Canvassing Current InsurTech Trends: powering value, innovation, insurance penetration and social impact

The intersection of insurance and technology, known as InsurTech, has become a powerful force for innovation and efficiency in the insurance industry. Despite economic downturns and concerns over stagflation, InsurTech firms that prioritize profitability and efficiency are finding a landscape ripe with opportunities. The challenges are numerous such as COVID19 pandemic, the Russia-Ukraine war, commodity inflation super-cycle, numerous natural catastrophes, transition brought about by climate change, squeezing VC funding leading to bankruptcies and so on. But as we always say as actuaries that ‘risk is opportunity’ so these tough times can separate the wheat from the chaff. In good times, the chaff includes InsurTech companies that focus relentlessly on growth hacking. These companies often neglect unit economies, leading to excessive cash burn. Ultimately, they struggle or fail when new funding dries up in tough times. The wheat or responsible players are those who do not overshoot their expenses or sacrifice profitability for growth and so are more resilient to shocks during economic downturns.

In other words, we can say that in times of crisis, systematic risks are brought to the front. In normal times, businesses sweep specific risks under the rug due to leadership’s keen focus on profitability and cost minimization. This leads to pent-up specific risks turning into systematic risks. Risk management can then be described as a way to “deconstruct” the current business practices so that we can “reconstruct” them into something that is more resilient to shocks.

Customization and Personalization

One of the most significant trends in InsurTech is the move towards hyper-personalization of insurance products. Thanks to big data analytics and machine learning algorithms, InsurTechs can tailor policies to individual risk profiles. This approach not only improves customer satisfaction by providing more relevant coverage options but also allows insurers to price risk more accurately, thereby increasing profitability.

AI and Automation

Artificial Intelligence (AI) and automation are revolutionizing claims processing and underwriting. AI-driven chatbots and virtual assistants are handling customer inquiries and claims, reducing the need for human intervention and speeding up service delivery. This automation extends to underwriting, where AI models can assess risks and process applications with little to no human involvement, increasing efficiency and reducing costs. The usual disappointing results under chatbots are getting a new lease of life due to the spectacular recent achievements of ChatGPT and generative AI.

Telematics and Wellness

Telematics, which involves the use of devices to monitor and transmit real-time data about an individual's driving behavior, is transforming auto insurance. Usage-based insurance (UBI) policies that leverage telematics data are increasingly popular, rewarding safe drivers with lower premiums and providing insurers with a wealth of data to assess risk more accurately. Wellness policies with fitness trackers and rewards upon leading healthy lifestyle are increasing in popularity for life and health insurance policies as well to reduce claim propensity and improve health outcomes.

Peer-to-Peer (P2P) Insurance

P2P insurance, a model where a group of individuals pool their capital to insure against a common risk, is gaining traction. This model emphasizes community and can lead to lower costs and greater transparency. InsurTechs are leveraging blockchain and smart contracts to facilitate P2P transactions, ensuring trust and security among participants. P2P emphasizes ethical business model similar to mutuals and Islamic takaful in order to increase trust in insurance by the customers.

Blockchain, Smart Contracts and DeFi

Blockchain technology is being used to create immutable records of insurance contracts, known as smart contracts. These self-executing contracts with the terms of the agreement directly written into lines of code can automate claim settlements and payouts, reducing the potential for fraud and increasing trust between the insurer and the insured. DeFi aims to remove or minimize trust and act as a digital marketplace similar to Lloyd’s where people can act as underwriter of risks for high risk high return and also get their digital assets insured.

Cyber Insurance Innovation.

With the rise of cyber threats, the demand for cyber insurance is growing. InsurTechs are developing innovative products that not only provide financial protection against cyberattacks but also offer preventative measures, including risk assessments and monitoring services to help businesses mitigate potential vulnerabilities.

On-Demand Insurance

The gig economy and the increasing desire for flexibility have led to the rise of on-demand insurance. Customers can now purchase coverage for specific items or events and for a precise duration, all through a mobile app. This trend is particularly prevalent in travel and property insurance.

Regulatory Technology (RegTech)

Compliance with regulations is a significant concern for insurers. InsurTechs are developing RegTech solutions to help insurers navigate the complex regulatory landscape more efficiently. These solutions can track changes in legislation and ensure that insurance products and processes remain compliant. Regulator themselves have followed a ‘sandbox’ approach to innovative InsurTechs where they can run on pilot mode without facing regulatory penalties and go live only after through checking and clearance from the regulator. This not only saves a lot of future headaches but also safeguards consumer interests by not allowing startups to just pop up, defraud people and run away with their money. Bad players still find ways around this but this acts as a partial safety net to reduce chances of such things from occurring in the first place.

InsurTech Ecosystems

Finally, there is a growing trend of creating ecosystems where InsurTechs collaborate with traditional insurers, technology companies, and other stakeholders to deliver comprehensive solutions. These ecosystems are designed to be flexible and customer-centric, allowing for innovation at scale.

Conclusion

The InsurTech landscape is characterized by a focus on efficiency, customer-centricity, and innovation. The trends highlighted reflect a sector that is agile and responsive to changes in technology and consumer behavior. As InsurTechs continue to push the boundaries of what's possible, the insurance industry stands on the cusp of a transformation that promises to make insurance more accessible, affordable, and tailored to the needs of the modern consumer. The future of InsurTech is not just about surviving the current economic challenges but thriving by embracing change and leveraging technology to create value for all stakeholders in the insurance value chain.

Areas of top focus whether as an InsurTech or a traditional insurer are sales, profitability, growth, cost minimization and short-term results. Although this is fine in times of economic booms and when the past is a good indicator of the future under normal business environment, in times of crisis it shows how businesses traded efficiency for resilience. Fragile, vulnerable, leveraged growth replaced sustainable long-term growth. Resilience looks like something that is unimportant and uncomfortable because it is bubble-breaking to the way corporate managers and investors usually think. Therefore, it is up to the risk manager to highlight preparing for worst-case scenarios without sounding like a doomsday prepper.

Their role is to believe in optimism. Any exercise where their business goes bankrupt feels emotionally very taxing as they attempt to make it work or die trying. The risk manager or actuary must start by acknowledging this optimism but then remind senior management that preparing for the worst, as the Stoics say, can help avoid the worst case from happening in the first place.

Risk managers or actuaries must focus more on structure and complexity as a way of understanding vulnerabilities and building anti-fragility, however limited, in the company. The risk management way of thinking should apply to all important decision making. Risk managers are themselves susceptible to trying to fit in with the crowd and may start filling the stomachs of file cabinets by increasing compliance and standards to the point that very little meaningful decision making can be achieved. This should be avoided.

Stable, consistent growth must be given more preference than currently. But this doesn’t mean that a company morphs into a frozen-in-time bureaucracy, because creative destruction will very quickly demolish it. A relentless focus on innovation has to follow despite knowing that most innovations will fail.

The risk manager needs a two-pronged focus, on the qualitative side, such as behavioral psychology, and on the quantitative side. The current trend is to hire risk managers from internal audit segments. While internal audit is a field in itself, it usually leads toward trend where more and more forms and compliance standards are adhered to. The quantitative side of risk management (capital modeling, implemented Monte Carlo simulations to decision making, scenario testing, stress testing) gets ignored as well as the qualitative side of behavioral psychology and focus on complexity and structural thinking (which can be both qualitative and quantitative).

Actuaries are ideally suited to handle both of these qualitative and quantitative sides but there is a need for them to delve in more detail in complexity models and apply them to the business case in point.