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Facing up to insurtech

Insurtech is on its way, and the insurance industry must brace for major change.

A new report from the International Association of Insurance Supervisors (IAIS) casts a comprehensive eye over the insurtech landscape, and its findings are a wake-up call not just for insurers, but for regulators and consumers too.

At the same time, the Australian Competition and Consumer Commission has warned that not all the consequences of fast-moving technologies and digital disruption are positive for the people it aims to protect.

The IAIS believes a range of push and pull factors make the ascendance of insurtech a virtual inevitability.

“Every process in the value chain, from product development to claims management, is being revolutionised by technological innovations – the pricing and underwriting processes being the most impacted.”

In 2014 about $US800 million ($1.05 billion) was invested in insurtech, but by 2015 this had more than tripled to $US2.5 billion ($3.29 billion).

Investment and intellectual firepower is increasingly being targeted at insurance, the report says, and changing consumer demands, particularly from “always online” Millennials, will have a fundamental impact on product development.

“As the banking industry becomes more competitive, some see insurance as the new frontier,” the report says.

“In addition, many entrepreneurs are seeking to exploit what they see as weaknesses in the incumbents’ business models – for instance, legacy IT systems and inertia in responding to changing consumer demands, such as a sharing economy.”

The report highlights a number of key innovations already affecting insurance, including the Internet of Things, telematics, Big Data, comparators and robo-advice, artificial intelligence, distributed ledger technology and peer-to-peer insurance.

“These technological innovations and new business models are likely to result in changes in the nature and type of risks covered, as well as potentially changing the relationship between insurers and policyholders,” it says.

Established insurers’ responses to insurtech can vary – it can be seen as either a threat or an opportunity.

Three out of four insurers believe some part of their business is at risk of disruption and 90% fear losing part of their business to start-ups, but many also see the benefits of collaboration.

“Given the enabling role insurtech firms are playing, as well as the challenges facing the established insurance sector and the barriers to entry for new businesses seeking to act alone, collaboration could result in mutual benefit – for the insurers and for customers.”

The IAIS says it is impossible to know the full impact of insurtech at this stage, so it has analysed three possible scenarios:

  • Incumbents successfully maintaining the customer relationship
  • Fragmentation of the insurance value chain with incumbents no longer in control
  • Big technology groups squeezing out traditional insurers.

The report concludes insurtech could reduce insurance market competitiveness over the long term, cause traditional insurers to exit the market and result in more individualised insurance products that could affect consumer choice.

It could also increase insurance sector interconnectedness through the use of a limited number of technology platforms, and lead to changes in insurer business models if profit margins come under pressure.

While it could be good news for many consumers, others may be threatened.

“Some of the innovations may disrupt the conventional risk pooling that is common to insurance,” the report says.

“The collection of data on insurer risk or policyholders may enable a more granular risk categorisation … and may lead to issues around affordability of certain insurance products, possibly even leading to exclusion.”

There may also be issues concerning the use, ownership and protection of data.

The report flags several challenges for insurance supervisors, including balancing the risks and benefits of insurtech; creating an environment that fosters innovation; evaluating and adjusting the prudential regulation framework; and considering the adequacy of current reporting requirements.

“Fintech innovations have the potential to change fundamentally the way the insurance sector serves policyholders,” Chairman of the IAIS Executive Committee Victoria Saporta says.

“Because of both the scope and pace of change, insurance supervisors must be alert to new developments and make necessary adjustments in their supervisory practices and skills.”

The report is clear that while the precise impact of insurtech is still unknown, a fundamental shift is under way, driven by unstoppable forces.

Insurtech can no longer be dumped in the “too hard” file – it’s time to face up to what’s coming or pay a heavy price.

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