Insurtech is a combination of “insurance” and “technology.” Much like the word “fintech,” it refers to the use of technological innovations in a typically uninventive industry. In the case of insurance, companies that leverage technology wisely improve upon the long-stagnant insurance industry model.
Why does it matter how an insurance company creates and distributes its policies? Because this modernization doesn’t just change things behind the scenes; it can lead to increased efficiency, better customer experiences and significant savings.
What insurtech really means
Insurtech is a sub-industry, but it’s changing the entire insurance industry — in many ways for the better. Insurtech innovations largely revolve around the implementation of big data and artificial intelligence (AI). Connected devices like phones, computers, tablets, wearables, IoT products and environmental sensors collect data that can inform underwriters about a policyholder’s risk profile better than actuarial tables can.
AI and machine learning, on the other hand, can analyze customer information and eliminate the potential for human error, improving and accelerating sales, policy building and claims processes.
In most cases, insurtech describes a startup. Larger insurance companies are also updating their offerings using new technologies, but they have less incentive to do so. They don’t need to take big, potentially costly risks to attract customers. And risk is something insurers always look to minimize.
Benefits of insurtech
Even insurance giants will admit that the industry was in need of some disruption. Modern consumers are used to shopping online, so they want to get a quote and buy their insurance policy without stepping foot into an agency or picking up the phone. In many cases, they demand more transparent pricing and on-request assistance as well.
Most insurtech solutions offer a better customer experience using digitized insurance records and automated conversation tools so you don’t have to repeat the same information every time you call or log on. Another big benefit of insurtech is the cost. Live data streams from multiple sources equate to a more precise risk evaluation, which often translates to more competitive pricing. Many insurtech companies have also eliminated outdated protections in things like homeowners insurance for things like pewter and furs to offer modern insurance with more affordable premiums.
Some insurtech companies are interested in designing an app where customers can manage and monitor their policy. Others hope to provide on-demand insurance policies for events that come up on occasion, or a peer-to-peer model that encourages risk-minimizing decisions through group rebates. Ultimately, the relationship dynamic between insurer and policyholder is ripe for change. Insurance companies like Hippo are becoming less like a safety net and more like a proactive partner. They warn policyholders when they’re in danger and provide tools that help them avoid costly damage.
Challenges for insurtech innovators
Unsurprisingly, updating a 300-year-old insurance industry is a process. Strict legal and logistical regulations make it difficult to enter the marketplace or enact significant changes to the standard model.
It doesn’t help that insurance products and services are extremely complex. Customers don’t usually understand their insurance policy, let alone look forward to buying it, so it’s difficult to market them in an attractive way.
Plus, since many insurtech innovations rely on big data, privacy and data security are major concerns. Insurance companies need to find a way to guarantee that the information they gather doesn’t put their customers at risk. Meanwhile, automated claims processes can speed things up and reduce overhead costs, but they also provide an opportunity for fraudsters and remove any chance for human empathy. When people are in a vulnerable situation that they haven’t encountered before, they probably don’t want to talk to a robot.
Some companies also rely on unverifiable data too heavily, which can impact underwriting integrity. These same companies also tend to calculate risk too precisely, creating unsustainable pricing algorithms that lead to either sudden jumps in premium costs down the line or the company’s own demise. Providers have to remember that traditional insurance has worked for so long for a reason and be sure they’re integrating tech strategically.
Whether the world was ready or not, the revolution has begun. According to recent data from Willis Towers Watson, insurtech investments grew to $724 million in the first quarter of 2018 and $579 million in the second. In 2017, total investment reached $2.3 billion, a 26% increase from 2016. UK-based research firm Juniper forecasts that insurtech will comprise 7% of the global insurance market by 2023, up from 4% in 2018.
Insurtech will surely evolve over the coming years. Customer expectations and demands are changing, and technology provides plenty of opportunity for advancement. Companies large and small will compete to provide the best insurance products at the best price. Though smaller, more entrepreneurial firms may have led the charge, traditional firms will likely do everything they can to catch up.
About the Author: Assaf Wand is the co-founder and CEO of Hippo, an InsurTech company that’s reimagining home insurance through the lens of homeowners – building policies with more comprehensive coverage for today’s consumers at up to 25% less than competitors. Hippo Insurance is available to homeowners in over a dozen states throughout the U.S. and will be available to more than 60% of the nation’s homeowners by the end of 2018.