I work in the reinsurance world. Wait don’t leave.
Specifically, I work in the legal sector, and prior to COVID-19, my attendance at insurance, reinsurance (and tech) related events/conferences felt monthly.
And every single one had one panel (some two) in connection with one particular topic, which they didn’t perhaps a few years ago: the evolution of insurtech.
Insurtech: what is it and where are we now?
So you’re in the insurance industry but live under a rock. What is insurtech?
It is just as the name suggests. The combination of insurance and technology. Or, perhaps more accurately, the rise and use of a wide range of technologies within the insurance industry, from underwriting and claims to administrative functions. What has always been an extremely paper-intensive industry is now gradually dragging itself into the digital age. The disruption of an age-old industry by the onset of a digital revolution.
Digital transformation. It is what it is. We currently find ourselves in a new industrial revolution — the 4th industrial revolution or “4iR” — though it sounds silly to call it that. As it is anything but industrial. The transformation involves many things: the rise of automation and artificial intelligence within the everyday work process, either replacing employment or enhancing employment, depending on your viewpoint. The use of blockchain technology and smart contracts, simplifying claims management and underwriting processes.
A quick example: Lemonade Inc.
A quick example and one of the poster children of the insurtech movement: Lemonade Inc. Its CEO and co-founder Daniel Schreiber once stated “The insurance brands we know today came of an age in the era of the horse-drawn carriage, but insurance is best when powered by AI and behaviorial economics, which is why we believe that companies built from scratch, on a digital and with a social mission, will enjoy a structural advantage for decades to come.”
What does Lemonade do? Using a mix of artificial intelligence, behavioral economics, and chatbots, it is able to allow its customers to be able to download and use apps, so rather than liaise with human beings when having to deal with an insurance claim — or employing the use of any insurance broker — their policies are handed automatically. Its most famous claim to fame was its ability to file and pay and claim a claim in three seconds. Plus, a portion of its underwriting profits goes to charity.
At its core, it is digital peer-to-peer insurance, similar to a mutual insurance company, except replacing brokers with AI. It’s primary (current) limitation is that it only really can handle small claims.
Embracing technology
Despite Lemonade’s limitations, as an example of the potential of how technology can disrupt a traditional industry, it is a good one.
So… insurance. Paperwork. Tradition. Regulation. Protection.
Innovation? It is slow to move, but even Lloyd’s is progressing into the world of technology. There are many, many new technologies that are becoming relevant to the insurance world. Blockchain, artificial intelligence and machine learning, big data, robotics, deep learning, healthtech. The internet of things and particularly the use of wearables.
Insurtech can really comprise of a number of things, including insurance vehicles looking to re-invent themselves embracing new technologies, potential new insurers establishing themselves to write insurance in a new innovative way, or simply new ventures that are offering specialized tech products to insurers and other market participants.
A jurisdiction to review: Bermuda
Bermuda, once called the “insurance laboratory of the world”, and its regulator, the Bermuda Monetary Authority (BMA) has specific insurtech legislation allowing vehicles to enter an insurtech “regulatory sandbox” as well as the provision of an insurtech “Innovation Hub”, promoting insurtech companies to exchange ideas and information with the BMA.
The insurtech sandbox approach is an interesting one, given Bermuda’s size within the global reinsurance world (being the second-largest reinsurance center worldwide). At its core, the sandbox allows for the formation of new insurance (or intermediary) entities, either as brand new start-ups or affiliates of existing insurers. These new companies will, for a period of up to one year (which may possibly be extended), operate using and experimenting with their proposed new technologies and provide their insurance products and services to clients in a controlled environment, under the close scrutiny of the BMA, with the BMA determining what legal and regulatory aspects of the existing legislation should apply to them in order to ensure policyholder protection.
One company has already dived in, AkinovA, which has been licensed as an insurance marketplace provider. The company focuses on cyber risk transfer; allowing sectors of the insurance market to trade in a faster and more efficient marketplace.
Following a year of progress, a Bermuda insurer can be established and “graduate” from the sandbox and become a fully licensed insurer should it wish to do so. These insurers can range from either small claims insurers (a la Lemonade) to full-blown commercial reinsurers. As an example, Nayms Ecosystems Limited has been granted a Digital Asset Business and an Innovative General Business Insurer license (IGB) to allow it to be a Class M (“Modified’) insurer.
The benefits to this approach include various aspects to the proposed entity wanting to enter the sandbox: (1) an opportunity to test its technology before heading into the formal insurance market, (2) allowing it time to work with the BMA as its main regulator to ensure everything being proposed “works”, and (3) helping reduce the cost of regulatory uncertainty a start-up would otherwise face.
As Bermuda’s Premier Burt stated at that time:
“Nayms represents a promising blend of digital assets and insurance, which showcases what the future of insurance looks like. Bermuda has taken great strides to position itself as an attractive domicile for players like Nayms and it is exciting to see the kinds of new ideas that are being developed. The ability to create shared digital rules around traditional insurance contracts is a game-changer for the industry. They allow for increased efficiency and greater market opportunity which ensures Bermuda continues to play a leading role in the insurance-linked securities market. We look forward to welcoming more innovators like Nayms who are showcasing the way digital assets will reshape the core infrastructure of traditional financial services.”
The future
So, innovation hubs, sandboxes, blockchain, behavioral economics, and AI. Is the reinsurance industry now finally at a tipping point?
There are the naysayers. Innovation hubs are really just means for companies that carry out tech-related activities to liaise with regulators within their jurisdictions. Blockchain-based, self-executing insurance contracts or ones that are done on a peer-to-peer basis using AI are actually pretty dumb and fairly limited to small claims for the time being. And sandboxes will still need a good degree of time to see if they succeed. And the use of a chatbot, robot, or any form of AI can never replace the logic and analytical skills which an actual underwriter or claims analyst will be able to provide. In short, the argument is there that the technology driving insurtech is going to take time, not to mention loads of regulatory requirements which underpin the industry.
But relating to that last point. Wherever we are in the existing insurtech revolutionary curve, for now, the need is there for regulators to both innovate and adjust. And for companies to expand and adjust to take into account the needs of their customers who seek quicker and more efficient service.
Whether you are an insurance vehicle that is competing with others, or an insurance jurisdiction competing against similar ones, we are, like it or not, transforming into a new digital era. Soon, the insurance industry will not be paper-based. And those insurers who fail to realize that will have to do so soon, like it or not.
And finally, to those naysayers who ask me the question: is insurtech for real? When Lemonade Inc’s IPO launched in late June 2020, its share price soared to 132% of its trading value, raising $319 million, and was valued at $2.1 bn in its 2019 funding round.
Yes, insurtech is real. Very real.
[Authors note: This article was initially published in April 2018]
Chris Garrod – February 2021