The rise of InsurTech
In recent years, InsurTech has acted as an increasingly disruptive influence in the insurance sector, using technology and innovation to improve the efficiency of existing transactions and processes and to enhance customer experience, writes Georgina Perrott of Birketts LLP.
InsurTech currently sits under the wider umbrella of FinTech, although the recent increase in the focus on InsurTech is leading to it becoming an industry sector in its own right.
Startups are challenging the traditional insurance models and incumbents are investing in research and entering strategic partnerships to supplement or update their existing offerings.
Key changes to the insurance sector include insurers using smart devices to produce more personalised insurance, the appearance of new models such as usage-based insurance and peer-to-peer insurance and the exploration of the potential of Big Data. These raise interesting legal and ethical issues.
InsurTech is using smart devices to price products with increased accuracy based on observed behaviour and to encourage good behaviour. Auto-insurers have been the first to widely adopt smart devices to collect information about an individual customer’s needs and risks.
By installing a telematic device in the customer’s vehicle, or through a smartphone app, an insurer is able to determine a driver’s risk profile by collecting data on his or her driving, such as speeding and braking rates, as well as other factors which influence the driver’s risk including driving in rush hour, in urban areas or in bad weather.
The insurer can use this data to set a more accurate premium and the driver has a financial incentive to drive carefully. The use of data from wearables, such as Fitbits and smart watches, and connected-home technologies has similar potential to improve product pricing and incentivise good behaviour.
This has not yet been fully exploited by insurers but an example is South African insurer Discovery’s Vitality programme which uses fitness trackers to encourage health insurance customers to exercise.
New entrants are challenging the status quo by exploring new insurance models such as on-demand insurance and peer-to-peer insurance. Usage-based insurance aims to cover infrequent or one-off insurance events, such as insuring a camera for a day or the occasional flying of a drone.
Again, this development is visible in the car insurance market where start-ups Cuvva and Metromile provide insurance on a pay-as-you-go basis, reducing insurance costs for occasional drivers.
Peer-to-peer insurance models used by InsurTech start-ups vary, but broadly, the term covers a group of associated individuals who pool their premiums to insure against a risk.
One example is US start-up Lemonade which provides home insurance; it groups individuals by reference to their preferred charity and at the end of each year gives any surplus from the group’s risk pool to its chosen charity.
Other peer-to-peer insurers such as Friendsurance return surplus money at the end of the year to their customers. By pooling friends or individuals with common causes, the peer-to-peer model aims to remove the conflict between the insurance company and the individual when paying out claims and to reduce fraudulent claims.
Big Data provides new insights into customers for insurers and the mass of data available lowers one of the traditional barriers to entry to the insurance sector, that of accumulated historic data.
Insurers are exploring the use of data from a variety of sources to analyse and predict customer behaviour, for example, researching the correlation between posts made by an individual on social media and his or her behaviour to assess that individual’s risk.
Big Data can also be used to smooth the process by which individuals purchase insurance and improve claims processing.
Technological innovations and the increased use of data by insurers give rise to legal and ethical concerns, most notably in relation to privacy, data protection and discrimination.
Ownership and protection of intellectual property is also a consideration, particularly when working in partnership. Much of the data collected constitutes ‘personal data’ under the Data Protection Act 1998.
With the implementation of the General Data Protection Regulation in May 2018, insurers will need to obtain explicit, informed consent from an individual to the use and processing of his or her personal data.
Ethically, there is a danger that with the increased use of Big Data in calculating premiums, ‘uninsurables’ (high risk individuals who cannot obtain or afford insurance) will emerge. This is particularly the case in the health and life insurance sectors where companies are already offering gene sequencing to identify risks to an individual’s health before they develop.
The gathering momentum behind InsurTech is likely to result in significant changes to the insurance market in the years ahead. It has the potential to create more personalised, fairly priced products and the use of smartphone apps by insurers to interact directly with customers, creates a more flexible, efficient and scalable structure.
Approached correctly, technological innovations present an opportunity for insurers to provide a more holistic service-orientated business model to customers.
These developments present a wealth of legal and regulatory issues for businesses to consider when marketing new insurance products.
• You can call Georgina Perrott on 01223 326635 or email her at: georgina-perrott [at] birketts.co.uk