The idea of insurance goes back many years. Centuries ago, traders already paid an extra sum on their loans for merchandise so the cargo was protected against storm or theft. Through the years, the concept of insurance has not changed radically. Entrepreneurs built brands around insurance and these brands now reign the insurance industry. Uptil now. The insurance industry however, is about to turnaround. The world has witnessed global disruptions in, among others, internet, telephone and automobile. Now insurtech –insurance solutions based on technology- is about to become the next big thing. Insurance never used to be a truly innovative business, but change is on its way.
The sharing economy as we know it today is slowly adapting to the future. In a few years, a lot of the products people now own will be offered as part of a ‘service’. The car industry will probably go ahead by not selling just cars, but also transportation. The car then functions as a means of this new ‘service’. A current and concrete signal is the popularity of Uber: people do not bother about owning a vehicle, they are merely looking for a service to get from A to B.
In a redefined global economy, the need for insurances will not faint. However, if everything is offered on-demand, insurance products in their current shape do not suffice anymore. They have to be on-demand as well, like the products or services they protect. Companies such as Trov and Metromile have foreseen this and are thus developing applications that cater to the needs of on-demand and pay-as-you-use insurance.
Smart technology to avoid loss or damage
Insurance is a mere necessity, as no one likes to get into a claim process because their home was robbed, flooded or damaged otherwise. From the idea of prevent rather than cure, many companies are developing technologies that help avoid unwanted events. Think of smoke detectors connected to the alarm system, or to the smart lighting in house. Or cameras and neighborhood networks to prevent burglary. Innovators such as Roost are transforming everyday items into future-proof products, like smart batteries for existing smoke detectors.
On the short term, innovations like those described above have a positive influence on the loss ratio of insurers. Insurers follow trends like these closely, but they are not participating yet. It is time for insurance companies to step in and emerge, as many other industries are slowly moving into the insurance market. John Deere already offers insurance for its agricultural machinery, and Tesla is close to insuring its own cars. Insurers cannot afford to remain waiting on the sidelines.
Data and machine learning to get to the bottom of risks
Risk assessment and underwriting are often structured in a strongly old-fashioned way. Business rules are based on parameters that reflect averages. Averages that are not related to individuals. And this is starting to cause pain to insurance companies. Risks adapt to a changing environment and thus, a new form of the economy requires a new look at risk assessment. On-demand insurance cannot happen with underwriting processes that were invented years or even decades ago.
It is time for insurers to innovate. And it also possible. Insurance companies are sitting on big piles of data. Data which is often not used to the extent it could be used. Insurtech solutions transform this data into value. Emerce published an article which states that FRISS, amongst others, is a disruptor in this field. Analytics can help attracting the right customers and prevent bad risks from entering a portfolio. Straight-through processing speeds up the underwriting process and offers flexibility to insurers. Technologies such as image screening, text mining or predictive modeling can help to detect and prevent insurance fraud.
Other means of technology can benefit insurers as well. For instance, telematics can play a helpful role in diminishing risks and reducing fraud. It may also appeal to customers, when discounted premiums are offered as a reward for safe driving behavior. Some progressive insurers are already offering, or experimenting with, telematics.
Future of insurance
For the first time in years, there is room on the insurance market for startups to step in. Innovative concepts as explained above underline the need for insurers to shift or prioritize their focus. This does not mean that organizations need to spend lots of resources on building software or developing expert knowledge themselves. However, they should make smart decisions. Instead of fearing insurtech entrants, use them for the better. Now is the time for insurers to strongly invest in their cooperation with insurtech companies and improve their business proposition. This is the way for traditional insurers to stay on top of their game.