It has long been apparent that IT is rapidly changing the way businesses operate – insurance is no exclusion. While ‘InsurTech’ might sound like a sophisticated definition of a yet more complex discipline, it is important to note that there is no universally accepted definition of what InsurTech is.
A question might arise as to what has initiated the development of the ‘InsurTech’ symbiosis. The answer to this question lies in the mere fact of yet another industrial revolution era we are living in, which influences all aspects of our life.
The foundation of PayPal in 1999, which started the digital transformation of financial operations, namely online payments, and the introduction of online banking by Wells Fargo in 1995 have triggered the gradual digital transformation of the financial industry.
However, for the sake of understanding the causational link, it is worth outlining that the introduction of these and further innovations in the financial industry are not the ‘request’ but the ‘response’ to the changing demands of the market – in simple words, online services, social networks, and technological innovations have created the demand for more convenient financial services.
From the viewpoint of businesses, technological innovations have been beneficial in terms of cutting expenses and quicker delivery of their services to people. This has in turn raised transparency and strengthened confidence in the financial industry. The introduction of smartphones and other mobile devices, as well as the expanding ease of access to the internet, have gradually been accelerating the transformation of the market demand for insurance services.
The lemonade effect, trust, and utmost good faith
While Uberrima fides is a legal contractual principle in insurance, it is based on the fundamental principle of trust. An insurance company relies on the presumption that the insured is disclosing all material facts about the risks subject to insurance coverage.
The fundamental principles of trust and transparency exist throughout the life of the policy through other related legal principles, and these principles are bilateral – they apply to both policyholders and insurers. While the three centuries-old principles of ‘Uberrima fides’ might seem monumental and not dynamic, Lemonade, an InsurTech startup founded in 2015 has successfully revived this principle through applying technological advancements and behavioral science.
Lemonade co-founder and CEO Daniel Schreiber outlines one of the core problems in the insurance industry, in contrast to the clichéd reference to ‘Uberrima fides’ – ironically, it is the lack of trust towards insurers. Lemonade made the decision to eliminate doubts about insurers trying to decline claims through their Giveback approach. This means that policyholders are informed upfront how much the insurer’s profit margin would equal from the premium they pay, and they are able to decide to which charity the remaining funds should be directed to in case if there is a leftover from the balance of claims and premiums.
How technology helps build trust and transparency
The application of AI and other technologies facilitates the introduction of innovative business models. Technological advancements and IT solutions help insurers solve many well-known problems. Here are a few problems, which can be effectively solved through information technologies:
Faster claims payments
Faster claims payments are beneficial to insurers both financially and in terms of strengthening the image of the insurer. They create a positive perception of how the insurer handles its promise of paying valid claims, which in turn facilitates customer retention and reinforces transparency and trust towards the insurer.
Aside from the reputational benefits, it also enables insurers to optimize claims reserves and direct free funds to the business growth.
Reducing acquisition costs - insurance as a software
The COVID-19 has had an immense impact on how people and businesses buy insurance. There are many InsurTech companies out there now offering online insurance purchases. However, a new trend in insurance acquisitions is the introduction of insurance-as-a-software. InsurTech companies like EIP and simplesurance offer software for both insurers and retailers to enable their businesses to access innovative InsurTech platforms.
To put it in simple terms, insurers who do not have the resources to digitalize their services now have access to various easy-to-integrate software for online insurance purchases, claims management, fraud management, and more. At the same time, retailers are now able to sell insurance with a convenient integration of these technological solutions into their websites or mobile applications and offer white labeled insurance to their existing client base.
Reducing leakage through technology
AI-powered and other technological solutions help insurers automatize various claims management functions, and even end-to-end claims management for some personal lines claims. Digitalization helps insurers reduce human errors in analyzing claims information, thus reducing ‘leakage’. For instance, Tautona, a Lloyd’s Lab successful InsurTech company offers AI-powered claims management solutions, offering fraud detection and AI-powered claims adjustment software to insurers – again, yet another tool for the InsurTech industry to expand in geometric progression.
Fraud detection
While fraud detection is a major problem in the industry, with the developments in InsurTech and innovations in the insurance business model, insurers will face new challenges in IT security and fraud detection. Business interruption, pandemic outbreak, and cyber incidents shared the top three places as global risks according to the 2021 Allianz Risk Barometer. COVID-19 triggered an urgent digital transformation for many insurers, which brings new types of fraud risks in the face of cyber-crimes. Again, this is likely to create the demand for innovative software for fraud detection in the InsurTech industry.
The main conclusion, which derives from the very brief observation we have made, indicates an analogy with the domino effect – software development and technological advancements trigger innovations in insurance – the initiator is technology. ‘Old’ challenges such as insurance frauds, access to insurance and reinsurance, and risk analysis will be mitigated or eliminated over time. However, the tools we use for battling these challenges, such as AI or other software contain new risks, which in turn will trigger the demand for newer solutions.
It appears that a never-ending chain of technological developments has only recently started and it has a long way to go.