Researchers Simona Cosma, from the University of Bologna, Department of Management, Italy and Giuseppe Rimo, from the University of Salento, Department of Economics, published an article on Research in International Business and Finance, 2024, regarding the achievements and perspectives in Insurtech. The article provides an up-to-date review of this issue. Here are some key issues.
The application of technology to the traditional insurance business takes the name of Insurtech, a new term born from the merger of Insurance and Technology. Today, the Insurtech phenomenon is conceptualized as the use of technology by traditional and non-traditional market players to provide data-driven and customer-oriented solutions, improve the marketing and distribution of insurance products, improve underwriting stages and risk management and innovate traditional insurance business models.
Information technology helps reduce costs, improve efficiencies, and provide customers with personalized, more value-added, convenient, and easier-to-use services. Insurtech also offers individual, tailored and personalized solutions to life’s risks using data analytics, sensors, wearables and cell phone data. Wearable devices (e.g., Apple watch) allow health insurers and life insurance companies to obtain a series of biometric information on physical activity, cardiovascular measures, sleep quality data, and to better understand the actual risks associated with the insured.
In the case of car insurance, telematics allows the real-time transmission of a large amount of information, enabling the insurer to estimate the probability of claims more precisely, avoiding making approximations that lead low-risk individuals to leave the insured pool.
The article highlighted how, until 2016, many investors had poured billions of dollars into Fintech startups specializing in payments, loans and brokerage but not in the insurance field. This was mainly due to two obstacles:
- Regulation: Health insurance, especially American health insurance, is heavily regulated, requiring insurers to get numerous state approvals before offering policies. Overcoming the regulatory obstacle, therefore, is costly and time-consuming
- Capital: Fintech companies usually receive funding from venture capitalists to cover operating expenses, such as salaries, information systems, and employee benefits. However, these loans are not intended to support a large balance sheet, which may be required to provide insurance services.
Many fintech companies avoid holding risky assets for an extended period of time. Instead, they act as intermediaries between different parties, such as lenders and borrowers, investors and investments, or between sender and recipient of money. However, this model is not suitable for providing insurance services. Unless a fintech firm focuses solely on being an intermediary or broker, it will take on some risks and need to meet the capital requirements required to bear those risks.
Adding to these hurdles is the fact that customers will not buy insurance policies unless they are confident that the issuing company will be able to honor claims when they file a claim. However, a startup, by its nature of being a fledgling, does not have an established reputation that could help bolster customer confidence in the firm’s ability to handle claims.
The research highlights that the main common feature of Fintech and Insurtech lies in the proposition of more efficient services in terms of cost and performance, more convenient and more personalized but which entails some skepticism about the reliability and reduction of human interaction dictated by the expansion of chatbots and virtual assistants.
The impact of technology in the traditional insurance sector
Artificial Intelligence: According to the article, AI-based insurance applications are emerging for personalized recommendation of products, underwriting, risk and compliance, cybersecurity, product development, and operational efficiency”. AI can help in identifying anomalies and potential fraud in the claims or to propose personalized pricing by exploiting customers’ behavioral data. Telematic technologies make it possible to develop pay-as-you-drive solutions to replace periodic premiums in the case of car insurance or on-demand insurance for low-severity risks and with short-term coverage.
Digitization: The emergence of new digital products and contracts will likely lead to the emergence of new insurable risks, such as those related to small market changes in non-traded or illiquid assets, or risks related to physical health, which become insurable thanks to new medical technologies, wearable devices and the use of big data in health insurance.
The irruption of emerging start-ups into the insurance market sometimes leads incumbent operators to establish strategic partnerships with Insurtech startups or participate in incubator programs or ventures to keep up with the times and ensure business continuity.
Blockchain: The blockchain enables the creation of a digital ledger, irrevocable and shared by many peers, and can facilitate the recording of transactions, ensure that data is shared and easily verifiable. Applying blockchain to the insurance industry can be particularly useful when there is a need to reduce operational costs in the value chain, produce a secure and reliable shared record for all stakeholders, or eliminate intermediaries in the value transfer/exchange process.
The automatic execution capability of smart contracts could facilitate the processing of claims and automatically initiate refunds upon certain events.
Risk management of digital insurance
According to the researchers, the new consumer-centric approach of digital technologies allows insurers to understand the habits better, and therefore the practical risks, of policyholders; big data analytics and digital technologies make it easier to predict, understand, and visualize disasters and manage claims.
As a result, digital technologies enable more accurate risk assessments and insurance premium calculations through the processing of extensive sets of Big Data.
Conclusions
From a practical perspective, this review has important implications for policymakers, who are called upon to safely and prudently manage the process of innovation that has the potential to transform an industry, insurance, that has seen little change in the past 300 years.
In particular, the authors point out that the new technologies pose new challenges related to commercial distribution mechanisms, customer privacy and the legal status of smart contracts, as well as risks of fairness, non-discrimination and how consumer data is recycled for other commercial gains.
Addressing these challenges is critical to the effective de-ageing of the insurance industry, and the role of policymakers is crucial.