The insurance industry is ripe for technological disruption, but the results may be dicey. Some areas of banking services, notably payments, have been relentlessly targeted by start-up companies since the financial crisis. But nine in 10 insurance executives polled by consultant PwC reckon at least part of their business is at risk over the next five years – a greater proportion than in any other area of finance.
The hope for fintech is that by offering greater efficiency it will benefit society by driving down or eliminating economic rents. Insurance is crying out for Toyota-like industrialisation: brokers and underwriters at the Lloyd’s of London market still agree on cover using paper documents. Sadly, most of the start-ups to date have focused on front-end customer interactions rather than the back office, unlike in banking.
Perhaps the biggest potential advantage would be reducing claims: by using micro-chips embedded in industrial and everyday appliances – the “Internet of Things” – it could be possible for insurance companies to use such sensors to anticipate and prevent damage. This might save costs in the long run not just for reinsurers and investors, but also for individuals and communities.
The flipside is that many of the other innovations proposed so far look more troubling. Some seem to rely on intrusive Big Brother-like methods. A handful of health insurers, for instance, now offer wearers of fitness trackers lower-cost policies if their data is up to scratch. So-Sure offers a kind of peer-pressure insurance, by offering groups of friends or acquaintances – with an emphasis on social media links – money back if none claim on mobile phone insurance.
Other new companies may present a challenge to risk management. Consider those offering ever more tailored insurance policies, by giving customers the ability to guard against the damage or loss of specific commercial contracts, say, or each individual component of a smartphone. One example is Cuvva, a start-up which provides UK drivers with comprehensive insurance on third-party vehicles for as little as one hour to no more than 24 hours, while outsourcing the underwriting of its policies. Working out how much capital should be held to guard against such claims looks set to become a trickier task for regulators.