To follow the line of argument, that we define InsurTech by its purpose rather than its dictionary-style definition, let's just look in summary at how some of the features of FinTech have been playing out in insurance.
Insurance has been, in many ways, more conservative and risk-averse than banking. It's had its scandals and the many crises in past decades. Consequently, the industry is, today, ever-more highly regulated and the heavy layer of compliance comes on top of many layers of inefficient process and technology - an accretion of custom and practice going back many decades, and in some cases, centuries, as in the Lloyds's market.
Anyone working in the market, up until recently, would recognise it as highly labour-intensive, with a lot of repetitive and dull work done mainly by bored human operatives, and with a correspondingly high error and reprocess rate.
Add in the hugely increased burden of regulatory compliance since the turn of the 21st Century, and it's obvious that insurance is an excellent candidate for automation and transformation. Many attemps in the form of IT, business change, and transformation projects and programmes over the last two decades have been made, with variable levels of success. One common saying was that the large share of the 'projects' either failed or completed with no appreciable benefits. Many observers, rightly, were sceptical, even cynical, about the whole idea of progress.
However, change - real change - is now finally taking place.
But this time it's driven largely by outside forces of competition. New entrants - small, agile InsurTechs, mainly startups, with innovative ideas - are breaching the barriers to entry and forging market incumbents to react by adopting their new models. Many commentators predict that incumbent insurers will not be around in ten years' time unless they adapt their business model to incorporate the key trends below. That's probably an exaggeration, but there's no doubt that the incumbents recognise the implicit threat.
Digital Garage, Skunk Works, Innovation Labs - call them what you will - are the way that incumbent insurers will collaborate ever more closely with InsurTechs. Large firms, such as Zurich and Aviva, like Barclays in the banking sector, are making - suddenly - huge efforts to be first-movers. In fact, at the time of writing, Aviva is making considerable news out of its publicly stated deside to become an InsurTech entirely.
Initiatives covering all the areas above, in this blog, abound across the insurance business, as the big insurers invest and set up discrete joint ventures or partnerships with InsurTechs, in their quest to learn more from them on specific capabilities, project areas, new tools for their existing organization, or the culture or processes and methodology InsurTechs use to be agile and fast: for example, there's a notable increase in insurers adopting the lean and agile approaches of the startups, as well as establishing their own internal accelerators to innovate.
And at this point, it is worth stating that the apparent dichotomy between the rapacious startup and the dinosaur incumbent doomet-to-fail is looking less and less tenable. Every business in the insurance industry is going to get on board and be part of the industry-wide transformation. Success and failure will be, as always, more to do with the usual commercial fortunes than failure to grasp new opportunities.
2. Operational efficiency
Following on from the comments above on how inefficient so many parts of the insurance value chain are, the squeezing out of cost through the insurance value chain is key when one considers how many insurers have a combined ratio over 100%. Digitizing existing process really now is absolutely necessary for operational excellence and cost savings, and is one of those advancements which insurers will naturally want to exploit.
The process of digital transformation, as it is defined currently, is not new of course: it began in the insurance industry in 2015, gathered pace in 2016 and will extend in 2017. In fact, all insurers, big or small, have been working on this for decades prior to this, in the form of traditional IT, and change projects to work more efficiently in claims, underwriting, policy management and new business.
Hence, the growing investment in technology will continue, but on a different track with InsurTech meeting that need. One good example, amongst many, the British Insurer Cuvva, which offers hourly cover through its mobile app.
3. Open architecture
Service Oriented Architecture (SOA) and Application Programming Interfaces (APIs) and their ecosystem - an open architecture - have emerged to dominate as the enabler and prime-mover of much of the digital transformation over the last 10 years. Software apps can communicate with any other without the need for them to share the same coding language. They then can be incorporated as 'loosely-coupled' components within an SOA to provide a range of services to another SOA for any purpose in an agile, responsive way that can evolve over time to meet changing market needs.
In the InsurTech context, this means those that generate and collect data (think IoT suppliers) can supply to those who develop new apps based on that data. It can link up different apps within the insurance value-chain intra-company. But equally, it allows insurance companies to cooperate to buil multi-company structures.
InsurTech offers market participants new data sources, efficient and effective organization and processes, and new interactions between a much wider array of users.
4. AI, analytics and IoT, VR/AR, Bitcoin, Drones, etc.
Internet of Things (IoT) has come to the fore only recently. Still a chaotic and dynamic market, with multiple competing suppliers, platforms and products, it is still a long way from settling and maturing into a more reliable and steady shape. But that will come in time.
With regard to insurance, the biggest strides have been made in the auto-insurance market, where Italy is a leading market. But with the advent of SmartHome, buildings and contents insurance is not far behind. One can see already the applications of mobile healt apps' integration into health and life insurance products are not far off.
Naturally, this explosion in IoT is creating a vast new pool of data; but current technologies are not yet able to manage this into meaningful information with can be 'consumed' by the current systems. How then do insurers not just store and manage the tsunami of data coming their way, but also turn it into real insight, and from there into relevant and distinct value propositions to engage their customers?
Here InsurTechs' specialisation in Big Data, advanced analytics and AI are offering a robust solution to meet the challenge. Expect to see, in the next few years, a growing number of insurers taking advantage and leveraging the massive potential and value of these innovative technologies.
Add to this the virtual and augmented reality, bitcoin, drone technology and one can see that the potential for growth and transformation is truly massive.
As well as the startups, major market incumbents such as Axa, Allianz and LV have a major presence in each one of these areas, working with their own in-house innovators and the InsurTechs.
Blockchain's provision of a new medium in which any given transaction has an authentic, true, immutable, chronological and verifiable record, will offer the insurance industry innovative ways to collaborate in sharing risk, and is likely to be highly effective in improving operational efficiency, compliance and cost-effectiveness.
InsurTech firms are and will continue to work at building a completely new infrastructure, based of blockchain technology. A fitting example (of many) of this is Monax, which develops software for secure, low-cost data infrastructure using blockchain and smart contract technology.
The big debate about how robots will take over the world and make everyone rebundant is not very enlightening or helpful.
Yes, AI and automation will deconstruct jobs roles into tasks or processes which will be removed and given to robotics to do more cheaply, without error and much faster. But, thinking on the positive side, from this creative destruction will emerge many new reconstructed roles that can only be done by humans, possibly augmented by AI.
Roboadvisory will undoubtedly radically change the face of work as we know it today. But building relationships with customers will always require emotion, empathy, passion, creativity, and original thought. The task for insurers will be to maintain and augment such a relationship, but in the digital space.
InsurTech will allow firms to have their cake and eat in this area. It will provide the opportunity for insurance companies to do many things previously impossible, such as combining structured and unstructured data and applying machine learning to predict customer risk behaviour for use by humans at a higher intellectual level.
In its early stages, insurers will use robo-advice platforms such as UK's AdviceRobo, which supports underwriters with a machine learning platform to score and predict risk behaviour of consumers. InsurTech apps like this will not replace, but rather support, front-line people to improve their interactions with customers and brokers, to generate higher conversion rates and customer satisfaction. As the model matures, this function will increase to enhance human skill and judgement along the rest of the insurance value chain.
7. Customer focus
Digitisation and a lower cost base are a necessary, but no longer a sufficient, condition in such a dynamic and competitive market. Operational excellence has never been, nor will be, a USP giving long-term competitive advantage.
More and more insurers realize 'customer-centricity', now enabled by new technology, is crucial. Customers don't just want some cosmetic changes but a real transformation to new value-added services and business models.
Again, this is where the flexibility, ingenuity, creativity and speed-to-market of the InsurTechs, such as Claimable (one of the many apps taking the pain out of making a claim), will help insurers to innovate in customer engagement.
For most people, big data means the same 'Big Brother', or worse, given the growing threat of cyber risks. Customers are rightly nervous about disclosing vast amounts of personal data to insurers, mainly for the benefit of insurers themselves in improving risk mitigation and pricing to make more profit.
To be honest, apart from the possibility of lower premiums, there hasn't been much in it for the customer - until now...
If insurers want to leverage the all the new emergent technology, they will have to address privacy and security properly.
Whatever they do, they will have to offer more - much more - value on data than what they get from the customers. What's more, they will have to enable full self-service manipulation of customer data by customers themselves, as, after all, it is their data.
9. More inbound, less outbound
As in marketing, so in insurance, outbound strategies don't work anymore. Inbound is the way forward, as they say.
But incumbent insurers really haven't moved to this new page in their customer engagement strategies. In 2017, however, we are seeing signs of a shift to inbound, or pull-through, innovation.
The outbound model of the insurers is all about cold-calling, leafleting, email marketing; basically, it's pushing products at customers.
Inbound is to do with understanding, informing and communicating with the customer, in such way that there is a constant dialogue to underpin the development of more nuanced and relevant services and products to solve the real needs.
A cursory glance at any list of the top InsurTech solutions will show that these companies really do listen to, and interact with, customers and adapt and develop their platforms dynamically to meet or anticipate their customers' needs.
10. Marketplace model
A model from banking, which recognises that no business can be best in everything, nor can it develop every aspect of business indefinitely. The solution it offers is to give customers real-time, direct access to best possible third-party partner products and customer service at the lowest cost. It's a kind of cut through from the insurers platform to those of other firms specialising in a niche where the insurer has little or no capability.
InsurTech companies are enabling this development through growing partnerships among themselves, with insurers and other third-party participants outside of the insurance industry.
These market platforms will likely become the focus for integrating all the above trends and driving the transformation of the insurance business model in the next five years.
The above thoughts are just an overview of the current state of InsurTech. It's likely that this will change in ways which we cannot predict today, for the better undoubtedly.
To answer the question 'What is InsurTech?', today, would be:
'InsurTech is a new dynamic model combining an array of disparate and innovative systems, technologies, approaches and frameworks which will largely transform the insurance model'.
It will be fascinating to follow its progress over the next five years, I believe Fintastico might help in this.