Out-Law Analysis | 09 Dec 2019 | 10:32 am | 6 min. read
Collaboration offers insurers fast access to new solutions built on innovations in big data analytics, wearables and connected devices, for example, which can offer better ways to understand, price and manage risk, or to innovate in the way that insurance is bought and sold.
For insurtech providers, partnerships with insurers can help them overcome major barriers to entry in the market.
One of the main drivers of insurtech innovation is the disruptive force of customers in the market. A number of factors, including developments in technology as well as pro-customer regulation, have given increasing weight to customer demands in recent decades.
The so-called 'Amazon model' is prevalent in the insurance markets for consumers who want to be able to access products and pricing quickly and easily without having to provide the same information repeatedly. Price comparison websites have both created and, to an extent, responded to a demand for this in the more straightforward sectors like motor and home insurance, where price is often the most important factor for purchasers.
Customers' needs and expectations are also changing. Whereas insurance was traditionally an annual purchase, many customers now want cover only when they need it and will expect it to be more tailored to their particular requirements and priced according to their particular risk profile.
Customers also want more from their insurance than a cheque when things go wrong, including assistance in managing their risk and smartphone-friendly engagement, and through these digital channels they want the ability to easily adapt their cover as their risk changes and to make claims and manage settlement when things go wrong.
There has also been increasing interest in peer-to-peer or other risk sharing models.
The insurance industry is adapting to these changes, but customers are increasingly sophisticated and less loyal. Insurers need to win and retain customers by offering products and services that meet their needs. Technology has a major part to play. There are opportunities for those willing to lead and perils for those who are left behind.
Technology has already played a significant role in disrupting other areas of financial services. In banking and payments, for instance, there has been an influx of fintech providers to the market. Unlike in the insurance market, however, this digital disruption has been underpinned by legislative reforms and regulatory intervention, including the EU's second Payment Services Directive and the UK Competition and Markets Authority's order on open banking.
The absence of similar intervention in the insurance sector coupled with challenges associated with legacy systems and there being strict regulation around the provision of insurance means there are major barriers to entry in the market.
While the requirements to become authorised or exempt as an insurance distributor are likely to be achievable for new entrants and start-ups, those for becoming an insurer are generally viewed as being too onerous for all but the largest challengers – even the largest US technology companies have so far been put off entering the market. It is therefore no surprise that start-up insurtech providers have focused their attention around the fringes – the core business models for provision of insurance have not been subject to disruption.
Some of the innovation in the sector that we have seen has been driven by the need to insure new types of risk that traditional products don't adequately cover – many of these have themselves arisen out of technology innovation – and technology has been an important part of the solution to these new products.
New entrants such as Slice have developed on-demand insurance for Airbnb hosts so that they only pay for cover when their property is being rented out. Smartphone apps make it simple and easy to switch insurance cover on and off. The insurance is still provided by a traditional insurer and sellers such as Slice are still carrying out insurance distribution activities for which they require authorisation or exemption, but the traditional annual policy has gone.
Similar products have been developed for drone pilots. Flock allows commercial drone pilots to choose between on-demand cover per flight or monthly cover – or both. Flock uses data providers to aggregate real-time data relevant to drone flight risk, like drone data, environmental data, and local weather conditions. This helps them to price insurance premiums.
Flock's partnership with one major insurer on ‘pay-as-you-fly’ drone insurance is an example of insurtech working with an existing insurer to meet new customer needs.
In health insurance, Yulife, which aims to be the world's first "lifestyle" insurance company, has teamed up with an insurer. Yulife offers life insurance to individuals and businesses and, through its wellbeing app, encourages users to complete activities like walking or meditation and rewards them for their activity with air miles and gift cards. The insurer underwrites all of Yulife's policies.
Yulife is an example of an insurtech collaborating with an existing insurer to engage with customers differently, with a focus on preventing and managing risk and rewarding good customer behaviour.
The success of LeakBot shows how home insurers are also embracing sensor technology in partnership with others. Where a leak occurs, the temperature drops and the sensor triggers a notification being sent to the property owner via an app. The purpose is to help detect leaks quickly and minimise the resulting water damage.
In the two years since its launch, LeakBot has been adopted by 11 home insurance providers in the UK, Holland and Denmark. It is offered to customers as part of their home insurance packages, with the cost of the device borne by the insurer.
Although the insurance market has not moved as quickly as other areas of financial services in embracing fintech, there are lots of opportunities and it is a sector to watch.
The regulatory sandbox operated by the UK's Financial Conduct Authority (FCA), and similar projects elsewhere in the world, provide scope for insurtechs looking to provide regulated services the opportunity to test out new solutions with customers while working closely with the regulator.
There is a current example of this within the FCA's current cohort of sandbox testers, where a collaboration involving MoneyLine and an insurer is being tested. The companies are working together to explore the creation of a new home contents insurance product for low-income customers. Their aim is to provide continuous insurance cover for customers that may need to take a break from making payments and to increase cover amongst customers that are traditionally under-insured.
The shift to a system of 'open finance' is also likely to spur opportunities for collaboration, using the data insurers hold. The open banking regime, where customers can mandate banks to share their data with trusted third parties, has shown the way in this respect, and the data sharing initiative is expected to increasingly spill into other sectors of financial services.
Gaining greater access to data would make it easier for insurtechs to collaborate with insurers by allowing them to securely integrate their products and services to the data held by insurers via APIs, to offer data aggregation services such as price comparison.
The onus, however, is on industry to see the opportunities this presents – both for insurers and insurtechs – and to drive this initiative. This is because there does not appear to be a desire from policy makers or regulators to mandate such arrangements, in contrast to the open banking regime.
As insurers and insurtechs explore solutions that are built on data and greater connectivity, so they must be cognisant of the legal risks that apply.
The mass collection of data presents a risk of information overload, which can prevent businesses from using the information at their disposal in a useful fashion and can create difficulties in understanding exactly what data they are responsible for managing.
Where this data concerns customers there will be obligations under data protection law. The penalties for non-compliance that can now be imposed under the General Data Protection Regulation (GDPR) are severe – as cases involving British Airways and Marriott hotels have already demonstrated.
In the context of big data analytics, there is also the risk of discrimination stemming from algorithmic bias. Even if there is more risk attached to certain individuals or groups, insurers are not allowed to discriminate in relation to protected characteristics such as race, gender or disability.
The more granular segmentation of pools of customers, which big data analytics offers scope to provide, also carries the risk that 'high risk' individuals are deemed too expensive to insure.
With great power, comes great responsibility, and insurers need to be very careful when using big data to avoid unintended consequences and make sure that it is used in a way that benefits customers and is still consistent with their legal and regulatory responsibilities, such as treating customers fairly.