Technological advancements have contributed significantly to the insurance sector. The industry has undergone tremendous growth due to specific innovations. For instance, following the advent of GPS functionality, smartphones, and social media, the process of assessing claims by the clients has become more convenient. Furthermore, data analysis and legitimate interactions with clients have become key to maximising profits while keeping the customer satisfied (Solodkiy, 2018, para 3).
The insurance sector is a lucrative industry with an enormous market that for the past century has been relatively stagnant regarding creating new technological advancements. Some researchers argue that the ongoing wave of technological advancements and innovations being employed in the sector is a relatively new phenomenon (Curak, Lončar, and Poposki, 2009, p.31). Similarly, studies on the technical impact in the industry have been relatively lacking. Therefore, this wave of innovations is seen as a reactionary response to the aftermath effects of the 2008 financial crisis. The financial crisis led governments to develop new financial regulations and adopt more strict compliance enforcement (Marović, Njegomir, and Maksimović, 2010, p.135). These effects created tremendous opportunities for innovators and start-ups to disrupt the industry. Moreover, the banking sector through FinTech gave innovators in the insurance a more significant challenge to take on (Braun and Schreiber, 2017, p.34).
Mills and Tubiana (2013, p.4) have a contrary opinion regarding innovation in the insurance industry. The two scholars do not believe that innovation in the sector started recently. The authors argue that a good record of inventions in the industry has been masked by the conservative reputation of the sector. The researchers adopt Michael Raynor’s definition of innovation to argue their point. Michael Raynor, a distinguished researcher, and innovator with Deloitte wrote: “Trade-offs define the limit of what is possible at a point in time, not what is possible for all time … all innovation is about breaking trade-offs” (Mills and Tubiana, 2013, p.2). Therefore, according to Mills and Tubiana innovation does not necessarily translate to improved and new concepts and technologies. Changes could be anything, which is not necessarily new but anything created to achieve the desired outcome or expand the realms of possibility (Solodkiy, 2018, para 3). Clayton M. Christensen concurs with this argument citing that innovations can be categorised into three groups namely; Empowering, Sustaining, and Efficiency (Christensen and Raynor, 2013, p.21).
Empowering innovations transforms costly items that can only be afforded by a few individuals or markets to relatively cheaper items availed to mass-market and affordable to most. Empowering innovations broaden the market, for instance, the transformation from whole-life to term products. Sustaining innovations involves replacing older products with new ones that may be better but with essential similarity. According to Christensen, most of the current innovations in the insurance industry fall in this category (Christensen and Raynor, 2013, p.21). Lastly, efficiency innovations reduce the costs of distribution and production. Internet usage by most auto insurance writers is an excellent example of sustaining innovations (Mills and Tubiana, 2013, p.4).
Following this categorisation, Mills and Tubiana view most companies or even industries as always undertaking innovative ideas, whereas the other option may be a steady or swift decline into irrelevancy, similarly to what happened to blacksmiths or daily newspapers (Mills and Tubiana, 2013, p.4). However, some scholars maintain that before Insurtech, the insurance sector lacked innovative ideas. The most significant current invention in the insurance sector that threatens the industry’s conventional way of doing business is Insurtech technology. Financial analysts argue that Insurtech is to the Insurance sector what FinTech is to the banking sector (Clayton, 2013, para 2).
Customers Perception of Traditional Insurance
For a while, now customers have been wary of the insurance sector viewing it as a dishonest way of doing business. Furthermore, the incumbent has been traditionally associated with court battles with claimants to avoid paying legitimate claims. In addition, customers who have taken insurance covers before have experienced inefficiency in services provided. Outreville (2012, p.23) argues that several sides are exerting immense pressure on the insurance sector. On the one hand, the industry faces a wave of new regulatory frameworks, the influx of alternative capital, and the current low-interest rate offered in the market.
On another side, the sector is undergoing numerous ground-breaking transformation that has been brought about by the advanced digital assimilation in the industry. Watson (2017, p.247) also agrees with this point of view. Additionally, Watson writes that there are substantial alterations in the traditional demands and needs of the consumers. Advanced technologies have also created an environment of intense competition and in turn, eroded profit margins. In the current set up, success and profitability require comparability, a simplified process of making claims, high transparency, faster offers, and more personalised offerings (Watson, 2017, p.247; Skinner, 2018, para 2).
In a similar perspective, a global report on Insurtech adds to the above analogy by indicating that current millennial clients expect digital experiences in all the services they receive. Therefore, this has forced the insurance industry to react to these developments by digitising its value chain. However, since agility is crucial in a technology-driven and fast-moving market set up, the insurance brokers and companies that conventionally are slow to adapt to changes have had a fair share of challenges (Curak, Lončar, and Poposki, 2009, p.31).
Additionally, on top of these challenges, traditional insurers still have to face new competition from Insurtech and start-ups who are rapidly entering the insurance business in numerous numbers and revolutionising the industry while changing the rules in the process. Solodkiy (2018, para 8) in his article relates this circumstance to the proverb “one man’s sorrow is another man’s joy,” whereby these technology start-ups are reaping huge market shares while the well-known Insurance companies are struggling to remain relevant. The start-ups are transforming the industry and leading the industry at an accelerated pace because of innovative and fresh ideas, immediate reaction time to changes, and intuitive concepts.
Current Insurtech Landscape
Guy Fraker (2017), the head innovation officer for insurancethoughtleadership.com, writes that the insurance industry is currently undergoing a sea of transformational changes, which has no historical precedents or proxies. Fracker and colleagues are involved with the tasks of matching Insurtech firms with investors and executives, making him extremely knowledgeable of the industry landscape. He adds that no other sector has experienced what is currently being witnessed in the insurance sector. Fraker (2017) distinguishes the metamorphosis of the insurance sector from other areas by establishing that the simultaneous technological advancements in the industry are both external and internal to the industry.
Most authors are considering Insurtech as promoting a series of technological advancements that are severely altering the insurance value chain and providing solutions using connected and exponential technologies to offer customised insurance products while also saving money for insurers (Nicoletti, 2017, p.221; Curak, Lončar, and Poposki, 2009, p.29). Skinner (2018, para 3), for instance, opines in his article that Insurtech start-ups are not just ordinary insurance companies using techniques such as internet of things (IoT), application programming interfaces (APIs) or artificial intelligence (AI) to enhance the insurance value chain. Instead, Insurtech is a transformation from personal property and automobiles’ on-demand insurance to customer focus products that enhance brand loyalty and customer retention (Braun and Schreiber, 2017, p.23). Therefore, Insurtech provides new insurance landscape through a digitally connected environment. Similarly, a report by OECD (2017) indicates that numerous areas in the overall financial sector are being challenged due to the technological advancements. In addition, the report identifies the most impacted regions to be underwriting, risk products, risk awareness, customer engagement, and the customer experience (OECD 2017, p. 7-9).
Catlin, Lorenz, Münstermann, Olesen, and Ricciardi (2018, para 7) in an article in Forbes magazine analyse the current landscape of Insurtech and finds that some countries have lowered regulatory barriers to encourage Insurtech companies to try their innovative ideas in those markets. The United Kingdom and Australia are some of the states that exempt Insurtech start-ups from specific regulations that are mandatory to other traditional insurance firms.
Insurtech has over the past few years grown and gained a considerable market share in the insurance space. Moreover, Insurtech start-up ventures have progressed from the initial financing rounds of seed and venture-capital to advanced rounds of funding. Cartin et al., (2018, para 5) note that in 2015, the average investment per Insurtech rose significantly to USD 22 million from the initial USD 5 million in 2011.
The global report on Insurtech landscape indicates that although the pioneering market for Insurtech companies is in the United States, most of these firms have their headquarters in other countries, especially in Europe (Cartin et al., 2018, para 4). The reason is that the favourable policies in Europe that encourage their establishments. Only forty-six percent of Insurtech start-ups have headquarters in the United States while forty percent are based in Europe with Germany and the United Kingdom hosting most of the companies (Cartin et al., 2018, para 5). Additionally, fourteen percent of the start-ups are headquartered in the Asia-Pacific regions although analysts predict that the firms will experience tremendous growth in the coming years (Cartin et al., 2018, para 4).
The global report on Insurtech further indicates that many of these technology start-ups have already laid out plans to operate beyond the simple notions of the current value chain digitisation. Instead, they are using big data analysis to predict future customer needs and anticipate critical trends hence taking a market leadership position in the industry by offering smart products and solutions. Most Insurtech start-ups have innovative business models such that analysts and investors in the insurance industry have raised concerns that the new companies will soon put incumbent insurance providers out of business through disruption of the conventional insurance markets. Therefore, it is not surprising that the fast-rising Insurtech landscape is currently one of the most discussed topics in the insurance sector.
Previously, the onset of FinTech start-ups dominated the financial services sector discussions. Raynor (2011, p.7) opines that FinTech uses the same concepts and technological constructs in the banking and finance sector as Insurtech in the insurance industry. The only difference between FinTech and Insurtech is that the latter started slowly and encountered considerable delay but then picked up the pace. In support of Raynor’s argument, Cartin et al., (2018, para 5) looks at the global funding trends in the sector and discovers a significant increase from the initial volume of a paltry one hundred and forty million US dollars in 2011, which has since risen tremendously to almost two billion US dollars in 2016.
The Theory of Insurtech that Encourages Customers to Pursue Good Health
Dr. Volpp (2018, p.4) writes that extending amounts of cases made in perspective of consistent diseases that impact a person’s ability to work, causing cash related strain and infringing upon personal growth. Making sense of how to end this challenge to people’s lives is essential to enable individuals to live better and increasingly happy lives with their families and for a logically sensible future for a nation’s prosperity. Using behavioural economics those involved with preventive health programs in insurtech encourage high participation in healthy behaviour by providing incentives but with the intention that consumers will be able to retain the healthy habits even after withdrawal of incentives (Volpp 2018, p. 15). To help address this issue, Insurtech technology is bringing the world's greatest prosperity and wellbeing program such as Vitality programs to consumers. Using the latest research in lead money related angles and prosperity impulses, Vitality is arranged by scholastics and prosperity masters to ask people to make the essential steps towards healthy living and, even more fundamentally, to make these lifestyle changes enduring (Volpp, 2018, p.5).
Besides Vitality programs, Polanski adds that Insurtech technology is encouraging healthy lifestyles among consumers through the collection of big data from products to clients such as wearables. Likewise, the mindful prosperity maker is determinedly checked by Garmin harbinger 735XT watch, Garmin vivofit 2, Apple Watch variation 2, and the iPhone prosperity application. The approval of customers' data to a backup plan may provoke life methodology that offers moving additional security rates (Polanski, 2018, para 10). Furthermore, some Insurtech firms such as Discovery deserve acclaim, which already offers, demonstrates, and compensates restorative inclusion clients for exercise, prosperity checks, eating good and extraordinary prosperity markers. As such, centres may be grabbed through a wearable device that tracks normal heartbeat and length of action development (Polanski, 2018, para 12).
Previously, traditional insurers using the actuarial method naturally expected clients to take health insurance coverage and did little to inspire a positive, healthy lifestyle. Contrastingly, Insurtech technology and start-ups go overboard to utilise big data, collection of which requires the active participation of clients (Nicoletti, 2017, p 235). As such, Insurtech is genuinely in their standard scope of recognition when they conduct an ordinary prosperity survey with a medical history and current physical examinations and consequently have amasingly mind-blowing chronicled data. This standard examination will regardless prompt the best premium rates despite for high totals insureds with a couple of impedances (Polinski, 2018, para 13). In turn, customers can afford customised health insurance covers that enhance healthy living.
In another article, essayist Gregory Freeman forms that Insurtech technology start-ups are re-examining the insurance business, and their prosperity depends on the progress of clients, which traditional insurers have neglected (Freeman 2018, para 1). Fox expects Insurtech to bother the social protection industry likewise by improving ways to deal with publicise restorative inclusion, playing into the procedure with an example for association (Freeman, 2018, para 9). Therefore, Insurtech is pushing for more noteworthy, and logically creative prosperity needs to advance, in a manner that backs up consumers that are more significant while the relatively normal plans will persevere and incur more charges (Curak, Lončar, and Poposki, 2009, p.29).
The Theory of Insurtech Making Uninsurable Customers Pay More
Sophisticated use of big data has created an “underclass” of people who cannot afford insurance. According to the latest study by Chartered Institute of Insurance, some consumers could miss some types of cover altogether if they are flagged as a high level by insurers. The future of the insurance sector underwriting greatly depends on big data analysis. Insurtech start-ups have invested millions in new systems to collect consumer behaviour data to understand better the information that they will use to determine each consumer’s risk level. By better analysing each policyholder’s risks, Insurtech is hoping to accurately price insurance covers as well as advising clients on alternative actions to avoid incurring loss against the customers has taken cover (Ralph, 2018).
However, Akintoye, Beck and Hardcastle (2008, p.243) writes that a study by Chartered Institute of Insurance indicated that using data to price insurance products threatens the foundation concept of the industry, which is pooling risk. Significant data usage can be advantageous or disadvantageous to the consumer. Therefore, it is critical that insurers carefully consider ignoring the principle of risk pooling for individual pricing (Curak, Lončar, and Poposki, 2009, p.29). For the broader public good, insurance should disregard individual pricing approach. The effectiveness of insurance cover relies significantly on the principle of pooling risk. Hence, individual pricing may lead to insurers identifying some people as high risk and in turn, priced out of insurance altogether. In effect, big data could lead to insurers categorising a group of people as uninsurable. Although sometimes this high-risk classification may be caused by modifiable trait such as reckless driving, sometimes it is a factor that a person has no control over (Ralph, 2018).
Insurers are increasingly becoming more interested in securing new markets or expanding their market shares and increasing profit margins. Availability of price comparison websites has made it easier for consumers to compare prices for insurance covers and consequently shop around for the best prices in the market. Insurers have been forced to adapt to these factors by developing tools and techniques for price optimisation (Cartin et al.m 2018, para 7). Consequently, product commoditisation by insurers has shifted consumers focus from the insurance products to their prices. This quantitative instead of qualitative approach to insurance services has enabled insurance companies to collect data on consumer preferences and habits from price comparison websites (Akintoye, Beck, and Hardcastlme, 2008, p.285). The data obtained from these websites are then analysed and used to customise products accordingly. Insurers are also using this information to charge different prices to different customers undertaking the same insurance cover, otherwise known as dual-pricing (Braun and Schreiber, 2017, p.231).
Furthermore, Insurers are increasingly exploiting price elasticity to ensure that they charge the minimal possible price to maintain the business. The insurance consumers are the biggest beneficiary as they can negotiate the best prices in the market. Furthermore, insurers are customising products to the specific demands of the consumers. Similarly, insurers continue to exploit as much data as possible, and in some cases, they can obtain increases in premium up to certain levels that the targeted consumers are willing to pay (Braun and Schreiber, 2017, p.25). This approach has faced criticism from various sectors including regulators in the industry, defining it as "price discrimination." This approach goes against current pricing using the actuarial technique that used the actual and forecasted cost components of the cover to determine its price (Raynor, 2011, p.12).
Customers’ Perception/Feeling of Current Insurtech
Kocianski writes that although Insurtech is a subset of Fintech, which has been broadly researched, the innovation has elicited minimal interest from scholars. Part of the reason, she argues, is an issue of semantics whereby Fintech has an extensive coverage while Insurtech on the other end, does not. Traditionally, consumers have had a bad experience with the insurance sector. The trust in the sector further plummeted after the 2008 financial crisis. Customers believe that insurers will go to extreme ends to avoid paying claims. Correspondingly, insurers charges are believed to be exorbitant thus adding to the resentment of the sector (Kocianski, 2018).
This negative perception of the sector still exists despite Insurtech providing consumers with more innovative products as well as breaking off from some traditional insurance practices. Besides, personal experiences cause this negative perception. However, the main problem is that consumers do not understand how the insurance industry operates. Therefore, when the term Insurtech is involved, consumers do not understand what it means for them. The challenge becomes even more acute especially in markets dominated by websites for comparing prices. Under such setups, consumers usually go for cheaper policies rather than the right one (Kocianski, 2018).
Summary
There is a literature gap in the negative potential of the Insurtech. Little information is available that has critically evaluated the possibility of the Insurtech negatively influencing the insurance sector. However, the available studies all conclude that this disruptive invention is beneficial to the industry. There are significant similarities between FinTech and Insurtech as both have disrupted their various sectors. However, Insurtech, unlike FinTech, affects the insurance industry both internally and externally. In this respect, incumbent insurance companies should learn from the practices and operations that Insurtech firms employ. Alternatively, mainstream insurers should consider collaborating with Insurtech start-ups. However, the latter option can be an even more significant challenge.
Although acquiring a start-up firm or investing in one usually is more comfortable, integrating its technology, philosophy, and people into mainstream business operations could be very challenging. However, partnerships are the only option available to traditional insurers. Therefore, since both companies and collaborators are scheduled to obtain maximum benefit from the partnership agreement, care must be taken during its formation to ensure a win-win strategy (Cappiello, 2018b, p.33). Insurtech firms will gravely benefit by having access to the incumbent’s massive client base upon which it would test out its capabilities and propositions. Similarly, incumbent insurers are most likely to benefit from the convenient and accelerated ways of achieving its business objectives, operations, propositions, and enhance customer value as well.
Interestingly, Cartin et al. (2018, para 10) argue that collaborating with Insurtech start-ups is not the only option available to incumbents in the ongoing innovation conundrum. He continues to claim that most insurance companies are already leveraging innovative products and other strategies to handle in-house business challenges, whereas other firms are holding design sprints to create new innovative offerings and improve the experiences of their clients. Insurers have a plethora of options on how to innovatively stay relevant and curtail competition from Insurtech start-ups (Cappiello, 2018a, p.31). Furthermore, with the financial strengths that most incumbent firms have, these options could be used to drive innovation within their insurance industry or even create disruption elsewhere. However, incumbents will have to focus on three crucial activities (Gross, 2011, para 3; Jubraj, Watson and Tottman, 2017, p.5).
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