge to startups in very specific use cases of technologies. But there’s as upside by building an ecosystem around insurance processes. Insurance companies can bring that technology to their customers, and keep ownership of the customer relationship.
Of course, communication is always a two-way street (or a multi-way one for that matter). Coordinating the efforts of many stakeholders is complex. And this is as much a challenge for insurance companies as it is an opportunity.
Insurance companies will need to consider:
- Alternative digital sales channels
- Smart Contracts automating relationships between parties
- Role of insurance companies in established ecosystems
- Ecosystems around insurance companies (your users and their behavior)
- Other interaction with non-traditional parties
If there’s a trend that goes across all industries, that’s automation. Repetitive work is disappearing. Work that relates to processing information is disappearing. Work that relates to simple assessments and decision-making are disappearing. Insurance business is no different in this regard.
This leaves time for employees of insurance companies to focus on the challenges and the difficult decision. And even in those, Artificial Intelligence enables them to make better decisions. By providing them the right information in the right moment. Or by using of Big Data to predict behaviour. Or analyzing scenarios. Maybe for personalizing a decision to the individual. Or automating the generation and processing of agreements.
Insurance companies will need to take into account:
- Automation of more and more processes
- Data-driven culture, use of analytics and Big Data
- Real-time risk assessment
- Models that predict user behavior, considering modern technology and medicine
- Other uses of Artificial Intelligence for business processes
So what’s next for your insurance company?
The world is changing very fast, and the growth of insurtech reflects that.
Before you adapt to the trends above, you have to ask yourself:
- Do you have a clear vision of how these trends affect your business?
- Were you aware of these trends?
- Do you have a mechanism to adapt to them?
- Is your organization ready to innovate at the right pace?
- Are you prepared for collaborating with partners on this journey?
- Do you know how to analyze technologies and insurtech startups?
- Do you have a plan for working with them?
We recommend that insurance companies go through each of the trends. And each of the bullet points under them. And figure out how your business fits with each of the trends. Some of them, you will embrace yourselves. Others, you will need to explore more. And finally, some you will ignore. And for everything except the last one, collaborating with startups is the best way to adapt the trends yourself.
Are you ready to dive deeper into these topics? Or into how startups can help you in your financial institution? Nestholma is always happy to help! You can book us for a free 45-minute consultation. And let’s talk about your venture into digitalization.