The enablers of innovation in insurance

InsurTech topics have witnessed a rise in the last months. With grown digital players like Check24 (see here) and PolicenDirekt (see here), the digitisation of the insurance industry is not nascent. However, we currently observe the emerging next wave, which is supposed to awaken the industry and disrupt and not just digitise its current industry structures.

Companies such as Clark (see here), Lemonade (see here) and Element (see here) are at the forefront of this wave (see illustration below for our view on the current German landscape) and we expect to see many more soon.

In insurance, digitisation is not only an opportunity for significant cost savings and a redesign of current industry architecture but also an opportunity to drive a real product and service innovation along the full insurance value chain. To identify the core enablers of this change, we have selected four areas of particular significance:

Enabling product innovation and new forms of insurances

The insurance industry, and particularly its P&C segment, was subject to a very small extent to product innovation over the last years. Traditionally, insurances are “push” products and changing that status is difficult. Technological developments, such as IoT sensoring, however, are the foundation that is needed to create new forms of risk coverage. These will include micro-insurances with situational or use-based elements that for instance would enable people to get insured as they drive or as they enter a skiing area. Furthermore, the emergence of completely new classes of risks, such as information security (cyber) insurance, or coverages for self-driving cars are also pushed by this technological progress. The cyber insurance market alone is expected to reach a similar level as the car insurance market in the next 20 years (see here). In addition, evolution of sharing economy has resulting in development of community-based products such as coverage for home-sharing services like AirBnB.

These emerging insurances, however, can not be realized with the legacy IT infrastructure of incumbents. Signing a situational insurance in the skiing area “based on paper” is simply impractical. New digital infrastructure and backend systems supporting gathering and processing of the required information are required allowing quick time-to-market for new products and instant and situational underwriting.

Changing distribution paradigms for the digital world

Today, the dominant distribution channel for insurances is still brokers. In Germany, for example, only 13.5% of P&C products are sold directly by insurers (see here). That is a disadvantage not only due to the sales via intermediaries being quite costly, but also because insurers do not get the chance to know their customers directly, and thus miss an opportunity to comprehend their needs and wishes. On the other side, customers value the convenience and trust-based relationships offered by brokers. Technology needs to close this gap by engineering trust-enhancing solutions at the (digital) point of need.

Simultaneously, digitisation causes another effect: an increasing transparency in the market and exposing opportunities to easily compare insurance products. However, although customers can make use of comparison websites, user experience is still dominated by frustration and an extensive timespent. Thus, it is not surprising that millennials have a clear preference for buying insurances online (see here)

In order to address this situation, many emerging InsurTechs are currently improving the (digital) customer interaction at the frontend and innovating the way in which insurances are sold. As a result, the future may bring fully digital app- or chat-based sales interfaces as we already can see it at Clark providing trustworthy digital solutions. And in the example of Clark, it’s not only the millennials using it but also many older people. On this front, China is even one step ahead: WeChat has proven to be an excellent enabler for selling insurances digitally. Furthermore, annex-insurances as for instance travel insurance are already sold with many flights or hotel bookings today. Other examples are Apple Care providing coverage product for the company’s major devices, and even Tesla, announcing recently its intention to sell products that include maintenance and insurance in their price (see here). With those examples, it becomes obvious that “baking in” insurance in regular product offering can turn insurances into a ”pull” instead of a “push” product. This approach to digital sales can already lead today to significant volumes: the Chinese insurer Zhong An has underwritten over 630 million insurance policies and serviced 150 million clients in its first year of operation via digital channels.

Expanding the value chain into full service claim support

Insurance companies have much less customer interaction points than banks. For instance: a customer typically buys an insurance and comes back only if he/she has a claim to make. Insurers that recognize these existing problems and emerging opportunities will focus on increasing the customer centricity and customer experience by making them central to the few interaction points. Hence, even in the case of claims the digital customer interaction will be of a much higher quality.These quality interactions could be represented in two ways: supporting customers in reducing risks or giving them full service support in case of claims. A result could for instance be an early warning for customers to avoids risks such as publishing storm warnings connected with the advice to close the windows in order to prevent damage in the customer’s’ house. Another example could be that the digital claim processes are not only set up in a way that the customer can easily inform the insurer with his smartphone about a damage and has his claim settled within minutes instead of weeks but also finds help in finding the right replacement products and receives advices what to do to avoid the damage the next time. This may even lead to businesses that provide “Claim Support As A Service” providing all the needed support around a claim beyond the classical claims handling – basically a digital version of the ADAC not only limited to car-related issues and much closer to the insurance services.

Upscaling underwriting and fraud detection with data

Incumbents’ IT systems follow old design and development paradigms as well as with siloed structures along the classes of insurance (P&C, Life, Health) constrain a 360 degree view on the customer. This leads today to situations at incumbents in which the typical cross-sell ratio is 2-7% due to insufficient information about the customer. Many incumbents simply don’t have their customer’s email addresses.

However, technology such as big data and machine learning can only unleash their full potential when certain barriers are torn down. Besides the need to upgrade existing IT infrastructure and gather the right data, new analytical approaches for underwriting and fraud detection need to be defined. Last year, for instance, insurance company Admiral wanted to analyse people’s driving skills by using an algorithm that included the driver’s Facebook posts. But the approach was out of Facebook’s comfort zone, so the social network company prohibited the analysis of the data. However, such data could be of great use in the future. Considering the digital information that are available for almost every person, insurances could be priced much more personally and without burdening the customer with cumbersome and time consuming questionnaires. The ability to use data from different sources and sensors will open doors for more predictive prevention models. It would also allow insurers to develop new ways to monitor and manage risks.

The IoT will increase the amount of data that are taken into consideration when underwriting and adjusting policies, checking for fraud or using the gained insights to prevent claim events. Insurances need to become with this more proactive risk managers that support their customers based on their insights.

Providing an infrastructure platform to support the changes needed

In order to address the above mentioned points, significant changes are needed in the insurers’ infrastructure platforms. Currently, the majority of InsurTech businesses are focussing on the frontend because it is what customers see and experience first, and based on what they make purchasing decisions, without any ability to see their experience down the line. However, the needed change at the customer interface can only happen with a platform behind supporting fully digital processes. Thus, FinLeap has taken the matter in it’s own hands and started building the required infrastructure from the core. Based on the leanings we gained with our venture solarisBank (see here), we see also in insurance that without major changes in the backend, the front won’t be able to support a fully digital experience down the line. This is why we submitted an application for an insurance license for P&C and are building the required IT as we write this: we are building insurance from the back so that the front can work in a digital age and the customer can get a truly digital experience.

About the authors

Dr. Matthias Lange oversees as Managing Director the “build phase” for new FinLeap ventures, from the identification of new business models to their product & tech development to the point they have grown their independent founding team and shown product & market fit. Before joining the company builder, Matthias had been with McKinsey & Company for 8 years, focusing on digital business building & IT architectures.

Inna Leontenkova is Entrepreneur in Residence with FinLeap. In her capacity, she managed over the last months the development of FinLeap’s latest InsurTech venture Element. Before joining FinLeap, Inna worked in senior positions for foodpanda and Groupon as well as for the UK’s largest insurer Aviva.