Seven flavours of fintech in insurance

By Roger Peverelli and Reggy de Feniks
Roger and Reggy are the authors of the worldwide bestseller ‘Reinventing Financial Services’ and the founders of Digital Insurance Agenda and DIA Barcelona

Successful insurtechs tap into the key challenges insurers are facing. A sneak peek at the seven different flavours of winners in fintech insurance. Insurtechs that accelerate the digital transformation of the industry.

According to CB Insights VC investments in insurance fintech firms almost quadrupled compared to 2014. NYC health insurance start-up Oscar became the posterchild for customer engagement, the proof that insurance can be made sexy. AXA launched AXA Strategic Ventures, a 200 mio euro corporate venture arm for emerging strategic innovations relevant to insurance. And so did among others Allianz, MetLife and PingAn. Mark Wilson, CEO Aviva, said ‘the industry is in the stone age’ and started hiring staff from Google and Amazon to update Aviva’s technology, Startupbootcamp announced its first insurance accelerator program in London, backed by Allianz, Admiral and Lloyds.

In our view, 2015 was just the start. We expect ‘insurtech’ to really take off in 2016. We see four key challenges that insurance carriers are facing. Each challenge drives sense of urgency at insurance firms to accelerate digital transformation. And each challenge also invites new entrants to move into the insurance space.

1. Current cost levels are much too high
To be frank, an insurance, the transfer of risk from a consumer to an insurer, is quite expensive. Insurers spend between 20 and 40 cents of each euro of premium on costs of operations and customer acquisition costs, marketing and distribution; not on what the insurance is actually for. We have come across health insurers that actually spend 15 cents on every premium euro on recurring broker commissions (and are afraid to change this to more responsible levels just because they do not want to damage the relationship with their most important distribution channel).
Operational excellence and cost efficiency will remain priorities. Insurers are looking for ways to operate more efficiently in every major part of the costs column: in claims expenses, costs of operations and customer acquisition costs. Short term focus therefore includes sophisticated underwriting, risk reduction, improved claims management and cost efficient service. We expect technology purchases and investments by insurance carriers in these areas to further explode. And so will the number of fintech solution providers that want to cater to that need.

2. Customer engagement leaves much to be desired
Most insurers still have low Net Promoter Score ratings. In spite of all the efforts and investments in the last years, customers still experience a lot of frictions throughout the customer journey. Rising consumer expectations are more and more difficult to meet. The frame of reference is set, not by the service offered by other insurers, but by what customers experience when they reach out to other brands, for instance using their smart phone. Furthermore, insurance is still about averages, products, one size fits all, paper, brokers – which is not always in sync with changing customer preferences and what technology is able to.

Insurance firms are turning to digital technologies and what fintechs can offer to improve the way they engage with their customers.
But all these frictions also stimulate new entrants to introduce more relevant concepts. To explain the ‘why’ of launching the company, new entrant health insurer Oscar admits: “We didn’t start this company because we love health insurance. Quite the opposite in fact.”
Technology has eroded the barriers to entry. Many more new provocative concepts will be launched in the years to come. Let’s not forget that insurance is an extremely attractive market. The global insurance industry alone is a 4 trillion dollar market (12 zeros) according to McKinsey. A market that size, with so many imperfections and latent and manifest needs obviously attracts investors, entrepreneurs as well as blue chips outside the insurance industry.

3. Internet of things just entered the radar screen
Connected cars, connected homes and e-health are about to become mainstream. All these connected devices generate an avalanche of data that can be used to improve risk assessment, but also to offer new products and services and to create new revenue streams and growth opportunities.
However, a Roland Berger / EFMA survey among 23 European insurers revealed a hesitant attitude. About 60 percent of the participating insurers have started initiatives in connected cars, but mostly limited to using telematics data for more sophisticated underwriting and claims management and hardly ever exploring the development of entirely new products and revenue streams from all the contextual information that becomes available. And in connected home and connected health there is even less activity.
This has invited all sorts of new entrants that see the commercial potential of data produced by drivers, homeowners and health device users. Numerous tech start-ups that are devoted to creating innovative products and services based on the internet of things. But also big names in consumer technology such as Amazon, Apple, Google, Microsoft, Philips, Samsung and Siemens have designated the internet of things as a focal point in their strategy. What helps them is that according to the Edelman Trust Barometer ‘Technology’ and ‘Consumer electronics’ are the most trusted sectors among consumers.
Car manufacturers who are looking for new revenue streams have also woken up to and are increasingly moving into the insurance space—becoming more active in sales, distribution, and claims—just like they have become key players in financing new-vehicle sales over the past decades.
MS&AD, a leading Japanese insurance group with strong links with Toyota, acquired a 75% stake in innovative British telematics insurers Insurethebox and Drive Like a Girl.
John Deere, the famed producer of farm equipment, acknowledges the increasing importance of data too. In their view the software in each vehicle is the core of the product and a John Deere tractor is a software package encased in thousands of kilos in mechanical parts. By trying to copyright-protect the software the company would gain the exclusive access to all of the data generated by the vehicle. GM is moving there as well.

4. Speed of innovation has been limited so far
The appetite for innovation in the insurance industry has always been limited compared to other consumer industries. This is remarkable in view of the impact of Google Search and insurance comparison engines such as Moneysupermarket.com, Comparis.ch and independer.nl that fundamentally changed market dynamics. Past profitability resulted in lack of sense of urgency. Obsolete conventions and vested interests (broker sales) killed any innovative ideas.
Insurance carriers are now making the leap into the 21st century. They have little choice. If they fail to deliver against the ever increasing demands and expectations of customers they will lose share to traditional rivals that do succeed in striking the right chord. And to new entrants that have the advantage of digital DNA to leverage technology to provide lower costs and better service.

So what do we expect for 2016?
Which insurtechs will be successful? We distinguish seven different flavours of winners in fintech insurance. Winners because they bring specific flavours of added value to insurance companies and to customers. In the coming weeks we will publish blog posts that take a closer look at each flavour, including ample examples of fintechs, so stay tuned.
For now a sneak peek at the seven flavours:

1. Superb customer engagement
Solutions that help insurers to make a leap in customer engagement, to become much more effective in every step of the customer journey. Plus new entrants that are attacking specific frictions, complex processes and product and pricing imperfections customers have to deal with when working with insurance companies.

2. Dramatic cost savings
Fintechs that provide innovative solutions that impact the key cost drivers. Think of solutions for improved claims management, fraud detection, more cost effective customer acquisition and cost efficient service.

3. Sophisticated underwriting and risk reduction
The core competence of insurance is ready for a makeover thanks to all sorts of new technologies; machine learning and cloud computing.

4. Disruptive business models
Also in 2016 we will continue to see the emergence of new digital first carriers. They have one thing in common. They attack with a new business model that is clear about how it creates value for its customers.

5. New roles in the value chain
Traditional agents and brokers are becoming an endangered species in many mature markets because of lack of added value in view of excessive commissions and online alternatives. A whole new breed of intermediaries now enters the insurance arena.

6. Innovation acceleration enablers
The systems of most insurance carriers are older than the customers they serve. Obviously, this is a major hurdle to innovation. Several fintechs are offering powerful solutions that align IT with the business demands for speed, flexibility, agility and cost efficiency.

7. Contextual data propositions
Connected objects will generate loads of new information, not only directly related to the insurance but also about the context. This will spawn much deeper customer insights and in turn these should lead to fascinating new directions for product and service innovation.