We have already seen significant disruption in the traditional banking processes, with PayPal now processing more than 11 million transactions a day, while Apple Pay is likely to be a major force in cutting banks out of the small wealth transfer process. On the lending side, Kickstarter and other crowdfunding investment operations currently tend to offer options for businesses locked out of traditional markets. But there is no reason why they should not enter the traditional market space as well.
Also on the lending side we have, among many others, Lending Club in the US, CreditEase in China, Zopa in the UK. They serve to provide borrowers with new sources of cash and lenders with more attractive, albeit less liquid and less secure, forms of investment.
Competing with financial institutions are retailers, and not just Amazon. Starbucks is exploring a mobile payment strategy, while OpenTable is another high‐profile player; device makers (Samsung); tech companies (Apple, Microsoft) and online companies (Alphabet, parent of Google). What the companies have in common is a direct link to the consumer – one that could bypass a financial institution if a separate wealth transfer infrastructure was in place.
The largest deals of Q2 2016 according to the KPMG “Pulse of Fintech” were with Lu.com ($1216 bn), the largest online P2P marketplace in China, and JD Finance ($1.01 bn), the consumer finance subsidiary of Chinese e‐commerce company JD.com – both of them in Asia. Three more: Oscar Health Insurance; Welab Holdings, and Betterment, were for more than $100 m. Two of these were in the US. Of the 25 largest FinTech deals in Q1 2016, only one – Spotcap – was in Europe.
JD Finance provides a number of online financial services to consumers, startups, and companies in China. As with Lu.com, one of its operations – JD‐ZestFinance Gaia – appears to be trying to bring into the investment and borrowing space the millions of Chinese who, until only recently, would have had only a tangential link with this sector. It aims to offer new microloan options to Chinese consumers, particularly those who not have credit history and other credentials traditionally required to land a credit card or other finance options.
New York City‐based Betterment is a leader in the robo‐advisor sector. The US company is a disruptor to traditional asset‐management businesses providing a combination of goal‐based tools and low management fees, particularly for accounts over $100,000; those accounts pay just 0.15% of assets managed. Like other robo‐advisors, Betterment uses exchange‐traded funds (ETFs), and clients pay no commissions or transaction fees. It claims more than $3.9 bn in assets under management, and more customers than all of the competition combined. WePay, based in San Francisco, processes credit card payments online, focusing on crowdfunding platforms such as GoFundMe. It is a low‐cost option both deploying FinTech and being used by other FinTech operations.
Two US operations – Affirm and Kabbage – take an old‐fashioned offline operation in short‐term loans at relatively high interest rates, and transfer it to a lower‐cost online space.
The above all fit into the “disruptor” space, but there are many companies in the service provision space. One is Reykjavik‐based Meniga, has developed money‐management software which it is licensing to banks, on a subscription basis. It has signed a deal with Santander, one of the largest banks in Europe, as well as 24 other banks.
These are but a few examples out of many. FinTech business models range from subscriptions to commissions to (less commonly) sales. Some are units of larger e‐commerce operations; some are independent. Some see the retail customer as their target market; some see other online operations as their potential customers, while many are looking to sell to the traditional financial sector, helping them transition to the new world.
32.1.5 InsurTech – the Current State of Play
In 2015 there remained a disconnect between banking FinTech and InsurTech. Accenture observed that FinTech investment in the Asia‐Pacific region increased four‐fold in 2015, to $4.3 bn. China attracted 45% of that investment, while India received 38%. However, 78% of FinTech deals targeted banking. Only 1% targeted the insurance sector.
Indeed, the United States currently dominates InsurTech investment. In the first quarter of 2016 there were 45 InsurTech deals concluded, and most went to US firms (compared with FinTech as a whole, where the big money tends to be in Asia and, particularly, China).
CB Insights [5] believes that this temporary skewing towards the US is likely to lessen as InsurTech matures, with funding likely to follow the geographical pattern seen in retail banking and payments processing.
Meanwhile, analyst firm Gartner has predicted that there will be 20.8 bn “things” connected to the internet by 2020 – about six devices for every person on the planet [6]. Jean‐Francois Gasc, managing director of Accenture’s strategy for insurance in Europe, Africa and Latin America, said in a 2016 blog post that “our research shows that 45% of insurers believe this trend will be a major driver of revenue in the next three years”. Not only will product providers be seeking more liability cover, but the “Internet of Things” will provide insurers with a great deal more data on customer habits. This in turn will offer the opportunity to provide new products, based on data that had not previously been available to actuaries [7].
Greater levels of individualized rating are already available via wearables, connected cars, connected homes, and data gleaned from smartphone apps. The concept of risk assessment before a premium is calculated could be changed into real‐time risk assessment.
The concept of “always on” insurance could become outdated. The ability for the customer to turn cover on and off as and when required – with a corresponding increase in unit premiums but a potential decrease in premiums per year – will change radically the actuarial approach to risk management.
New entrants will have sophisticated data modelling tools to hand, exploiting technique such as those used in high‐frequency trading. Insurers will need to choose the right partners when exploiting new techniques. New companies have appeared providing customized insurance solutions in response to changing customer demands.
The ultimate disruption threat would be where deployers of InsurTech tried to render the existing insurance stack irrelevant, creating an entirely new marketplace concept.
32.2 Threats to Insurers
Within the insurance sector described above there are four distinct divisions and three “spaces” between those divisions. There is the customer, the broker, the insurer and the reinsurer as “divisions” and B2B, B2C, and B2B2C as “spaces”.
InsurTech can serve as a cooperator in those sectors or as an aid in bridging the spaces between those sectors helping traditional insurers to create more customer value. However, InsurTech companies could attempt to disrupt the status quo by using their more efficient technology to “invade the space” providing more customized responses to customer needs.
There are IT and tech players, whose names one would not automatically associate with the insurance business, that are investing heavily in advanced data analytics. At the moment these companies are not attacking the insurance business – preferring instead to collaborate with established partners – but this is mainly because they know that the hurdles of regulation are high. If the regulatory hurdle were not there, there is nothing to stop them underwriting their own insurance products.
At the time of writing, most of the InsurTech companies are looking into the B2C retail business space, for example motor insurance, but we see already the first companies looking into the B2B commercial space. It will probably start with SMEs, but will then creep up the ladder, serving larger companies.
Insurance is about much more than the sale of a policy. Pricing and conditions must be correct (risk assessment); potential loss levels for the insurer need to be controlle
d (risk management); claims need to be verified (loss adjustment) and payments in both directions need to be efficiently processed.
The entire insurance cycle needs to be as smooth as possible. Although InsurTech can be used to help established insurers and brokers make the insurance cycle more efficient and user‐friendly, there is also the threat that new companies will invade spaces that up until now had been the preserve of established brokers or insurers.
The higher one climbs the insurance ladder, from retail to commercial, the harder it becomes to manage the customer experience in an efficient fashion. For the large corporates and multi‐national accounts that remains a challenge today. Customers’ expectations also shift as they move from retail, through SME, to large corporate segments.
What InsurTech can do in the large corporate space is expedite speedier, more efficient and accurate risk assessment, pricing, risk management, loss assessment. and payment. Although this will cause evolution and, indeed, some disruption, it does not fundamentally alter the insurer/customer relationship.
However, that does not mean it will never do so.
No‐one knows yet what will be the Uber in the insurance segment, but there are many parts of the insurance space where it might appear. Insurers needs a coherent digital strategy that will make it ready if and when a major disruptive threat takes hold.
32.3 A Digital Strategy Response
Traditional insurers – in parallel with incumbent companies from more industrial sectors – have evolved a number of response strategies to position themselves most effectively in the future insurance eco‐system (see Fig. 32.2).
Fig. 32.2Digital strategy responses by traditional insurers
32.3.1 Pillar 1: Investor Approach/Strategic Partnerships
The traditional insurance sector can participate in the wider digital ecosystem through the establishment of digital partnerships – leveraging the scale and scope of the established insurer to complement the innovations of InsurTech businesses.
PricewaterhouseCoopers (PwC) observed recently that “the majority of InsurTech startups are focused on activities that will help incumbent insurers to do a better job, rather than to steal their business”. In terms of the earlier roadmap, this means they would lean towards the “provider” sector rather than the “disruptor” sector.
Many insurers see InsurTech’s potential for transforming the back office, noting for example the opportunity for innovation in data and analytics, plus new approaches to underwriting risk and loss prediction.
Allianz entered a cooperation and investment partnership with Berlin‐based simplesurance, an e‐commerce provider which now distributes Allianz insurance products in 28 European countries via customer portals such as Schutzklick.de, as well as some 1500 online shops. Allianz took a minority stake in the InsurTech company. Established in 2012, simplesurance has developed software that enables customers to buy products online and purchase corresponding insurance coverage in a few completely paperless steps.
Munich Re has invested in several “Internet of Things” startups. These include Helium, Waygum, and Augury through its corporate venture arm, Munich Re/HSB Ventures. Munich Re’s subsidiary American Modern helped underwrite venture‐capital‐backed pet insurer Embrace Pet Insurance. It has partnered with drone start‐startup PrecisionHawk and with disease outbreak risk analytics firm Metabiota.
32.3.2 Pillar 2: Direct Digital Attacker
A second strategy, which can blur into the first, is for an insurer itself to offer digital products and channels. These can include the development of customer apps or in‐house client portals as product and service platforms.
A client portal such as myAGCS.com requires registered commercial users to log in to manage their policies and global programs or access risk reports from one online touchpoint. Other large insurers have also developed client portals. These include myAviva, RSA Travel Insurance and partnerportal from HDI.
“AGA (Allianz Global Assistance) Mobil” is a smart travel cover application offering a range of travel insurance services on the customer’s mobile phone. These not only include policy details, but also useful local telephone numbers, an international drug directory to make obtaining the right medication as easy as possible, first‐aid terms, an international hospital search, and a hotline to assistance experts.
Offering tailored solutions through digital channels in a fast and convenient way can be enabled through the employment of white‐label technologies such as Blockchain, adapted to suit the purposes of individual insurance companies or contractual scenarios.
Blockchain is one of the most interesting FinTech and InsurTech areas. It will be the next big disruptor for the banking and insurance industries, both from an internal and external perspective.
A recent World Economic Forum report said that distributed ledger technology (DLT) has “great potential to drive simplicity and efficiency through the establishment of new financial services infrastructure and processes”.
In June 2016 Allianz Risk Transfer, the alternative risks transfer specialist of Allianz, worked with Nephila Capital to pilot the use of blockchain smart contract technology. The “proof of concept” put forward by ART and Nephila transacted a natural catastrophe swap. In the case of a financial cat swap, the insurer pays a third party to assume the financial risk of a defined catastrophe event, such as a Florida hurricane, in exchange for a payment or series of payments. If the event occurs and meets the pre‐defined trigger criteria, the third party is responsible for the pre‐agreed financial risk. This was a transfer from A to B. However, the process could also be used for catastrophe bonds, where a number of parties assume the catastrophe exposure through a securitized financial instrument.
The neatness of blockchain is that each validated contract contains data and self‐executable codes inherent to that contract. When a triggering event occurs which meets the agreed conditions, the blockchain smart contract picks up the predefined data sources of all participants, and then automatically activates and determines payouts to or from contract parties. Blockchain acts as a distributed ledger, enabling transactional history, contracts and integrity to be maintained and stored. Any party in the transaction can access these details. Further, “smart contracts” could see the contracts, and the securities underlying them, to be created in a single blockchain. Compare that with the process which currently takes place with catastrophe bonds and the increased efficiencies and speed are plain to see.
The potential use cases in both retail and corporate insurance are pretty apparent: any kind of contract we have in paper or pdf today could be translated into a smart contract on the blockchain. You could close such contracts online and it would be immediately available to all the participants. The contract would be immutable, and could even have program code embedded that executes automatically based on events or a certain point in time. There are a lot of contracts and transactions in insurance and other industries and these could be modeled, transacted and stored on a blockchain – providing more transparency, speed and convenience to all.
32.3.3 Pillar 3: Digital Ventures Accelerator Programs
Several major insurers have developed their own “accelerator” programs in response to the flourishing InsurTech startup environment, although how they define the word can vary. In some cases it is an internal division, while in others they are closed‐end programs, seeking applications from external startups to benefit from an established insurer’s mentoring and contacts.
Whatever the precise structure of the accelerator, in all cases opportunistic minds within the insurance sector encourage new “big ideas” – with the hope of being at the head of the queue should an individual idea prove successful.
One of the most high‐profile InsurTech moves in 2016 was Swiss Re’s insurance accelerator
program in Bangalore, India, running from mid‐July to mid‐October. The reinsurer actively sought out companies that might be threats. Swiss Re’s program mentored and helped curate startups aimed at disrupting insurance practices. Startups engaged with Swiss Re executives and were given access to Swiss Re’s expertise.
In September 2016 Munich Re established MundiLab which is divided into two phases: A five‐week program starting in February 2017 will take 10 selected teams in diverse industries to the next level, opening opportunities to them within the insurance market (cash and equity free for participants). Within this phase startups will take part in workshops to improve their entrepreneurial toolkit, and gain links to the network of Munich Re partners and clients.
Munich Re will then select the best‐performing companies with the highest potential to disrupt the insurance industry. The startups will be offered an opportunity to work on a pilot program with Munich Re, an opportunity to pitch their ideas at Munich Re demo day and access to key investors from European top VCs. Entrepreneurs will also be given access to key decision‐makers at Munich Re to learn how corporates think and take sourcing and partnership decisions.
Allianz X is the company builder of the Allianz Group, identifying, building and globally scaling new business models in the InsurTech space. A more open‐ended operation than the Swiss Re or Munich Re programs, Allianz X offers “a unique working environment and a world‐class team to launch new ventures in less than six months from idea to market entry”.
Digital Marketplaces Unleashed Page 47