Bringing fintech innovation to the insurance market
Future of Fintech 2015 has been deemed the year of technology transformation in the insurance sector. The speed of change in an industry long characterised as a slow adaptor of technology is gathering pace.
The fintech story in recent years has concentrated on consumer facing services, but the same dynamics that have been driving this change - leveraging new technologies and disruptive business models to lower costs and barriers to entry - are enabling development of new products and services for previously underserved insurance markets.
According to Swiss Re, the UK population is significantly underinsured, with a total protection gap of £2.3 trillion. Only 1 in 3 households with incomes below £20,000 have life insurance, one third of households have no contents insurance, rendering vulnerable households exposed.
The insurance sector shares challenges with banking in the provision of affordable, appropriate products. Incumbents are hindered by outdated, inflexible legacy systems and pricing mechanisms too complex to adapt to the underinsured. The typical product offering is too expensive for low-income groups. The pricing of risk, using standard models, cannot assess these market segments.
Technology is creating the potential for insurance companies to serve low income consumers. Advances in a range of technologies; data analytics, biometric identification, psychometric testing and the rise of mobile are now being applied to the insurance sector, broadening the range of consumers to whom it is profitable to supply insurance products and enabling the creation of new, personalised insurance products.
At the heart of insurance is pricing risk. A number of online platforms that use big data analysis to calculate risk are broadening the pool of people who can be assessed and provided with suitable products. Using both available and unorthodox sources of data, platforms can analyse pools of data that allow for more accurate, targeted pricing of risk.
The data generated by telematics allows for a finer assessment of risk and reduces insurance premiums. Discounts in life or health insurance can be offered to those who are able to demonstrate healthy lifestyles using wearables, rewarding and incentivising low risk behaviour.
The growth of fintech will continue to drive change across financial services, and the insurance sector will not be immune from disruption. The need to meet changing customer demand will force the challenges of legacy systems to be addressed. Potential competitors, spurred by the evolution of technology, may emerge. A Forrester Research report Trends 2014: European Digital Insurance, noted that European companies are falling behind and startups and companies in the manufacturing, utility and telecoms markets could take business from traditional insurers.
With that disruption comes the opportunity to meet the additional challenges of incorporating millions of would be clients into the financial system and provide them with insurance products that have the potential to protect them from the impact of life changing shocks.