The third and fourth revolutions also called the digital and technological revolution respectively have transformed daily activities exponentially. Amongst all sectors, there have been unprecedented changes either major or minor. The financial sector has been no exception, although slow and cautious, fintech has been at the forefront of these changes. 

As of 2018, it had a market share of $127 million with India accounting as the third-largest centre for Fintech.  The insurance market only reaching 4% of Indians, it has become a potential field for a fintech disruption. The insurance market with less than 75% of the population with a life cover is teeming with opportunities for startups, creating the perfect buzz for insurtech. 

What and why it’s so important about InsurTech? 

Insurtech, coined in 2010, is a combination of insurance and Fintech i.e. exploiting the wave of the digital revolution to improve insurance provision, innovation, and cost reduction. Insurtech employs artificial intelligence for customization of insurance products, simplification of pricing, and underwriting for the products. It reduces costs through disintermediation and automation, easy and quick settlement of claims, and provides a platform for innovation. 

Traditional insurance models had access to point-in-time information about customers, based on their risk scores and others, hence, relevant factors they were pooled together.  This pool was offered a one-size-fits-all product maximizing the profit of the company. Therefore, some people invariably ended up paying a little more than they should.

In the case of motor insurance, for instance, A and B are in the same income bracket, with a similar car and same time period with clean driving history (this is the point-in-time information available to the company). According to the traditional model, both of them are grouped and offered the same product and a similar premium.  However, A is riskier than B in behaviour, who hasn’t met with accidents, however, travels long distances, in peak traffic, etc. Nonetheless, this vital information is not included while underwriting the policy, due to lack of information. Besides, post-underwriting, the insurance company doesn’t have information about the risk inducing behaviour of the customer. Hence, in this process, B ends up paying more premium than he should. This is what insurtech aims to resolve. 

How will Insurtech help?

InsurTech as a combination of insurance and technology – makes use of physical devices like the Internet of Things (IoT) devices and analytical tools like machine learning and artificial intelligence, for better risk assessment, product underwriting, and product pricing. The main agenda for insurance is to improve the risk assessment that aids in providing a customized product at a customized price to the client. 

In our previous example, the insurer now decides to collaborate with the automobile company, with the consent of the clients installs a tracking device in the car that collects information limited to the usage of the car. Now the company has more information about the driving behaviours of A and B. Hence, B can be rewarded for his consistent and safe driving i.e he could pay less for the same policy. Simultaneously, A could be incentivized for improving his behaviour.

In the case of health insurance, an insurer would obtain only point-in-time data (through medical tests) about the policyholder which is not completely sufficient to make accurate risk assessment and underwriting. Once the customer is on-boarded, there is no effective way an insurer could know or keep track of the risk entailing activities of the agent. To remove these lacunae insurtech with the help of big data, blockchain, or information records of Technology-driven devices (IoT devices like wearables and trackers) to maintain a regular stream of data that enables them to price the risk better and provide appropriate incentives to customers’ to reduce their risk exposure. For example, pedometers to count steps walked in a day, fitness devices that capture heartbeat, oxygen intake, blood pressure, etc, or even information recorded by smartphones (sometimes linked to the wearables) is used as input data that helps insurers to gain better insights into the behavioural pattern of the policyholder. 

Additional information available to the tech-driven insurtechs that gives them an edge over the conventional insurance companies in assessing the risk more accurately. The analysis could be utilized to motivate customers to maintain good health  by providing incentives like health-score based reduction in premium or other tangible benefits like discounts on health products, free subscriptions etc.

Risk assessment, underwriting, and fraud detection are done by the analysis of the accumulated data using artificial intelligence and machine learning techniques. With the digital revolution and rapid increase in the use of smartphones, insurtech sees an opportunity to reach out to its customers in a fast and convenient way. Unlike established insurers, insurtech has the flexibility to steer clear of legacy products and provide tailor-made products for the customers according to their needs and demand. Incumbents, or the established insurers, are viewing this as an opportunity and catalyst of innovation rather than a threat to their market penetration and customer acquisition. The collaboration of incumbents with the nascent start-ups is a win-win situation, with the integration of the best of both worlds- the established infrastructure and market share of incumbents and innovative products, niche targeting, and better pricing by employing AI and ML algorithms of the Insurtech.

Further Readings

Asia InsurTech-

 InsurTech -Working Group Findings & Recommendations (IRDA)

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