The Intelligent Quarterly from the publishers of The Insurance Insider

Summer 2018

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Ripple effect

Mark Crichard

While the FinTech sector has been active for several years, the technological advance in the insurance arena has been slower off the blocks. However, that is definitely changing. No article, seminar or event in the insurance world would now seem complete without mentioning the phrases "digital transformation" or "InsurTech".

This is also reflected by the flow of money into this space. InsurTech, in 2016 alone, attracted $1.69bn of investment, and money backing UK start-ups tripled from 2015 to 2016.

So, InsurTech is set to revolutionise the way insurance is sold and the working practices of underwriters, brokers, managing agents and many more. But, what does it actually mean? And how does it fit into the future of the insurance industry?

The phrase probably means different things to different people. In broad terms, it typically means either the use of new technology to improve the efficiency or reduce the costs of the (existing) insurance "supply chain", from product development through to claims, or "disruptive" technology-based businesses offering new or innovative insurance products.

Utilising InsurTech

The perception is that it is historically difficult for large institutional organisations, like insurers, to be nimble and agile enough to respond to a rapidly changing technological environment and shifting consumer preferences. Indeed, the insurance market presents some unique opportunities and challenges, particularly in the context of the more disruptive InsurTech offerings.

At one level the purchase of insurance (and then claiming on it) is probably just a necessity at best, or a distressed activity at worst. Encouraging customers to buy more insurance or, in some cases, to take out cover at all, is challenging.

Being a reputable, dependable and predictable insurer would certainly be seen as a good thing, but it doesn't necessarily fit well with the type of brand profile that is seen in the digital world. So, building a brand and technology that cuts through that is more difficult.

That said, it's not all doom and gloom. The industry is already looking at and using new technology, albeit in less high-profile areas. For example: the London Market Group is looking into the potential use of blockchain technology as part of the London market Tom Innovation workstream; traditional insurers are trying to better exploit data analytics; and the use of some form of robotic process automation is now pretty much universal in any insurance-related outsourcing deal.

A recent PwC survey found that 85 percent of respondents reported that data analytics would be the main area of technological investment over the next year.

As yet, no one has had their "Uber" moment in the InsurTech industry and threatened to fundamentally change the way risk is managed. However, several start-ups have emerged with the goal of finding new ways to meet genuine consumer demands at a fraction of the current cost and in a simpler manner. A good example is Brolly.

Brolly helps consumers adjust to the change from buying insurance through a broker to predominantly purchasing insurance through comparison websites.

The company spotted that purchasing insurance on the internet results in consumers: (i) being over- or under-insured; (ii) taking a fragmented approach to purchasing insurance, where documents are stored in emails with no interlink with other related insurance; and (iii) staying with insurers on renewal, despite having to pay more, due to the difficulty of switching.

As a result, Brolly designed an app that provides users with a single place to view, manage and buy insurance. Their app: (i) searches your inbox and "scrapes" existing policies into a "locker" with key details set out; (ii) spots gaps in insurance that a consumer may have and asks if they need a quote; and (iii) provides push notifications on the best time to renew policies (and when a customer renews, Brolly is paid commission by the insurer).

The ultimate goal is for insurers to pay for inclusion in the app, thereby giving themselves access to a pool of new customers that are more likely to purchase insurance because of the app's ability to make a complex process simple.

Similar apps on the market are having success in leveraging large insurers' reputations, distribution channels and regulatory approvals while also capitalising on their desire to move into the digital space, such as Sure (with its smartphone insurance offering).

Interestingly, InsurTech start-ups are proving that they also offer complementary innovations for existing insurance companies, as opposed to being the disruptive force that many predicted.

Zurich's head of business transformation, Antony Elliott, summed this up when he was recently quoted as saying "a few years ago, the insurance sector thought that these start-ups were coming to eat our lunch, now we see them more collaborating and joining us for lunch".

In fact, many insurers have spotted this opportunity and are actively seeking involvement with start-ups. For example, Munich Re has begun investing and partnering with start-ups and Travelers recently acquired Simply Business (an insurance platform) for $490mn.

Disruption ahead?

Despite the collaboration, InsurTech has the potential to be a disruptive force and threaten the traditional model of writing insurance business. Reflecting that, the same PwC survey found that 86 percent of those (traditional businesses) surveyed considered that revenue was at risk from InsurTech players.

The disruptive effect can be seen in the world of motor insurance. Start-up By Miles has recently been authorised by the UK Financial Conduct Authority (FCA) to act as a broker to offer a pay-per-mile insurance policy that works in tandem with a smartphone app.

The policy targets lower-mileage drivers based in cities who commute into work on public transport, with the idea of simplifying the process of obtaining car insurance while also making it cheaper and more cost-effective. With By Miles set to launch its offering later this year, the impact of this method of managing risk remains unknown. It will be interesting to see if this is approach is applied to any other insurance lines.

For the start-up community, leaving aside the usual issues with raising finance, managing cash flow etc, the biggest unique challenge is the regulatory environment behind the insurance world (and the associated capital requirements for those writing the insurance).

While we have seen several new payment service providers spring up in the banking and payments arena, almost without exception, start-up InsurTech businesses need to rely (at some stage) on existing insurance carriers.

For those trying to be more radical, scaling up will inevitably involve the considerable costs of obtaining and maintaining appropriate authorisations. Although initiatives such as the FCA's Project Innovate help, it is interesting to note how few InsurTech start-ups have applied or been accepted into any of the FCA's regulatory sandboxes.

Data is increasingly going to be at the centre of the InsurTech revolution. Those businesses best able to capture, control, analyse and exploit it are most likely to thrive, provided, of course, they can do so within the ever-tightening regulatory grip of data protection legislation.

Ultimately, the potential benefits of InsurTech are yet to be fully utilised and, in the words of PwC global InsurTech lead Jonathan Howe: "Whether it is partnering with, or acquiring start-ups, or fostering innovation internally, insurers need to find a way to bring the benefits of InsurTech into the mainstream." (PwC 2017 Global FinTech survey).

For the UK's insurance industry, tapping into the opportunities that InsurTech offers is perhaps all the more important, as it looks for ways to cement its market-leading position while Brexit looms large.

Mark Crichard is a partner with law firm RPC specialising in technology and outsourcing

This article was published as part of issue Autumn 2017

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