What happens when the tradition of insurance combines with cutting-edge technology? That is right, the result is called Insurtech. Being a subdivision of fintech, what this new business model offers is high levels of flexibility and personalization for end-customers as well as considerable cost savings and process efficiency for the providers. Just as nothing is entirely black or white, there are some pros and cons that need to be considered when it comes to what exactly insurtech consists of and what its applications and limitations are.
From my experience working in a bespoke software development company, I am now fully aware that new and innovative technologies are so valuable for the improvement of our daily lives in the digital era we live in. Especially during a pandemic, when physical contacts should be restricted, we almost solely rely on technology to manage our day-to-day errands. Insurance has always been a sensitive topic as people want both reliable insurance partners and new innovative offers to fit their changing needs. That is why in this article, we will explore the advantages and disadvantages of insurtech-related solutions.
Pros: Why to Adopt Insurtech?
Firstly, we will dive into the pros to discover how insurtech brings value to both insurers and policyholders. Some of the main focus areas of insurtech are growth and reduced acquisition expenses. This is achieved primarily when insurtechs look for gaps to fill e.g unsaturated and untapped markets of unmet needs by industry incumbents. The use of artificial intelligence (AI) and machine learning (ML), drones or blockchain technology, which offer full automation and high connectivity is what insurtechs can hope to disrupt the traditional insurance with.
A direct rivalry with incumbents is not a smart move especially for new players, that’s why insurtechs avoid direct targeting of customers. They put most of their efforts on individually tailored offers that appeal to many of the millennials or early zoomers (but older generations too) because of their inner desire for individuality and flexibility. Through AI and ML insurtech apps for example can gather insights about their users, analyse it and then provide a unique offer. A young man borrows a friend’s car for two days and needs two-day insurance without any further commitment. This kind of customizable insurance policies are highly attractive for people who know what they need, for how long exactly and expect appropriate solutions to be available. Insurtechs make it possible and easy that personalized needs are met. Within a few clicks.
2. Peer-to-Peer Insurance
This type of insurance service, often abbreviated as P2P insurance, represents a convenient product that allows a group of people to pool their capital, self-organize and self-administer their insurance. P2P appeals to savvy consumers who want to enjoy transparency, the feeling of control towards an insurance provider. Although this concept is not brand new, the insurtech era helped boost its relevance in the sharing economy.
A practical comparison between traditional insurance models and new insurtech solutions may be helpful to illustrate the example. Incumbents usually keep hold of reserved premiums from claims, whereas in P2P in case fewer claims are filed than expected, the premiums (residual funds) can be shared by all insurance members. In P2P blockchain technology and cryptocurrencies are also used to further reduce transaction costs and for secure digital wallet management.
3. Limits the Scope of Disagreement
Sometimes conflicts may arise between insured policyholders and insurers which may lead to cancellation. On one hand, different interests regarding the claim validation or in some cases damage claim acceptance might slow down claim processing or even lead to overall disapproval.
On the other hand, clients expect a prompt reaction from their insurance and strict adherence to agreed policies and disagreements can worsen customer experience and cause dissatisfaction. To decrease the scope of disagreement on an insurance claim, insurtechs are often flexible and can immediate automatic enforcements of contracts. This feature is entirely thanks to technological innovations and is promising because users get greater satisfaction due to transparent policy handling.
Speaking of transparency, for emerging companies in the technological era, it is of crucial importance that their digital transparency is impeccable. This could be achieved through blockchain, for example, a technology that is encrypted by design without the chance of later modification. Sensitive data is vulnerable to improper use in the wrong hands so everyone on the insurance scene aiming to stay there longer should keep this in mind and take responsible actions to ensure that data is handled transparently. Even though insurtech companies answer the need for transparency required by customers, it is always better when changes happen at higher national or international levels. This makes it clear that transparent data collection is not wishful thinking but a must and the recent implementation of the General Data Protection Regulation (GDPR) in the EU is a good example of relevant data protection legislation.
Cons: Where is it Still Lacking?
1. Privacy Challenges
Among the biggest concerns for digitally-based businesses is the privacy topic. Many users are concerned about how their personal data is being collected, to what extent and for what purpose it is being used and if it is sold for financial gain only. Insurtech as an emerging business model may raise such concerns, but let’s face it: if personal data is misused this soon gets noticed and the damaged reputation of the firm involved is the slightest problem they’re going to be facing. The tradeoff for customisation, which is a major component of insurtech is exactly personal data. Reputable companies need to make sure they put enough effort and design their services in a way that data protection is a top priority and data collection is compliant to the particular industry (e.g medical, travel, real estate etc.)
2. Different Regulations
Insurtechs push boundaries in the sector and raise questions about how the insurance industry will deal with their regulation. It is believed that although technologies are used to the betterment of processes and increase client satisfaction, challenges will remain until algorithmic underwriting (risk evaluation and analysis and price establishment) is regulated. Another concern is the anti-rebating laws that prohibit insurers from providing any other services except insurance. This issue is relevant because some insurtech apps offer direct robo-advisors or virtual agents which require separate licencing. In the future we will see how these challenges unfold and what direction insurtechs will take.
3. Financial Uncertainty
Generally, in case of a traditional business bankruptcy such as a national bank or insurance company, many of them can rely on governmental financial help to survive and recover. Insurtechs are a relatively new fintech creation so it is rather uncertain how financial hardships will be handled, whether or not it would be acceptable to receive government funds to stay afloat. Even in the USA, each state regards different criteria for user protection in this kind of situation, so it will take time until this challenge ahead of insurtechs is overcome.