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Digital transformation has changed the world of finance, investments and legal regulation. As fintech and regtech continue to flourish, it’s no wonder that digitalization is spreading its influence even further. However, popular terms emerge every day, and it seems that any word ending in “-tech” promises to be the next digital revolutionizer. But is it?
The thing is, it’s often hard to distinguish hype from a truly transformative technology. This was the case with insurtech in 2010, when a couple of startups tried to invade the traditional, well-established insurance market. Back then, it brought forward a lot of buzz, but almost no real disruption. The first wave of insurtech was more hype, but it did kick off the process of digitization – and the reshaping of the industry became inevitable.
Now we’re really seeing dramatic changes in the insurance industry due to political, economic and technological shifts. KPMG report notes that the insurtech agenda is a top priority for 73% of insurance CEOs who have declared that they’re ready to lead the company through complete transformations to stay competitive. Here we’ll put our finger on the pulse of fintech new frontiers and discuss why it’s smart to follow the insurance industry’s digital transformation – and, if you already are, what you need to consider when building an insurtech app or during the fintech app development to make it one that people will want to use.
Indeed, if you compare fintech with the Star Wars universe, insurtech is the Han Solo movie in it. To be clear, fintech is a broad term that covers a lot: online banking, online payments, online investments, online mortgages and other financial services that few years ago were available only through bricks-and-mortar institutions. Today, all of these can be accessed via smartphone apps. Innovation brought these industries closer to customers, and the same is happening with insurance.
Insurance is just another, once-traditional industry that is being changed by innovation. Because of the digitalization of practically all spheres of life, people can buy houses, invest money, start retirement plans and manage their banking accounts online. It was just a matter of time for them to demand the ability to obtain insurance in the same way. It’s simple: no one wants to go to the insurance company office to insure a house they rented or bought online. And that’s why insurtech was born.
The insurance industry tried to hold back on the drastic changes that digitization would impose on its comfy conservative world. And that’s what explains the failure of the first insurtech wave and why it took so long for innovation to break through into the industry. But progress is hard to ignore, and eventually the major insurance market players had to admit the necessity for change. Some of them tried to invent their own solutions by digitizing their products; others decided to collaborate and invest in startups. All this was done to satisfy the modern customer, but that wasn’t the only result of the insurance industry’s transfiguration. Technology affected the industry much more deeply.
First, insurtech made incumbent market players worry when it appeared that, because of the high-level automation of underwriting and other backend processes, the average prices for insurance offered by the insurtech startups were much cheaper. (For instance, insurtech startup Lemonade offers homeowner insurance from $25 per month, while the average price for it in the U.S. starts at $120).
The second issue that makes insurtech revolutionary is that it strongly changed the customer attitudes about the insurance industry. Insurtech made it easier to get, manage and understand insurance. Just as investing and mortgages were affected by fintech, insurtech brought insurance closer to customers.
Third, digitization helped companies serve more of the niche-customer categories formerly excluded by traditional insurance companies, like small businesses (by Next Insurance), disabled persons or people with long-term health conditions, pet owners who want to travel (by Bought By Many), or those who want to drive a borrowed car from time to time (Cuvva).
And above all, the peculiarity of insurtech is that it can include both solely insurance products and insurance as an integral part of some other fintech service (for instance, when one obtains a mortgage and wants to cover it). Today, the insurtech landscape is much broader than the one we had in the 2010s, and it has broadened from classic healthcare, property and auto insurance offered online to more innovative SaaS players that offer software for insurers, insurtech startups, and the incumbent companies that invest in these startups.
The answer is simple: innovative carriers pose a danger to those who don’t or can’t offer a superior customer experience and more convenient services.
The threat lies not only in the never-offered-before things brought to the market by the startups, but in the fact that new players have already started insurtech innovation of their services, while the incumbents have yet to implement or build new technology solutions. While it may not be a huge problem at the moment, in a few years, those who missed the moment now will barely be able to catch up with the early adopters. Digitization means not just transferring traditional services from the desk to online. It requires a complete change of current business models, and the quality of this transformation will shape the future of existing companies.
– Will Pritchett, Global Head of Insurtech KPMG International
Therefore, below we’ll discuss what you need to consider when you decide to start developing an insurtech product.
If you already have a fintech product and want to enrich it with an insurance feature, or you want to update your existing insurance service or launch an insurtech product, there’s one thing you have to remember and realize: insurtech application development is not about placing classic insurance products online. When starting insurtech software development, it’s necessary to bear in mind that:
These are three major elements to consider in the insurtech app development process. Let’s take a closer look.
Why is it important? When building an insurtech product or starting fintech software development in general, you have to remember the end-user for whom you’re doing it. Place customers at the center and ask yourself what they want, how they want to use it, what their needs are and how they can communicate with them. The customer must be at the center of the product’s business model. Everything in the product must be oriented toward the customer: flow, functions, security, design, interface, channels of communication. This is what will make the product successful. By creating customer-oriented offerings, you can capture new demographics, such as Millennials and Generation Y. Even a few years ago in the U.S., 21% of young adults were uninsured. It’s a new generation of insurance customers who would rather secure their VR system or a car borrowed from a friend for a weekend than a mortgage loan, like the baby-boomers before them. New times bring new customers, and new customers require new offerings.
What’s the problem? While e-commerce and online financial services have been developing and become routine for most people, the insurance industry has been slow to grasp how far it’s become from its customer. Phone calls and door-to-door marketing have lost their effectiveness in the digital age, but most insurance companies have failed to invent new channels for customer engagement. To be clear, insurance is an industry with one of the lowest levels of customer satisfaction in terms of interactions with service providers.
This gap should be bridged, but it’s getting harder, as the customer now controls the access. They can filter phone calls from companies or refuse to communicate with insurance agents. Given that, it is necessary for insurtech products to establish channels of communication with digital customers – the ones who are never off their phone, but can choose to ignore phone calls.
How to solve it. The rise of chats makes digital customers more responsive to digital content marketing than phone calls. Moreover, machine learning and artificial intelligence make this process more efficient and present a digital technology with a human face. Thus, chatbots can be used to automate the processing of customer inquiries. For instance, Lemonade states that their Maya AI bot handles 19% of their support requests from start to finish. These technologies use language that engages with customers and make the overall process simpler and faster.
Why is it important? The answer here is quite simple …, well, because it’s security. The security of key data, customers’ peace of mind, the company’s brand and reputation protection. Cybersecurity breaches and leakages of personal data are the primary issues that can damage a company’s reputation in the digital age.
What’s the problem? In 2016, the number of stolen records in the largest cyberattacks increased by 124% in comparison to 2015. And the number of cyberattacks will certainly grow.
According to an Ernst & Young Security Survey, only 16% of respondents think their cybersecurity approach fully meets their needs, while 75% of them don’t think “it’s very likely” they could detect a high-profile attack. It’s clear that most insurtech players feel endangered by the cybersecurity threat.
How to solve it? First of all, when you create an insurtech platform, you have to keep in mind that your cybersecurity efforts must be strategic and proactive rather than aggressive and defensive. In your haste for a quick digital transformation, you should not underestimate the risk and must take the necessary precautions. Given that most attacks are launched from the outside, you might implement emerging technologies, such as blockchain or artificial intelligence, to mitigate risks.
Why is it important? While you can’t rush security, you may still need to develop an insurtech product fast. For that, you have several options: do it in-house or outsource to an insurtech development company and create a custom product, or use a ready-made solution. While each of the options has its benefits, the major difference between them is the development time and money they require. Also, if you’re choosing between a ready-made solution and a custom one, you have to know exactly what the business value of your product is and what customer needs it should meet. Depending on these, you will know how important it is to be able to customize the product in the future.
What’s the problem? The problem involves choice. To make the final answer easier, you have to clearly understand what your end-product is and what resources you’ll need to develop it. Thus, having an in-house team may be more expensive and more complex in terms of management and work process organization than hiring an outsourced team.
Another problem: do you need to build a new custom product or use a ready-made solution? The latter may be a good choice for a well-established company that wants to break into the digital market with a known innovative product. In short, why reinvent the wheel? The major problem with this is that an existing product can’t be as easily customized as a custom one. On the other hand, you won’t spend much time on development.
How to solve it. On our experience, a win-win choice here is to proceed with custom development and an outsourced team. Outsourcing helps you solve problems with internal capacity and overcome legacy constraints. And to make it faster, easier and cheaper, developers can use existing technological solutions, like APIs, tools and libraries that have already been used in other products – and thus, brick by brick, create a new custom product.
Like most innovated industries, insurtech must trust new technologies in terms of process optimization, security and data analysis. And the next phase of insurtech development will be tightly connected to artificial intelligence, big data analysis and blockchain. However, when short development time is a priority, using existing tech solutions may be more efficient.
Let’s take a closer look at each technology.
AI and ML are used by insurtech products for internal process optimization and automation. The latter allows insurance companies to reduce the costs of daily work and change the tasks of some workers from daily routines to more creative ones. Machine learning, in particular, has been widely used for automation of claims settlement. By eliminating the human factor, AI makes claim processing faster, more precise and cheaper.
Lemonade is a relatively well-established insurtech startup that focuses on protecting property and homes. They are famous for their insanely low prices, which they manage to achieve by automating a huge part of their internal workflow. Initially, when a claim settlement was processed manually, it took 11 days to render a decision. After the process was automated, most of claims were handled by a chatbot that can render decisions in seconds if the case is easy. If it’s not, it passes the case to the claims team. As a result, the time of claim settlement has been shortened to 1 day on average.
Those insurance companies who strive not to be left behind by insurtech pioneers and want to gain competitive advantage must make big-data analysis the integral part of their innovated products. Data is the key to improved relations between companies and users. And today, it’s not information about who use the product, and how and where. Analysis of big data now brings much more insight to service providers. Data provides more precise risk assessment, underwriting efficacy, and market macro trends, and is a fuel for AI and RPA management. In return, customers get better pricing, improved responsiveness and more customer-oriented experience delivered by sensor and IoT inputs.
TrackActive offers patients and their doctors a better and more efficient way of walking through medical programs. Using the app, the doctor can track the patient’s activity, estimate the risk of any injuries, and prevent them by changing the patient’s medical program and, overall, help the patient recover faster. The behavioral app receives data from the patient’s smartphone or smartwatch, which tracks their physical activity, heart rate and blood pressure. Analysis of this data provides the doctor with insights into how the recovery is going, what the risks are, and what can be done to prevent them.
Integrating solutions from outside partners is the best way for an insurance company to innovate its product, become a part of the insurtech rise, and not get left behind. As we said above, those who miss the moment to digitize will significantly suffer from competitive disadvantages.
Fortunately, APIs, libraries, and microservices are technologies that help to integrate existing solutions into a product and save time and money that the company would otherwise spend to develop all application features from scratch. For instance, a third party might provide the product with a feature that checks customer data to prevent fraud and abuse.
Blockchain became a buzzword recently, but in insurtech it represents a revolution. Its role in strengthened security, fraud prevention, and building effective reinsurance systems has made it one of the major technologies used in insurtech today. The very nature of smart contracts makes the blockchain system almost impossible to break or defraud. For instance, blockchain can be used to reduce the number of fraudulent claims by combining many data points from different sources (such as analytics and location) and analyzing them.
B3I Services is a cohort of 17 insurers from around the world that explores and promotes the efficiency of blockchain for the insurance industry. They use it to make insurance cheaper, reduce risks and improve the management of payments and data. They launched blockchain system for property reinsurance contracts, which is comprised of 38 brokers and insurers.
A few years ago, one would have thought twice before naming insurtech as the next frontier of fintech, as it seemed to be more hype than something that offered real value. But with the rise of tech, AI and blockchain, which insurtech has successfully absorbed, it became clear that industry changes were inevitable. And that those who ignored digitalization would be left far behind their competitors.
Innovating insurance products is not an option, it’s a necessity. People demand more customer-oriented, secure, convenient and cheap products than ever before. And there are several things you have to consider before you build them.
When creating a product that you want customers to love, there’s always a temptation to implement loads of features. But, as MoneyPark CTO Benjamin Tacquet says, “Sometimes you want to do too much. My best advice is to do less, but better.” Choose the core of your product, do it as well as you possibly can, and master it. And then, perhaps, you’ll have an opportunity to add other options.
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