Insurtech: the future of insurance and insurance regulation

Technology has the potential to reshape the insurance industry. It promises not only to change the ways in which consumers buy insurance products – it will also change the types of insurance they buy and who they buy insurance from. It will change the way that insurers choose their customers, the way claims are processed and the way losses are assessed. Technology even has the potential to reduce risky behaviour and make everyone safer.

Of course, the insurance industry has always embraced technology, since the first undersea cables revolutionised international commerce. However, with the rise of the internet, the smartphone and social media, we are seeing a renaissance of technological innovation in the insurance industry.

“Insurtech”, which attracted around US$2 billion in investment in 2016, describes a range of technologies currently being developed and used by traditional and new insurers:

• Sensors and tracking devices make it possible for insurers to keep a closer eye on policyholders. These technologies can be used to encourage less risky behaviours, by providing feedback on dangerous driving or a financial incentive for keeping fit.
• Big data provides insurers with a more accurate way to assess risk. Insurers who analyse data more effectively will find themselves insuring lower risk policyholders and receiving fewer claims.
• The groups of consumers formed by social media are being used to sell new kinds of insurance product. These include crowdfunding insurance, which offers to top-up donations received from a crowdfunding campaign, and peer-to-peer insurance, which uses social media groups to offer a variation on the old “mutual assurance” model of insurance.
• The ubiquity of smartphones provides opportunities for new kinds of on-demand insurance, and also to provide insurance products to third world countries in which smartphones are one of the few types of communications infrastructure.
• Robo-advisors are starting to replace complex comparison sites as a means of helping consumers understand which insurance products might meet their needs.
• Blockchain promises to have a range of applications in the insurance industry, from recording claims and reducing fraud, to a platform for “smart” insurance policies which automate the claims process.

While the success of individual technologies remains to be seen, it seems inevitable that insurtech will bring seismic changes to the insurance industry.

Technology such as big data and sensors allows insurers to assess the risk more accurately. This means that insurers using technology to cherry-pick the lowest risk customers will receive fewer claims (Boston Consulting Group predicts one-ninth as many claims) and be more profitable than those who do not.

Assessing risk more accurately will, of course, increase premiums for customers assessed as high risk. This raises several concerns.

Firstly, insurers will need to ensure that their algorithms are fair and accurate – that they do not incorrectly identify people as high risk. This is more difficult than it sounds, because big data analytics often produce results that unintentionally reflect social biases.

Secondly, regulators have expressed concerns that it would be unfair for high risk individuals to be denied insurance or face increased premiums where risk factors are not wholly within their own control - in particular for medical insurance. It is possible that regulators could feel obliged to mandate coverage or limit premiums for high-risk individuals.

Thirdly, there is the concern (illustrated in Facebook's reaction to Admiral's proposal) that insurers could misuse or fail to secure personal data. Insurers could conceivably use big data not just to assess risk, but also to set prices – for example, by identifying whether policyholders are wealthy or frequently engage in comparison shopping.

Technology also allows insurers to take practical measures to reduce risk across the board. Home insurers can warn of bad weather, car insurers can provide feedback on risky driving and health insurers can remind policyholders to attend checkups. As a result, Boston Consulting Group is predicting that global risk pools for personal lines could shrink by as much as 9% over the next few years.

However, this raises several questions for insurers. As insurers monitor policyholders more closely and provide warnings and preventative advice, does this expose them to liability? Presumably insurers who offer poor advice to policyholders could be liable for negligence. As policyholders come to rely on their insurer’s advice, could an insurer be liable for failing to warn policyholders of a risk? Do health insurers have a duty of care to tell policyholders about any health risks which may be revealed by their analysis?

There is also the question of whether existing insurance regulations are adequate to regulate the new products and business models made possible by insurtech. For example, several startups are offering variations on the “mutual assurance” model, where groups of policyholders insure each other out of a common pool. Business models where traditional functions are automated also create regulatory challenges – last year, US robo-broker startup Zenefits was investigated for allowing its brokers to skip mandatory licensing training.

Many insurers and reinsurers are already investing in insurtech in various ways, which include launching their own startups, acquiring existing startups, partnering with startups or simply licensing white label products. The challenge to traditional insurers comes both from startups and from companies outside the insurance industry.

Startups have an advantage over traditional insurers in that they are nimble and can embrace and develop new technologies quickly. Traditional insurers tend to be burdened by legacy systems that make rapid technological change difficult. The insurance market is full of niches which a startup can target with a relatively small investment. Insurance customers have relatively little resistance to dealing with new providers.

The greater threat to traditional insurers, however, may come from the technology giants like Google, Facebook and Apple. These companies already have vast amounts of information about their users’ lifestyles, consumption habits and preferences which would be invaluable to marketing insurance products. They are already trusted by consumers, significantly more than they trust insurance companies. Google in particular is always looking for new industries to disrupt, and has acquired insurance licences in several US states.

Kennedys has a unique offering to insurtech enterprises, both in terms of the depth and the geographical spread of our expertise, in relation to insurance in general and insurtech in particular.

Kennedys is a global leader in insurance, offering unmatched expertise in insurance regulatory matters, advice on policy wording, claims management and litigation in offices throughout Asia-Pacific and the world. Kennedys also has an experienced technology and data privacy law practice, which has expertise in advising insurers, reinsurers and brokers on the challenges of procuring and developing information technology and of collecting, using and securing policyholder data.