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Insurance Disruption is Happening Right Now

Insurance occupies a sector of our economy that has not seen any major technology disruptions until recently. Its history goes back to the Lloyd's of London in the 1600s, who mitigated their risk exposure by posting notices of their cargo headed for the New World. The cargo would ship out only when enough merchants signed up to undertake the travel risk. The risk-takers eventually came to be known as underwriters and the bonuses they received for undertaking that risk were called premiums.

With a space so antiquated and full of consumer trust issues, why has nothing changed? Well, 66 percent of consumers have distrust for the insurance industry. Seventy percent of consumers feel that choosing financial products are confusing, according to Deloitte. The distribution model is outdated; insurance agents are still making house calls. Market conditions create an interesting opportunity for startups vying for a seat at the table. There is a need for newer distribution models, a simplification of consumer products, and a shift in a mindset among customers.

Also, today’s household decision makers are becoming harder to sell to. A 2015 LIMRA study found that the majority of Gen X and Y consumers know they are under-insured, but less than 20 percent are likely to buy life insurance.

Millennials also have a strong opinion about current insurance policies. Bob Mozeika, head of Munich Re’s Executive Innovation Strategy, stated at the Plug and Play Insurance kickoff event, "Millennial's really want more transparency in their products… people want to fully and easily understand their coverages and value they are receiving, Not just easy access".

There are many barriers to entry for new innovative insurance companies. For one, insurance companies have been slow to adopt technology innovation. They are also making expensive acquisitions with price to book values falling between 10x to 16x, according to Deloitte.  

Large insurers have had difficulty implementing IT system integrations. Many still rely on old legacy infrastructure. With current regulation stifling advances in peer-to-peer insurance there are still many significant barriers to entry for insurtech startups to get off the ground.

The market is already starting to make way for disruption. In the past six years, early stage insurtech funding has grown from less than $50 million to close to $350 million, according to CB Insights. The new inflow of cash mimics the trends in the FinTech space.

New 'insurtech' companies are leveraging the power of shared economy made popular through services like Uber and Airbnb. On top of that, there are now more effective communication platforms to reach customer segments. The Internet of Things and Big Data have given unprecedented insights into customer habits in real time. New tech such as autonomous driving will also significantly change the future of auto insurance, explains PwC. These tools will allow the insurance sector to move from a reactive model, to a proactive one—a revolutionary turn.

We are starting to see mobile and in-app solutions develop in this market space. A number of high caliber startups are beginning to deliver innovation especially in the on-demand insurance space. Trov offers a mobile app that tracks, prices, and delivers insurance coverage for single items and possessions. Early this year, they raised $25 million. Slice Labs offers on-demand insurance to the ride-sharing economy on the drivers’ side. They just closed $3.9 million earlier this year. Bunker raised $2 million in a seed round in effort to provide insurance for freelancers, otherwise known as on-demand employees.

These investments pale in comparison to the massive war chests of major insurers. That said, the nimbleness of these startups, tapping into the on-demand hype, could eat away at the market extremely fast.

Business models are being reinvented as we speak, especially in the insurance sector which is often marked by low customer interaction, limited service levels, complex IT systems, and masses of data. A new digital revolution has created more data enabling new risks, tailored products, performance warranty, and new ways of underwriting. It has given insurance companies access to customers they have not been able to access before.

Given the complexity of insurance products, technology can arm agents with resources to access traditional customers in new ways. Industry has also not been growing at the same rate as GNP and is losing relevance. There is a desperate need for innovation to expand boundaries of insurability in an effort to bring new premiums into the market.

Disruption may not necessarily mean a complete overhaul to the traditional underwriting and premium model, but can we improve the risk assessment process? What about the way in which policies are sold to consumers? Will insurance policies work like the real-time stock market? Will we need completely different insurance products to safeguard against new and emerging tech such as cyber threats?

That’s a lot to think about.


(This article was written by Kevin Wang and Ali Safavi from Plug and Play Insurance, in collaboration with Robert Mozeika and Philip von der Schulenburg from Munich Re and Daniel Gadino and Prashanth Ajjampur from Deloitte.)

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