We hope you enjoyed last week's article on VC activities in InsurTech, part one of a two-part series. This week we will focus on 5 InsurTech trends i.e.:
Technology Developments Along the Insurance Value Chain
Big Tech Invading
Embedded Insurance
Microinsurance
Risk Prevention Using IoT
This article is also available on LinkedIn.
Technology Developments Along the Insurance Value Chain
In this section, we will review insurance technology from an insurance value chain perspective i.e.:
Marketing, Sales, and Distribution
Product Development
Risk Analysis, Pricing and Underwriting
Onboarding and Customer Engagement
Claim Management
Reinsurance
Asset Management
The advancement of insurance technology is primarily driven by consumer expectations. However, those expectations can and have changed significantly over time. First InsurTech began with price comparison aggregators and marketplaces. Next, those marketplaces and aggregators became the new intermediaries. Afterwards mobile and other digital channels were increasingly used by InsurTech companies to support traditional insurance companies' Marketing, Sales, and Distribution efforts.
Now InsurTech also supports Product Development such as creating subscription-based, usage-based, pay-as-you-go, and personalized insurance products. Risk Analysis, Pricing and Underwriting are being modernised by Artificial Intelligence and Machine Learning as more product types and more data become available. The results are insurance products that are more flexible and better tailored to the needs of the customers.
In other parts along the value chain, InsurTech helps with Onboarding and Customer Engagement, Claim Management, Reinsurance, and Asset Management.
In general insurance companies significantly increased their focus on modernising and improving their IT infrastructure.
Within the insurance industry we see a very interesting development, that traditional insurance companies very often partner with InsurTech companies, and less InsurTech companies are trying to disrupt the market by themselves. One of the main reasons for the cooperation is probably the regulation of the insurance sector and the fact that providing insurance and subsequent distribution of risk / cost among insured works much better with a large number of clients than just a few.
So cooperation and partnering between insurance companies and InsurTech instead of competition is the “name of the game”. Sometimes insurance companies go even further and make significant investments into InsurTech either directly or through their corporate venture arms and then use the know-how and products of those InsurTech companies to revamp, digitize and modernise their own value chain.
Big Tech Invading, Embedded Insurance, Microinsurance and Risk Prevention Using IoT
After the insurance industry had been for many years relatively slow to adopt to new technology trends, insurers finally changed and are now actively investing in Applied Artificial Intelligence, Distributed Infrastructure, the Internet of Things, and Trust Architecture to modernise their business processes and bring paradigm shift. Insurers might have found a good combination of cooperation, investment and some competition with InsurTech companies, but the real threat is probably coming from Big Tech.
In this section, we will share a few key trends including Big Tech Invading, Embedded Insurance, Microinsurance and Risk Prevention using IoT.
Big Tech Invading
By leveraging their strong platforms and direct access to billions of consumers, Big Tech companies have expanded into financial services, posing a serious threat to the traditional insurance companies. With their global, continuously growing customer bases, Big Tech has unparalleled access to users and their data, that allows them to directly address consumers in a way that insurance companies cannot compete with.
Amazon already offers financial services through partnerships with established financial institutions to a global customer base without becoming a bank or insurance company but leveraging their data and infrastructure. The question is probably not if, but when Amazon and other Big Tech companies will come up with their own products and handle the full underwriting process.
*Underwriting process is the process that insurers use to determine the risks of insurance for a particular individual, group, or business, and subsequently calculate a fair premium for the coverage.
Embedded Insurance
Embedded Insurance refers to any insurance that can be purchased as part of the purchase of another product or service. Embedded Insurance is not a brand-new concept. One of the earliest examples of Embedded Insurance was the purchase of travel insurance at the time of booking a flight. Or Apple Care when purchasing Apple products is another example.
Over the past years, Embedded Insurance has become a hot topic in many industries, as product providers as well as insurance companies have evaluated how Embedded Insurance is currently impacting or could impact their distribution strategy. According to a recent study, consumers are strongly attracted to Embedded Insurance due to its convenience and trustworthiness.
Customers love it, because the insurance purchase is mostly “straightforward” and perfectly complements the physical purchase process. No complicated forms to fill out, no protection gap i.e. exactly the insurance cover your need for that particular product. Again – just think about how simple it is to ensure your new iPhone or AirPods for 3 years with Apple Care.
Meanwhile, insurers get a better reach to their customers with this flexible approach, which creates more opportunities. Furthermore, the insurer can tailor their insurance products to reflect the real risk better in a specific situation by using the most relevant data.
Microinsurance
A microinsurance policy is a type of insurance that provides coverage for specific needs at an affordable price. As an example, it can cover a one-day trip, a one-time event, or even specific medical needs. Additionally, these products can also be designed to assist people with low income, and they can be offered by a variety of sources, such as insurance agents, community groups, microfinance institutions, and non-governmental organizations.
Transparency is another benefit. As Microinsurance covers a very specific event, there is no need for lengthy discussions with the insurance company if such an event is actually covered by the insurance policy or not, but claims can be handled quickly and accurately. Mobile phone usage also boosts Microinsurance as it removes the challenge of collecting premiums from large numbers of customers located in remote areas.
The availability of Microinsurance does not only cover the risk, but their impact can be much bigger and far-reaching. Researchers have found that farmers and small business owners are willing to take more risks and invest more in new ventures when they feel protected by insurance. This is beneficial to the entire economy.
Microinsurance is applicable to a wide range of insurance products. A popular form of microinsurance is pay-as-you-go (also known as "usage-based" insurance). As an example, Grab Ride Cover is a recently launched microinsurance scheme for users of the Grab Ride hailing service. If you pay an additional $0.30 per trip, you can upsize personal accident coverage from the standard $20,000 up to $100,000. Your family members will also be covered if they are traveling with you.
Global growth in the insurance industry and increasing access to financial services are driving the market's expansion. The global Microinsurance market is worth US$78.4 billion in 2021. It is projected that the market will reach US$ 111.84 billion by 2027, growing at a CAGR of 6.1% between 2022 and 2027.
As a result of these new trends, consumers will have access to flexible products and an end-to-end digital experience that provides transparency between the insurance taker and the service provider. Moreover, microinsurance policies are becoming increasingly popular among individuals with higher income levels as more products become available digitally.
Risk Prevention Using IoT
For centuries, prevention has been an integral part of the insurance industry. As a result of the Great Fire of London in the 17th century, property insurers operated their own emergency services in an effort to protect their clients as well as themselves. Insurers have long urged clients to take more precautions such as burglar alarms or wheel locks to avoid thefts that might result in claims
New technologies, the availability of internet services, the intelligent use of data, the Internet of Things (“IoT”), the growing network of connected devices from consumer wearables to industrial control systems now have the potential completely transform the risk prevention and the insurance of the risk.
The use of such technology allows insurers to intervene earlier and in more varied ways – an accelerating process that has begun to influence large parts of the insurance industry.
The auto insurance is a good example. The insurer is able to assess each individual's level of risk by monitoring their driving behavior. Those who avoid aggressive driving behavior will be rewarded with lower insurance premiums, thereby reducing the risk of aggressive driving. In order to assess the driving behaviour, the insurance company is using the data of the many sensors that are already built into a modern car such as vehicle speed, acceleration, steering wheel rotation and uses AI to determine a drivers profile. A similar reward mechanism can be used to encourage the prevention of risk in health insurance, cyber insurance, and property insurance.
The promise of lower insurance premiums encourages customers to reduce their risk, claims should go down and companies' profit margins should increase.
It is possible for insurance companies to identify molehills before they become mountains by utilizing IoT to stay abreast of various risk factors and encourage policyholders to take action accordingly.
Some industry leaders have questioned what the future of the insurance business will look like in light of the growing focus on risk prevention. Some worry that insurance coverage – the financial risk the provider takes, which has been the core business of the industry – will just become one element of a wider package.
QIDS Venture Partners is dedicated to supporting and catalysing the developments in FinTech by sharing with our audience FinTech trends and interesting FinTech business ideas. You may forward this article to other investors who are interested in FinTech as well. If you need more information or would like to arrange a meeting with us, please feel free to contact our Managing Partner Edward Shen via LinkedIn or email.
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