December 4, 2015
The prosperity of the FinTech industry has not seen limits yet. With the growing density of the unicorns club and speeding up of innovation adoption, bright entrepreneurs are entering the race for disruption in a variety of industries. However, there has been a blind spot in the US where little to nothing changed in many years. We are talking about the biggest industry in the US with net premiums of $1.1 trillion in 2014—insurance.
Insurance carriers and related activities contributed $421.4 billion, or 2.5% of the United States’ gross domestic product in 2013, according to the US Bureau of Economic Analysis. Yet, with $3 billion coming into FinTech in Q4 2014, the insurance industry in the US—with a massive distrust and caution to the players—has not seen wide disruption from technology companies. There are certain challenges that cause the slow entrance of FinTech to the space. However, there are also amazing opportunities as it is relatively fresh and untouched by innovation. Interestingly, it’s not only the startups that are starting paying attention to the industry. There are financial institutions and tech companies taking attempts to leverage the opportunities.
Challenges for FinTech in the insurance industry
As a starter, one of the greatest challenges for FinTech to enter the space is a highly regulated environment which is creating high barriers. Just like the financial services industry, insurance is a complex system is the US that has been a controversial topic for policymakers.
Regulations for the insurance industry can be fairly called the worst ones. There are different levels of control which require complex compliance and investments in licensing along with competition with long-time established industry giants with assets to control the policy.
Due to the complexity and extraordinarily high risk, new entrants have to be able to ensure the coverage of risks with significant funds. This has created serious barriers for lean FinTech startups since startups usually have limited resources.
Insurance is an interesting product that one maintains over a lifetime. Demand for insurance is only growing, involving even more risk with each new customer. Growing risk accordingly requires growing assets. It brings us to the same problem for startups—FinTech cannot ensure an endless and constant growth of assets as startups are coming and going with only a few being able to reach the success club.
Microinsurance Network, the only global multi-stakeholder platform of the microinsurance industry and experts, assessed the main market challenges and added to the list the lack of awareness, insufficient distribution network, and high level of claims, local regulations, moral hazard and lack of access to reinsurance among others.
There is another trick startups cannot avoid called anti-selection, brought up by the Microinsurance Network. At the early stage with the highest vulnerability, startups are doomed to get attentions from the pool of the population that is for some reason ignored by the established players. If you think of it, these people are most likely representing the high-risk population. Taking a large pool of high-risk customers onboard is not the best strategy for startups to get into the space.
Opportunities are in data and customization
At this point, it may seem that only the crazy ones would take a shot at entering the insurance industry. Surprisingly, there are technology startups on their way to shake up the space and take their stake in the trillion-dollar industry.
Companies like Oscar, Elliptic, Stride Health, Simplesurance, SimplyInsured, Eligible, Oration, Metromile and others have demonstrated that the task is not impossible to perform. Slowly but gradually, the insurance industry will see unicorns emerging in the space across verticals.
One of the most interesting examples is Elliptic, the world's first company to secure insurance for blockchain assets. It is also the world’s first company of a type to achieve accreditation from a Big Four audit firm, KPMG. The company offers a real-time AML protection for bitcoin.
Another exciting company is Oscar, a FinTech unicorn in the insurance space with notable investors like Google Ventures, Google Capital, Goldman Sachs, Khosla Ventures and others. Oscar aims to revolutionize insurance through data, technology and design. According to The New York Times, Oscar is valued at $1.5 billion.
We have been covering exciting business models to take over the insurance industry with attention to micro-insurance and pay-as-you-go insurance. What will truly change the nature of the industry is the shift from complex long-term insurance products to the fractions of insurance for a particular moment, time, miles count. The new opportunities to come are tied to mobile devices and time-efficiency. Insurance doesn’t have to take a week to set up; no doubt, it is a matter of time when we will be able to sign up for microinsurance in minutes on our smartphones. There are already examples in emerging markets like Bima Mobile, MicroEnsure, MFS Africa and others.
The opportunities are only growing over time with data being actively accumulated in one's devices. Health-tracking devices and smartphones are now capable of monitoring and storing the physical metrics of a person, which—in the future—can be applied to the insurance apps to contribute to the risk management and to offer more customized solutions.
Insurance doesn’t necessarily have to be something we are looking for in case of actual problems or accidents. The shape of insurance can change from saving at a dramatic moment to preventing it through data. Health-tracking devices will eventually be a part of the industry, helping to take care of our own health and save money on the policy purchased.
Google Maps can eventually be in the center of car insurers as a source of estimation for customized insurance. Risks vary from mile to mile and from location to location. Flat massive scheme can’t offer flexibility. With constant improvement of maps and location tracking, car insurance will change drastically.
Some of the craziest and most exciting ideas are emerging from FinTech for application in the insurance industry. Who would have seen any connection of P2P payments to insurance 10 years ago? Today, it is becoming a reality. Crowdfunding and peer network utilization can be applied to the insurance industry and we may witness unicorns coming from there. Ledge business model can be applied to insurance. If friends’ networks can back our debts, why can’t we utilize it to back our safety in certain insurance verticals?
The 35 million underinsured middle-market households in the US (life insurance example) ensure an outstanding opportunity and a chance to make a difference. Another pivotal point is the digital revolution. The generation of tech-savvy, smartphone-focused young people will force industries to turn to relevant channels. Those failing to address the trend may stay out of the vision and face a drastic drop in customer pool once the previous generation is gone with the revenue stream.
Just like banking, the insurance industry is not able to transform itself. Only with the rise of FinTech, traditional players started looking at the new opportunities as they noticed a shift both in mindset and in technology. The decrease in financial performance over time will push insurance giants to look for new technology and ideas. In fact, it is already happening. According to the Insurance Information Institute, the net income of the life/health insurance industry decreased by 12.9% last year. The perfect moment for FinTech to enter the space is still ahead, but the bravest ones are already taking a chance and being successful at it.
To demonstrate the activity in microinsurance space, the Microinsurance Network provided a list of companies in a white paper titled Commercial Insurers in Microinsurance that were providing services across a variety of verticals around the world.
Source: Commercial Insurers in Microinsurance by the Microinsurance Network
Emerging markets seem to be ahead of the game as they have the biggest pool of those in need of microinsurance. To keep up, the US market will have to make a significant shift in the regulatory space and mindset.