Word in the New$: Insurtech
by Ryan Ong
INSURANCE is like the spleen, or the pineal gland. No one except a handful of specialists can explain in detail how it works, but we all know it’s important. For the longest time, insurance was a thing you bought because everyone said it was important, and you kind of hoped the payout would be there when you need it. It’s also a huge, clunky industry burdened by middlemen, paperwork, and asymmetric knowledge (more on that below). Industries like that invite disruption from the Internet:
What is Insurtech?
The term Insurtech combines the words “insurance” and “technology”, just like my nickname now combines Captain and Obvious. There are two sides to Insurtech, one for consumers and the other for insurers.
With regard to consumers, Insurtech aims to lower premiums, reduce complexity, and provide faster access to policies. With regard to insurers, Insurtech is hailed as the next-gen approach to collecting and sifting through huge amounts of data.
By and large, one of the differences between Insurtech and many other forms of Fintech is that the major players – the insurers and policy buyers – tend to have a greater sense of mutual benefit. This is different from, say, P2P lending websites, which attempt to replace the business loans function of a bank (and hence competes against the established financial institutions). The exception to this are avant-garde models like P2P insurance (described below).
How does Insurtech work for consumers?
The simplest way is reducing complexity and paperwork. For example, local start-up PolicyPal is designed to help you with policy paperwork – you won’t have to look through a billion emails, or keep piles of letters from your insurer.
(And don’t pretend you don’t have a massive pile of unopened policy letters. Mine is three envelopes away from counting as Singapore’s first official mountain).
The other way it works is by removing the middleman. CompareFirst, an insurance comparison website, was set up by the Monetary Authority of Singapore (MAS) to let you buy insurance without going through an agent. By removing the insurance agent, you avoid having to pay commissions (which are usually deducted from your premiums).
It’s also more efficient for consumers, because the alternative is talking to multiple insurance agents to find the right policy. This is something most Singaporeans don’t have time for, and which we’d rather stick our face in a live blender than do.
Insurtech also aims to provide speed. You can, for example, buy travel insurance on your phone via companies like Hong Leong Assurance or FWD, and get it approved in a “night before my flight” situation.
How does Insurtech work for insurers?
Insurance is a product that pivots on data. Based on the amount of risk you pose, your premiums are adjusted accordingly. Someone who goes skydiving in the Carpathians in winter has a much higher risk profile than, say, someone who goes there to spend two hours in a hot spa every day. The problem is collecting that data.
Up till the present, insurers had to work with a lot of basic assumptions. There may be different premium rates for office workers versus construction workers, but they had to ignore the fact that some office workers had riskier jobs than others (sales staff travel more and are at greater than risk than a secretary, for example). Likewise, not everyone at a construction site uses machinery that could pulp their skull. The person who just logs the available materials may not be at much greater risk than the average office worker.
Premium pricing is, to some extent, guesswork.
Today though, data collection is easy thanks to factors like social media, smart phones, tablets, and fitness bands. Local start-up FitSense, for example, uses technology like smartwatches to track daily activities, Body Mass Index, locations frequented, and other details to help price insurance premiums. In theory, the healthier your lifestyle the less of a risk you become.
When insurers are able to collect data that is more precise, they can avoid high risk types that occasionally sneak into low premium categories (people can and do lie about their health and lifestyles). This also has a side-effect of helping consumers – if we had more precise ways of tracking motorists, for example, low risk drivers can be better differentiated from high risk ones, and pay lower premiums.
As an aside, the nature of selling online means that it is a bit easier for insurers to expand abroad, although there are still local government regulations to deal with.
The most radical of the Insurtech concepts, and one that could challenge insurers, is P2P insurance. The poster child for the concept is Lemonade, a company that’s been joined by behavioural economist Professor Dan Ariely (yes, that Dan Ariely).
Lemonade provides renter’s and home owner’s insurance, but the P2P model it espouses is being applied to other forms of insurance by start-ups. Under this model, policy holders pay premiums into a common pool. When something goes wrong, such as someone’s house catching fire, money is taken out of the pool (that’s the insurance payout).
When someone joins the pool, they are asked a series of questions, and accept responsibility for the level of risk in the pool (if you see everyone involved is a professional chainsaw-juggler for example, you’d probably want to pick a lower risk pool). Everyone can see when claims go in, and they can see when claims go out. Members who are drawing excessively on the pool can be rejected (there are a lot of rules that vary based on the P2P insurer in question).
Now the idea of pooled premiums is not new, it’s the way most insurers have operated for centuries. The difference is that this time, it’s almost as if a group of people are forming their own “insurance company”.
P2P insurance has lower costs than traditional insurers, and it’s theorised that it doesn’t need the same level of big data analytics. Just like during Primary School recess, the group regulates itself and kicks out the undesirables. Furthermore, P2P insurers don’t need to use the traditional model of a salesperson forcing a policy down your throat: it’s mostly voluntary and you are invited by friends or relatives, who are other members of the group. That means no commissions need to be paid.
But does the middleman lose out?
As with many other forms of Fintech, Insurtech benefits the service provider and the consumer at the cost of the middleman. But this doesn’t mean insurance agents will die out. It’s more probable that insurance agents will be given a more concierge-like role.
Right now, if you are unable to file a claim (such as due to an accident that leaves you unconscious), the agent is the one who steps in and handles the necessary work. This kind of customer service will still be needed.
On top of that, insurance agents are also financial advisors. Their role is supposed to be more holistic than just selling you an insurance product. It’s supposed to include re-balancing your portfolio, giving you advice on what to invest in, and finding ways to optimise your income. They will be held to that higher role in the coming years.
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