Insurtechs: Leading Digital Transformation in the Insurance sector
06 Jun 2016
The insurance industry has not seen much innovation over the last few decades. The few innovations on the market have not come from the big insurance companies, but from small Insurtechs (Insur for insurance and tech for technology) offering new approaches to industry problems.
Insurtech as response to the lack of innovation and user-centricity
Starting as a sub category of Fintech, Insurtech today is a category of its own. In 2015 alone, more than USD 800 million was invested in Insurtech start-ups. In 2016, the investment will be even higher. We are about to witness the start of an enormous revolution in the insurance industry.
Within the Insurtech universe so far, six segments have been established: Contract Management/Brokerage, Peer-to-Peer Insurance, Spot Insurance, eCommerce Insurance, Health Insurance and Usage Driven Insurance. Insurtech companies have one thing in common: the focus is on the consumer. Digitalisation is just a tool to make it happen. So far, the user experience in the traditional insurance industry has been largely unsatisfactory. Insurtech seeks to address that.
Friendsurance was one of the first start-ups to change the insurance market. In 2010, the Berlin-based start-up launched the first peer-to-peer insurance. The idea was inspired by insurance in its original form, when small groups of people such as village communities supported each other in the event of a loss. This was easy and efficient, but the extent of coverage was limited. Today, big insurance companies can cover claims of any amount, but marketing, administration and fraud generate high costs. Against this backdrop, Friendsurance developed a peer-to-peer insurance model that incorporates smaller groups into bigger insurance pools and rewards claim-free years with a cash-back bonus – ie a claims-free bonus. This is how insurance becomes more affordable and fair.
The business model: Sharing economy applied to insurance
Based on a sharing economy approach, policy owners with the same insurance type get together online in small groups. To get access to the claims-free bonus, Friendsurance adjusts your insurance contract. For this purpose, a deductible is added in your contract or your existing deductible is increased. Compared to just having an insurance rate with a high deductible on your own, you enjoy a huge advantage with Friendsurance: in the event of a claim, you do not have to carry the deductible alone and still benefit from low fees – that is because higher deductibles cause lower insurance fees. The difference between the old and the new fee goes straight into the cashback pool. If there are none or just a few claims, everyone gets back a share from the cashback pool in January of the following year. In case of a claim, the damage is paid out of the pool. If claims are higher than the deductible, the standard insurance company steps in. In case there is insufficient money left in the pool to cover a claim, a stop-loss insurance covers the rest. As a result, policy owners always enjoy full coverage and will not incur any additional costs.
Today Friendsurance has a six-digit number of customers, which is the size of a middle-sized German insurance company. So far, more than 80% of users have received some of their insurance fees back. In the property insurance line, the average cashback was 33% of the paid insurance fees.
The claims-free bonus has already been awarded several times: In 2015, Friendsurance was declared to be one of the best digital innovations and received the UN World Summit Award. In addition, Friendsurance was listed as an Emerging Star in the global Fintech 100 list by KPMG and H2 Ventures.
Currently, the claims-free bonus is available on a range of retail products in Germany: private liability, home contents, car, home and legal expenses insurance. Users looking for new insurance coverage can find a range of different offers on www.friendsurance.de. The contract they buy will already have the Friendsurance concept built in, enabling them to receive cashback each year. Moreover, the concept can also be added to existing contracts very easily, creating the most convenient way of saving insurance fees – without any change in coverage, insurance fee or provider.
Cooperation with insurance companies
As Friendsurance's business model was completely new, it took some time to convince the insurance industry to cooperate with them. The founders had to invest a lot of energy in relationship building – eg it took one year to establish the first partnership with an insurance company. Six years later, Friendsurance operates as an independent insurance broker in the German market with about 70 domestic insurance partners. They profit from increasing customer satisfaction and customer loyalty. At the same time, they benefit from reduced processing costs for small claims and reduced insurance fraud as it provides a clear financial benefit for careful and fair behaviour.
P2P is gaining ground
When Friendsurance launched its peer-to-peer insurance model in 2010, it was unique. Friendsurance spent five years as the only supplier in the market before the British provider Guevara launched a comparable model for car insurance in 2014. Within a few months, 14 more peer-to-peer insurance projects emerged in seven countries: Columbia, France, Great Britain, Netherlands, New Zealand, South Africa and the USA. Now a segment solely for peer-to-peer insurance has established itself within the Insurtech universe – with Friendsurance as segment leader. P2P insurance is not a short-term phenomenon. Friendsurance is expecting that, in the long run, peer-to-peer insurance will replace individual insurance. On its sixth anniversary, Hong Kong-based Horizons Ventures, the private investment arm of Mr. Li Ka-Shing, and others invested USD 15.3 million in Friendsurance. The firm intends to use the fresh capital to grow further in the German market and expand internationally. The first expansion target for 2016 will be Australia.
The insurance industry still deals too much with itself instead of the customer
The main beneficiary of the Insurtech revolution will be the consumer, as Insurtechs will play a substantial part in making insurance more customer friendly in the coming years. According to the “Digital Satisfaction Survey“ by Boston Consulting Group, the insurance industry is ranked number 14 out of 16 industries in terms of customer satisfaction. The insurance industry can learn much from digital companies – especially in terms of customer centricity. Insurtechs work in a very customer-focused way - beginning with the identification of target groups, user tests, up to product iteration.
When traditional market participants see innovation, they often ask themselves, “Will this harm me?”. They rarely think about how to use innovation to create a benefit for their users. They try to protect themselves by using regulation as a barrier to entry, thinking that this “protects” them and no outsider would enter the industry. Regulation in the insurance industry is a reaction to misbehaviour by the traditional players in the industry. By definition, regulation cannot be a problem for user-centric companies.
The reaction of the insurance industry to new innovative companies is revealing as well. The first reaction is, "Will this become dangerous for the traditional players in the industry?" Instead, traditional players should ask themselves, "What can we learn that will help us become more user-centric ourselves?".