Insurtech is an area that has seen exponential growth over the last decade. It essentially involves the use of technology to deliver savings and efficiencies in the insurance value chain. While the primary drivers of insurtech are those firms which were established to nurture an insurtech proposition, more traditional insurers have also become more active in this space too. In many instances traditional insurers are collaborating with insurtechs and there have been many instances where insurers have acquired insurtech firms with a view to bolting-on those new technology-led capabilities. As well as this, advances in technology have made entry into the insurance market more attractive to firms whose main interests lie outside the sector.
Pervasiveness of Insurtech
Aspects of insurtech are already part of daily life – we can connect with our insurer through smartphone apps which can be used to find the best deal or even submit photos of damage in the event of an accident. Some insurers have opted to make use of virtual assistants and chat bots on their websites. Many motor insurers have embraced the use of telematics – a device which tracks several different aspects of your driving. Tesla offers insurance which is principally based on the individual's driving habits rather than other more traditional risk factors such as age, number of years' driving experience etc.
Some life insurers have begun to harvest the benefits of the "Internet of Things" through harvesting both biometric and lifestyle data supplied by wearable devices.
A particularly interesting aspect of insurtech in recent years has been the rise and rise of parametric insurance. Essentially, parametric solutions are a type of insurance that relates to the probability of a predefined event happening rather than indemnifying actual loss incurred. This means that a pre-agreed claim settlement is made by the insurer where the parameter is reached or exceeded, irrespective of actual physical loss involved. Blockchain technology has enabled parametric triggers to be built into payment systems, meaning that in many instances the policy holder does not even need to submit a claim.
Parametric insurance complements rather than replaces traditional insurance cover and its added advantage flows from the fact that parametric insurance can cover risks that have traditionally been uninsurable – making it particularly attractive to those who are risk averse and wish to reduce their risk exposure.
Benefits of Insurtech
Financial services regulators often speak of customer centricity – which is about putting the customer at the centre of what insurers do. In many ways, the developments and innovations that have been made possible by insurtech often improve the lot of the customer while also bringing measurable benefits to the insurer.
By reducing the amount of time required in the policy lifecycle, the harnessing of insurtech-solutions can help reduce costs to insurers meaning that those savings can potentially be reflected in lower premiums for customers.
The use of data driven decisions will lead to more accurately priced insurance. The full or partial automation of claims processes should mean that customer claims are settled more efficiently.
For decades customers have had to adapt to insurers preferences and ways of doing business – but the recognition by firms (aided by regulators) of the need to put a greater focus on their customers' demands and preferences has helped redress the imbalance and has empowered the customer. The continuing innovations that flow from insurtech will strengthen that power but it will also ensure that all types of insurers – whether traditional or born into the insurtech sector – will be well placed to meet the demands and expectations of their customers.
Challenges Posed by Insurtech
A corollary of increased accuracy in risk pricing is that some groups may find themselves priced out of the market due to their bespoke risk profile – a very live problem for some sectors in Ireland today.
Insurtech will enable insurers to be more agile and make critical decisions more quickly – these could include decisions to exit a line of business or even a market at relatively short notice, leading to a higher degree of unpredictability in the market.
Another key concern is that of personal privacy and security. The gathering, usage and storage of increasing amounts of data, within the parameters of what is permissible, is an ever-present challenge for insurers.
Related to the issue of data gathering is the whole question of fairness and discrimination. Ultra-precise insurance means all aspects of an individual's profile may be taken into account in determining the cost and scope of cover. Despite the fact that machine learning amongst other processes are carried out digitally and impartially, in-time a review of trends may reveal biases on characteristics that are discriminatory and therefore open to challenge.
The increasing use of A.I. is naturally limiting the extent of human involvement. This presents challenges around auditability and A.I. processes present a conundrum for regulators who will find it increasingly difficult to exercise the required level of oversight.
Potential for Development
In Ireland for Finance - the Government's strategy for the development of Ireland's international financial services, Ireland seeks to position itself as a global hub for Fintech, incorporating insurtech, and is well placed to achieve that objective with the country already hosting the top 10 global software companies and the top 10 "born-of-the-internet" companies.
The insurtech sector is believed to be growing at the rate of 41% each year1 and the indications are that Ireland is picking up a decent share of the spoils. In October 2020, Munich Re announced the investment of €16m in its Dublin-based insurtech project. Also notable was the Ardonagh Group's announcement (July 2021) that it will open a global data and risk management centre in Ireland. In addition to boosting employment, insurtech successes in Ireland also contribute to the development of the wider eco-system which can help more firms in this space to develop and thrive.
The insurance industry is subject to heavy regulation and solvency requirements which are directly linked to the risks that each firm has chosen to take on. Consumer protection lies at the heart of insurance regulation. While many drivers of insurtech come from outside the insurance industry, tending to be technology led and are perhaps less focused or less concerned with the regulatory aspects of insurance. The most successful insurtechs ensure that both bases are covered.
The usual regulatory challenge with fast-paced technologically driven developments remains that of how regulation can or should best keep apace. At this point, insurtech firms have to work within a regulatory framework which was designed by reference to the business models and activities of more traditional insurers. In scenarios like this, sensible regulatory authorities tend to observe developments from a safe distance, not wanting to hamper evolution and development of an area of business, particularly in its early stages.
Ireland has successfully established itself as a leading jurisdiction for the funds industry and also for aircraft leasing. There is no reason why Ireland cannot become a leading jurisdiction for insurtech. Ireland has a great advantage in already having a strong presence from the world's leading insurers.
However, if the insurtech sector is to develop to its full potential in Ireland it will be necessary for Ireland to be able to proclaim that it has a modern and efficient regulatory and supervisory framework – one which strikes a careful balance between providing the necessary level of protections for consumers while avoiding measures which needlessly stifle innovation. Rather than watching the steps being taken by policy makers and regulators in other jurisdictions, this is one area where Ireland needs to be brave, step up and take the lead.
1. According to research report entitled "Global Insurtech Market 2019-2023" by Technavio.
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