Fintechs as a potential disruptor or enabler for the insurance industry
5 February 13, 2017 at 4:12 pm by Peter Morris
Whenever a new technology emerges, there is always the question as to whether it will assist or threaten existing industries. With the surge in activity from fintechs, the property and casualty insurance industry is facing this question on a number of fronts.
In a recent article he wrote for The Globe and Mail, Michael King, Co-Director, Scotiabank Digital Bank Lab at Ivey Business School, Western University, discussed whether financial technology firms, or ‘fintechs’, are likely to be disruptors or enablers for Canada’s major banks. Although the article mainly addressed issues in the banking sector, it touched on the property and casualty industry. Mr. King’s conclusion is that fintech startups represent both an opportunity and a threat to the incumbent banks. He described fintech as having the potential to be a cost disruptor, a revenue enabler and a revenue disruptor. In my opinion, his remarks are equally applicable to the property and casualty insurance sector.
An example of cost disruption is blockchain technology. This technology has the potential to significantly reduce the transaction costs for insurers while at the same increasing the security of stored data.
In terms of enabling revenue, insurers could use fintech startups to help target new customer segments. As noted by Mr. King, fintech startups have built user-friendly applications from scratch using the latest thinking in design and technology. These applications are attractive to customers and represent a source of competitive advantage when compared to the offerings of insurers using legacy systems. The issue of legacy systems has been discussed by Scott McConnell, senior Vice President and global leader of insurance at Genpact, a provider of digitally-powered business process management and services. According to McConnell, ‘the insurance industry needs to move beyond just fixing legacy systems’ and should extend the resources to transform the end-to-end customer experience.
Another way in which technology can enhance revenue is by using a digital platform to provide online, low-touch service to clients who have straightforward insurance requirements and who are difficult to service profitably in a high-touch environment. The launch of Sonnet Insurance by Economical Insurance in 2016 represents an example of this approach.
Although fintech startups could enter the insurance market directly, the barriers to entry are high. In most cases, it makes more sense for fintech startups to work collaboratively with existing insurers. For the startups, this approach allows them to avoid the barriers to entry into the insurance industry. For insurers, it allows them to gain the advantages of the latest technology without having to incur the cost and the risk of conducting their own insurance technology development. In a press release, Gartner, Inc. predicted that 80% of life and property & casualty insurers worldwide will partner with or acquire insurance technology firms by the end of 2018 as a means of securing their competitive positions within the insurance marketplace.
Because the barriers to entry are high, there is a limited threat of financial technology firms completely disrupting the insurance market. That is not to say there is no threat at all. As noted by Michael King, although it hasn’t happened in Canada, the potential risk can be seen by looking at the Chinese social networking giants Alibaba and Tencent which have jointly funded an online insurance company. If this model proves itself elsewhere, there is the potential for companies such as Facebook and Google to see a competitive opportunity here in North America.
As much as it’s too early in the game to predict exactly how technology will reshape the insurance industry, the time is right for considering how best to capitalise on the potential opportunities presented by fintech startups.
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Hi, I was just wondering how you meant when you say “Another way in which technology can enhancing revenue is by using a digital platform to provide online, low-touch service to clients who have straightforward insurance requirements and who are difficult to service profitably in a high-touch environment. The launch of Sonnet Insurance by The Economical Insurance Group in 2016 represents an example of this approach.”
thank you
Thank you for your question. There will always be customers who require, and seek out, the advice of an experienced insurance agent or broker. An obvious example of this is a homeowner with an expensive primary residence, a cottage, a boat, a couple of snowmobiles, and jewellery that exceeds the sub-limits on a homeowners policy. This type of consumer will almost certainly recognise the complexity of her/his insurance requirements and will therefore seek professional advice. The consumer’s insurance needs are significant enough to justify the time and attention of a professional intermediary.
At the other end of the scale is a millennial whose entire insurance needs consist of a modest rented apartment and perhaps a car. Although it’s always dangerous to generalise, it’s fair to say that many of these clients do not require extensive advice, nor do they wish to spend time speaking to an insurance intermediary. They would prefer to handle their insurance needs themselves, on line, at a time of their choosing. These customers are drawn to a digital platform. For insurers, a digital platform has two advantages: it allows the consumer to engage with the insurer in a method of the consumer’s choice, and it allows the insurer to offer coverage with minimal transaction costs and therefore a competitive price.
As much as Sonnet represents an entry into the direct channel, Economical Insurance was hardly breaking new ground here. A number of broker-distribution insurers have had direct-market subsidiaries for years. What sets Sonnet apart in my opinion is its digital platform that is designed to appeal to a new breed of consumers who prefer to obtain insurance on-line without dealing one-on-one with an insurance intermediary.
Interesting even in Here in Africa Banks and Insurance firms are downsizing staff since most of the services are being offered online. Like in Kenya the insurance penetration is very low we hope more tech companies can try to bridge the Gap.
The changes that we have witnessed over the past 20 years leads me to believe that online insurance will become the standard once the younger generations age and begin to need insurance. As baby boomers reduce in numbers, the percentage of clients only comfortable with brick-and-mortar insurance will drop and gradually disappear.
Technology can assist with insurance renewals and establishing an initial discussion. Homeowners and business owners need to know they are properly covered. An insurance broker can discuss the intricate details of the required insurance package(s) and implement a plan. After a relationship is established between the insurance broker and client, technology can assist with continued communication.