Is insurtech ready to disrupt the stodgy, $1 trillion insurance business in the same way fintech is upending financial services? According to CB Insights, insurtech startup funding reached $2.65 billion in 2015, more than triple the previous year as venture capital woke up to the coming disruption in the insurance business.
The insurtech industry is still in its infancy, so it's perhaps not disrupting with the same velocity as fintech yet, but that's not for a lack of innovation in the space.
Consider startup Trov, which has begun selling a unique type of mobile insurance policy in Australia and plans to introduce the service in the U.S. next year. Instead of selling you a policy for a fixed dollar amount, as traditional insurance companies do, Trov gets you to insure only those personal items that you really care about, such as your computer and hi-fi.
Once you've listed your items on the Trov app using its mobile platform, you assign a value and then agree to a premium for covering just those items. If something happens, filing a claim on the app is as simple as sending a couple of text messages.
Then there are peer-to-peer insurers such as Berlin-based Friendsurance, the UK's Guevara and Silicon Valley's Lemonade. (Could the names be any less insurance-like?) These startups take a page from the sharing economy by asking clients to form small pools for things like car insurance. The premiums are paid into a claims pool. Then, if there is money left over at the end of the year because few claims were filed, the insured get some of their money back. That's likely to be a hit with young drivers, who get clobbered by insurance companies just for being young regardless of their driving records.
This new brand of insurers is operating on an intriguing theory of behavioral finance: that a small group of peers with a common economic interest (low rates) will get together and suppress fraud (a big headache and cost for traditional insurance companies) because everybody wins if there are few claims. Lemonade has even hired Dan Ariely the best-selling behavioral finance expert, as an adviser.
How Insurtech Reduces Operational Costs and Friction
One thing most of these startups are taking direct aim at is the bloated staff at some of the old-school insurers. Why use an expensive human agent when you can answer questions though an online portal? Startup SaleMove provides insurtech companies with a platform to snag their customers in live interaction as they cruise their websites. Products may be tailored for the customers to complete once they are hooked online.
Chinese insurer Zhong An fully seeks to capitalize on digital tools. The company sells property and auto insurance solely through digital channels, mostly on the popular Alibaba website. Zhong An says it has written more 3.6 billion policies since its founding.
Another factor that may propel digital startups is the available of Big Data and machine learning on a huge number of insurable trends, which may make it possible to write very select personal insurance policies. This highlights a trend toward prevention rather than simply protection. So one firm, Metromile, is offering low rates to drivers who don't drive much, which is verified by getting a readout from the car's GPS data.
Similar efforts are underway to write personal health insurance policies for people who stay slim and exercise regularly, which can be ascertained by use of such dedicated devices as the Apple Watch or a Fitbit, which would tell insurers how many steps on average a customer takes every day, or an electronic, wi-fi connected scale, which could send weight information to a central computer, which would compare it with other data to make a more accurate prediction of likely disease-related costs.
One note of caution: most insurance companies are able to survive big payouts – think Hurricane Sandy – thanks to the Law of Large Numbers. This means they have millions of customers, whose premiums are stashed away in safe investments that gives the firms extraordinary ability to ride out just about any crisis. Small startups may find that a challenge when the crunch comes.
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