What is insurtech? It is just what the name suggests: the combination of insurance and technology. Or, perhaps more accurately, the rise and use of a wide range of technologies within the insurance industry, from underwriting and claims to administrative functions. What has always been an extremely paper-intensive industry is now gradually dragging itself into the digital age. The disruption of an age-old industry by the onset of a digital revolution.
Digital transformation. It is what it is. The world currently finds itself in a new industrial revolution — the fourth industrial revolution or “4iR” — though it sounds silly to call it that. As it is anything but industrial. The transformation involves many things: the rise of automation and artificial intelligence within the everyday work process, either replacing employment or enhancing employment, depending on one’s viewpoint. The use of blockchain technology and smart contracts, simplifying claims management and underwriting processes.
A Quick Example: Lemonade Inc.
A quick example and one of the poster children of the insurtech movement: Lemonade Insurance Company. Its CEO and co-founder Daniel Schreiber once stated:
“The insurance brands we know today came of an age in the era of the horse-drawn carriage, but insurance is best when powered by AI and behavioural economics, which is why we believe that companies built from scratch, on a digital and with a social mission, will enjoy a structural advantage for decades to come.”
What does Lemonade do? Using a mix of artificial intelligence, behavioural economics and chatbots, it is able to allow its customers to be able to download and use apps, so rather than liaise with human beings when having to deal with an insurance claim — or employing the use of any insurance broker — their policies are handed automatically. Its most famous claim to fame was its ability to file and pay and claim a claim in three seconds. Plus, a portion of its underwriting profits goes to charity.
At its core, it is digital peer-to-peer insurance, similar to a mutual insurance company, except replacing brokers with AI. Its primary (current) limitation is that it only really can handle small claims.
Despite Lemonade’s limitations, as an example of the potential of how technology can disrupt a traditional industry, it is a good one.
So… insurance. Paperwork. Tradition. Regulation. Protection.
Innovation? It is slow to move, but even Lloyds is progressing into the world of technology. There are many, many new technologies which are becoming relevant to the insurance world – Blockchain, artificial intelligence and machine learning, big data, robotics, healthtech, the internet of things and particularly the use of wearables.
Insurtech can really comprise of a number of things, including insurance vehicles looking to re-invent themselves by embracing new technologies, potential new insurers establishing themselves to write insurance in a new innovative way, or simply new ventures that are offering specialised tech products to insurers and other market participants.
A Jurisdiction to Review: Bermuda
Bermuda, once called the “insurance laboratory of the world”, and its regulator, the Bermuda Monetary Authority (BMA) is now working on an insurtech innovation: it not only provides for an insurtech “Innovation Hub”, which promotes insurtech companies to exchange ideas and information with the BMA, but also an insurtech “regulatory sandbox”.
The insurtech sandbox approach is an interesting one, given Bermuda’s size within the global reinsurance world (being the second largest reinsurance centre worldwide). At its core, the sandbox allows for the formation of new insurance (or intermediary) entities, either as brand new start-ups or affiliates of existing insurers. These new companies will, for a period of up to one year (which may possibly be extended), operate using and experimenting with their proposed new technologies and provide their insurance products and services to clients in a controlled environment, under the close scrutiny of the BMA, with the BMA determining what legal and regulatory aspects of the existing legislation should apply to them in order to ensure policyholder protection.
The notion is that within or following the one year of progress, an entity within the sandbox could “graduate” from it and become a fully licensed insurer. These insurers can range from either small claims insurers (a la Lemonade) to full-blown commercial reinsurers.
The benefits to this approach include various aspects to the proposed entity wanting to enter the sandbox: (1) an opportunity to test its technology before heading into the formal insurance market, (2) allowing it time to work with the BMA as its main regulator to ensure everything being proposed “works”, and (3) helping reduce the cost of regulatory uncertainty a start-up would otherwise face.
These insurtech sandbox regulations are still very formative, so there is still some time to see how they will be implemented and when they are, how successful they will be, but bearing in mind Bermuda’s stellar reputation in the insurance, reinsurance and alternative capital markets, it is hard to see them not being an attractive proposition for both existing players and new start-ups.
So, innovation hubs, sandboxes, blockchain, behavioural economics and AI. Is the reinsurance industry now finally at a tipping point?
There are the naysayers. Innovation hubs are really just means for companies which carry out tech-related activities to liaise with regulators within their jurisdictions. Blockchain-based, self-executing insurance contracts or ones which are done on a peer-to-peer basis using AI are actually pretty dumb and fairly limited to small claims for the time being. And sandboxes will still need a good degree of time to see if they succeed. And the use of a chatbot, robot or any form or AI can never replace the logic and analytical skills which an actual underwriter or claims analyst will be able to provide. In short, the argument is that the technology driving insurtech is going to take time, not to mention loads of regulatory requirements which underpin the industry.
But relating to that last point: wherever one is on the existing insurtech revolutionary curve, for now, the need is there for regulators to both innovate and adjust, and for companies to expand and adjust to take into account the needs of their customers who seek quicker and more efficient service.
Whether one is an insurance vehicle which is competing with others, or an insurance jurisdiction competing against similar ones, the industry is, like it or not, transforming into a new digital era. Soon, it will no longer be paper based. And those insurers who fail to realise that will have to do so soon, like it or not.
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