WHAT IS INSURTECH?
We are encountering the term InsurTech everywhere. The term comes across in presentations, lectures, articles, podcasts, and vlogs. Insurance innovators ask me: hey, what is this all about? Is there more behind it than insurance and digitization? My answer always is: Yes definitely, there’s more to it than merely digitizing insurance! So, What Is Insurtech?
InsurTech Is the Intersection of two Distinct Domains
InsurTech is the overlap of two domains of business practice. The first domain is the traditional insurance business. The second domain is innovation & technology. What makes this intersection so special is that the overlap possess properties of both domains. This is what we call InsurTech.
First Domain: Traditional Insurance Business
Traditional Insurance Business
Insurance is a simple payment promise as a means of protection from uncertain financial loss. To be insurable, the risk insured against must meet specific characteristics. Actuaries assess the financial risk of a particular situation based on historical data and applying statistical models.
The basic principle of the insurance industry has not changed for at least a century. It’s time to wake up the sleeping giant.
If it makes economic sense for the insurer to cover the risk, it offers the insurance product to prospects. When a prospect wants to be insured, an insurance policy gets issued. The insurance policy determines the claims which the insurer has to pay for damages caused by the risks covered in the contract. This business principle of the insurance industry has not changed for a very long time.
Not All That Glitters Is Gold
Traditionally insurance was a highly people-intensive business. Distribution, administration, and claim adjustment required a lot of staff. With the introduction of electronic data processing (the Tech of the ’80s) software applications automated parts along the entire policy administration process, from issuing a policy, keeping records up to date, to the settlement of claims.
The current two challenges for established insurers are the lack of interest income and changed customer behavior.
Today traditional insurers face two fundamental challenges. The persistently low level of interest rates calls the current business model into question. Due to the lack of interest income, many insurers have to discontinue, sell or massively reduce former profitable business lines. The second challenge is the massive change in customer behavior. The Internet drives consumer expectations and creates enormous problems for incumbent risk carriers and their sales force — more on this in the next paragraph.
Second Domain: Innovation & Technology
New Technologies Change Our Lives
One of the main drivers of change is the internet. The net Internet has become embedded in every aspect of our day-to-day lives. It changed the way of almost everything we do. Ordering meals, buying apparel, watching movies, sharing moments in life, and messaging our friends. The Internet has changed how we behave.
The Internet has changed everything, from how we behave up-to how we operate our businesses.
Also, the internet has removed all information and communication barriers. It changed the way we search for information, consume customer reviews, compare prices, and finally make purchases. This new customer behavior increasingly changes established industries, and in particular increases pressure to change for the insurance business.
New technologies that have not yet existed are already in the starting blocks. Inventions like precision medicine (genetics), Artificial Intelligence (AI), Internet of Things (IoT), Data Analytics, BlockChain, and many more will have a significant impact on our daily lives.
Business Innovations Transform Industries
Incumbent industries enabled and ensured our prosperity for over a century. It is all based on technical innovations. However, the main focus so far has been on improvements in products and processes. These traditional ways of thinking and managing corporations are no longer sufficient, to survive in this new economic environment.
Future competition no longer occurs between products and processes, but between business models.
New companies with innovative offerings and business models have taken the world by storm. These new entrants make it increasingly difficult for established companies to maintain their current business operations and profits. Prominent examples are AirBnB, Uber, Linkedin, Amazon, Netflix, and Wikipedia.
Furthermore, companies with new business models use the potential of new technologies (e.g., Internet) and thus achieve an economic performance that cannot be accomplished with the traditional product and process innovations. Industries like insurance have started to change dramatically.
Combine Traditional Insurance with Business Innovation & New Technologies
The intersection is the overlap of traditional insurance business with business innovation & new technologies and contains what we call InsurTech.
The new challenges for established insurers are business model innovations and new technologies, that create entirely new insurance propositions.
Combining these two domains has profound implications. Insurance prospects and customers are able to compare premiums while they commute, purchase insurance instantly when in need, covered only for the time they need it and manage their protection 24/7 without an agent, broker or call center. Oops!
A Few Examples of Insurtech in Action
InsurTech Full-Stack Carriers
These Full-Stack Carriers offer Full-Digital Services to intermediaries (indirect sales) in other instances to policyholders (direct sales) by applying newest Internet, Artificial Intelligence, Machine Learning and Big Data Analytics.
These intermediaries provide an excellent customer experience to policyholders and typically operate as an Agent or a Broker. They create value by offering protection to their customers' specific needs, e.g., 24/7 service, instant applications and sometimes special offers.
Enabling incumbent risk carriers and their intermediaries by operating as a provider of tech services. These enablers are typically creating value by increasing premiums, reducing costs, and speeding up processes for their corporate clients.
Chat Bots like SPIXII
Robot advisors exploiting artificial intelligence like Clark
Claim Handlers like RightIndem
Putting It Together
InsurTech is what you find at the intersection of traditional insurance and business innovation & new technology. This new combination creates novel ways of thinking, acting, and applications in the insurance vertical.
This is what InsurTech is all about. To return to the opening question, it’s much more behind it, than merely digitizing existing insurance operations.