The Opportunities and Threats of Insurtech for the Average Insurance Consumer

By Theresa Schmall, Manager, Center for Financial Services Innovation

Theresa Schmall, Manager, Center for Financial Services Innovation

The insurance industry is going through an exciting phase of innovation. The boom of the insurtech market has captured everyone’s attention, and for good reason. It has taken in over $8 billion in financing globally since 2012—an average of over $10 million per deal—and total investor spending exceeded $2 billion in 2017, a 31 percent increase over the previous year.

Insurtech can support profit and sustainable growth, which according to CIO Outlook is the top priority of insurance companies. But consumer impact is also key to this priority, and insurance companies must bear in mind the risks alongside the opportunities that insurtech poses for the average insurance customer so that innovation benefits both businesses and customers alike.

At the Center for Financial Services Innovation (CFSI), we think insurtech provides expansive opportunities for the insurance industry to better reach and serve all individuals, especially those that are financially struggling. In forthcoming research, we identify three trends in the insurtech market, along with the opportunities and risks they pose when it comes to providing innovative products that build people’s financial resilience and overall financial health.

1.  Expanded Distribution Channels

Insurtechs are creating new models for delivering insurance to consumers, such as mobile distribution, comparison sites, and new co-selling partnerships. This area of innovation is largely realized through online insurance marketplaces and the rise of digital distribution.

Opportunities: Digital distribution can cut the cost of the traditional agent model, allowing carriers to lower premiums and help customers overcome their price sensitivity barriers. It can also help customers acquire and maintain policies that provide them much needed resilience and protection. Comparison sites may serve to increase both transparency and competition in the market, and create a more efficient method of shopping around for the right policy.

Risks: The insurance industry should investigate who is and is not included in the expansion of digital distribution, and also ensure their digital models align with the needs of customers across income levels. The industry must also take care not to allow an increase in competition to result in sacrificing product quality in search of lower prices.

Example: SafetyNet, an insurtech venture from CUNA Mutual, uses digital insurance distribution to offer low-cost disability and unemployment insurance directly to low-to-moderate income customers.

"Insurance companies can innovate to operate successful businesses that offer accessible, high-quality products that support financial health" 

2. Individualized Policies and Risk Assessment

Advances in analytics and telematics/telemetry allow both policyholders and insurers more granular control over the risks they cover and the prices of their policies. Through this innovation, customers have a greater ability to only pay for insurance when they need it and insurers have a greater ability to price risk based on individual factors.

Opportunities: Advances is this area can allow individuals to lower costs for “good behavior” and help provide feedback to increase preventative behaviors. Additionally, more data and personalized products can assist individuals trying to minimize cost by providing usage-based coverage. Best practices in data use and sharing can help guide this process.

Risks: The ability to tailor risk assessments could lead to further limiting options and raising costs for “high risk” individuals by penalizing them for factors like living in lower-income areas. Access to more data will mean insurance markets need to assess new risk factors to avoid further biasing against low-to-moderate income consumers or other systemically underserved groups.

Example: Hugo provides low-cost, on-demand auto insurance to help drivers keep premiums low by only activating the insurance when they start driving.

3. Tech-Enabled Risk- and Claims-Management Tools

Internet-enabled sensors and predictive risk modeling encourage an ongoing shift from reaction to prevention. When disasters occur, these technologies also enable rapid response and claims management. This innovation has led to advances in connected devices and sensors that help prevent adverse events and support individuals in risk mitigation efforts. It also supports insurer and customer aftershocks through faster responses times that minimize loss.

Opportunities: A shift to prevention has the capacity to help individuals’ live safer, healthier lives and to align insurer incentives with individual interests. It can also lead to extended coverage in higher-risk areas, such as flood-prone land, to better serve at-risk individuals. This technology also has the potential to lead to more efficient and effective claims management.

Risks: Insurers may choose to use data to raise premiums rather than to seek risk reduction strategies. Further, any use of sensors or innovative devices would need to come with the promise of sizeable cost savings to increase trust.

Example: Understory uses distributed sensors to help insurers determine losses from hail damage. The data allow insurers to more efficiently and better understand the extent and nature of damages.

As these trends in insurtech continue to evolve and expand, we encourage the insurance industry to harness the potential opportunity to improve financial resilience, while mitigating the potential risks to individuals. By doing this, insurance companies can innovate to operate successful businesses that offer accessible, high-quality products that support financial health.

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