The Technology that will Change the Insurance Industry
Innovation in the insurance industry is still at the earliest stages but startups are beginning to provide new models for this traditional market. “The big breakthroughs in insurance will not come from startups that are targeting insurance directly,” says Harald Rosenberg, Head of Innovation for insurance giant, Munich-Re.
The insurance industry’s roots are ancient. In fact, the insurance sector first appeared during the era of Hammurabi. Back then, if a merchant received a loan to finance shipping, he had to pay an additional amount to the lender for the risk that the lender undertook in case of theft or loss of the shipment in the sea. Ancient Persian kings were the first to insure their subjects and made it official by registering that insurance in government offices.
Over the years the insurance industry has changed. Two pastors, Robert Wallace and Alexander Webster, deserve the credit for that. They were the first to harness the science of statistics and risk management for the establishment of the first pension fund – The Scottish Widows Fund. They were the first to calculate the mortality tables of priests, and then were able to calculate the insurance premium that must be collected and how much to pay each widow in a way the collected money would be sufficient to support her for the rest of her life.
However, it appears that in recent decades the industry stopped innovating: the high interest levels and high profits recorded by the insurance industry did not encourage change. Consequently, and in part due to zero interest rates which caused significant financial damage – insurance companies realized that now is the time to go back and innovate.
Innovation in the insurance industry comes several years after seeing similar reforms in the banking world, where thousands of startups around the world and in Israel have developed hundreds of different products, some of which actually undermine banking activities, while others have been adopted by banks. This industry has been termed Fintech (financial technology). Now it seems is the time for the rise of Insurtech (insurance technology).
Israel Commissioner of Capital Markets, Insurance and Savings, Dorit Selinger, appeared two weeks ago at a branch convention and said: “We’re in the stone age in the insurance industry, not only in Israel but throughout the world. Moreover, we lag compared to the financial industry, which presented the option to transfer money and buy securities using our smartphone many years ago”. Selinger called on the insurance industry to adopt digital innovation and to create greenhouses similar to those created in the Fintech industry. “We are ready to remove regulatory barriers and even to ease capital requirements for entities which present complete digital concepts and innovative models to manage insurance risk,” she said.
Last month, consulting and research firm Gartner published an article recommending insurance companies to start exploring the innovation facing the insurance sector in order to upgrade their digital strategy. Today, according to Gartner, 64% of the 25 largest insurance companies have already invested in some way in startups in the field. A study conducted by PwC consulting and accounting firm a year ago which examined the views of senior executives in the financial industry regarding Fintech, argued that despite efforts made in recent years, the technological development of the financial services industry is in its infancy.
JVP holds in its portfolio a number of Insurtech technologies and has taken the trend a step further together with the global insurance giant AXA by leading a start-up competition in the field. So far, dozens of start-ups signed up and registration is still open with the announcement of the winner will take place in February. The winner will receive an investment of a million dollars from JVP and the possibility of further investment from AXA Ventures, together with an offer to join Kamet – the innovation branch of AXA Ventures for early stage companies operating in Paris. Companies registered come from a variety of areas: Big Data, IOT, risk assessment and management, cyber, health and more.
One of the most prominent names in the global insurance industry is MunichRE of Germany and is trading at a value of 29 billion euros. Recently, MunichRE is known for adopting and investing in startups that offer innovation in the field.
According to the database of CB Insights, since last May the company signed seven deals with startups. Among others, the Company entered into a collaboration with two Israeli startups, Safe Beyond and Next Insurance, that offer digital tools for major insurance companies and end customers.
“Turn a negative experience into a positive one”
In an interview from the Tel Aviv offices of MunichRe’s strategic partner, F2 Capital, Harald Rosenberg, Head of Innovation at MunichRE, explains the changes occurring in the field and what the huge global-scale company is seeking in Israel. “The first step is to change the business model. Consider that about 30% of each dollar of income is spent on expenses due to the manner in which insurance companies sell insurance. The transition to digital platforms alone saves a lot” he says. In times of zero interest rates and of insurance companies losing profit, the transition to digital platforms can improve profitability significantly.
Rosenberg admits that today the majority of customer interaction with insurance companies is negative – only when something bad happens. “Using different technologies we intend to interact with consumers in a positive way”, says Rosenberg.
How do you do that?
“This is exactly what we are looking for in Israel. I will give an example from the cyber field, even though it does not have to be just cyber, since it can apply to health care as well. When the person insured requires compensation on the basis of any injury, he wants the full amount. On its part, The insurance company will attempt to earn a few bucks, so the client always sees insurance as a vile organization. “
According to Rosenberg, “if we can make a person who has insurance against cyberattacks update a version and thus be better protected or ask him to take steps to secure better his own devices – we can let him know one year later that we will reduce his premium. The ability to track the customer allows us to be more involved and enables us to offer positive things – thereby changing the negative experience into a positive one. “
The Junction operated by F2 Capital in Tel Aviv. “We are focused on a business model that will reduce the expenses of insurance companies and increase the growth of businesses in the market.״
Wearable technology will reduce the health premium
One of the insurance sectors that may change soon is health insurance. Following the growth in wearable computing, including bracelets and watches monitoring human health in an objective and permanent manner, its likely that the insurance product will be tailored to the customer. For example, if a person eats healthy, exercises and has normal medical indicators – he will be rewarded with a cheaper premium according to market rates.
This approach raised discussions about privacy and doubts about the interest of insurance companies to tailor a premium to each customer personally. However, according to Rosenberg, the assumption that insurance companies want to invade our privacy is wrong. “I think this is an extreme scenario. It’s really not our vision as insurance companies to know everything about the person. If that happens, the business model of insurance will disappear. The goal is to find similar statistical characterizations for a group of customers. This is the historical concept of the insurance sector. If we reach a situation in which every customer needs a custom package, there will be a lot of women and men that remain without insurance. We must leave something random. If in the future we’ll know everything about a person’s future, why sell insurance? “
Patrice Cohen, director of the local startups locating activity of MunichRE, argues that “today insurance companies ask the insured certain questions, some of which are specific and he can’t always answer it. The risk we want to take is the people who deviate from average. Instead of asking you about the state of your health, I will ask what medications do you use. This is good information for me. If I receive data from any device , I can make an objective analysis of the client’s medical condition. Technology is the way to achieve it, but it will have to stop in a certain limit. “
If you know a lot about a specific person, will it allow you to better price pension products?
Rosenberg: “This is true as long as everyone buys the product. But if we know – you as an insured person, we will also know your various risks and you will be able to calculate whether you should purchase such insurance, other insurance or not buy insurance at all. For example, If there is a high probability that a man will die at a young age, he won’t buy long term care insurance or health insurance, because it is unnecessary. In this case perhaps only those who live beyond a certain age will buy insurance products, so prices will only rise, and ultimately everyone will pay the price for the last person who lived – but here the discussion is getting overly philosophical “.
Will the integration of technology in the insurance field create new competitors for you, such as Google or Facebook?
Rosenberg: “If Google jumps into the insurance sector, it will undoubtedly be a big competitor. The question is why would Google do it. Google knows a lot about the customer, but we know better how to access and assess the data. We want to know the users better, it is part of the what we’re looking for. In addition, Google has a lot to lose if it goes into this field, and I don’t see a reason for it to do so, since it will lose its neutrality. “
Are you interested in using blockchain technology (designed to provide a more transparent business environment and remove mediators) ?
Rosenberg: “This field is still new, so we still can’t say how big is the impact of blockchain on the insurance sector. In the financial sphere it’s easy to see, because of payment transfers. We’re not sure if this is a real revolution or not. However, We have a group researching the field in Munich and cooperating with various insurance companies to consider the use of technology in contracts. We are focused on a business model that can reduce expenses and increase growth of businesses in the field.”
There is a problem of insurance fraud. Do you know what is the extent of it?
Rosenberg: “There’s no clear answer, only speculation. It is very much dependent on culture – and I won’t point out where there is more and where less. . I can estimate it’s a double-digit number. Nowadays when you are writing your policy, you cheat. If a person is asked about weight and height, and he knows that if he fakes a little his premium will be cheaper – he will cheat.
“People must understand that we are not against the payment of compensation claims. We are against the payment of compensation to those who do not deserve it, because it causes premiums to increase for everyone”.
Can Israel lead the Insurtech field?
So far MunichRE examined five local startups, and to this end partnered with F2 Capital, managed by Barak Rabinowitz and Jonny Saacks, former partners at Genesis. Rabinowitz explains that the connection between the fund and the German insurance giant “is based on a number of factors. First, the global insurance market is a huge market of trillions of dollars. Second, Israel is strong in areas such as cyber, big data and drones with deep expertise that can contribute greatly to the insurance industry.
“MunichRe works with us in order to find solutions for their clients – the insurance companies themselves, which are required to provide coverage for cyber attacks or third party insurance for drones. More than a million drones were gifted last Christmas, for example. Consumers do not realize the extent of their liability and Israel has much to offer in this field. Insurance companies needs new models and seek partnerships with startups who know how to build the relevant data. “
The cooperation between F2 Capital and MunichRE begins at the early stage of filtering companies entering the The Junction accelerator. Out of five startups in the current wave, two are relevant to the insurance industry. Cohen, the representative of MunichRE in Israel, meets these two selected startups once a week with a goal to produce a commercial pilot with MunichRE and their insurance customers.
“There’s something special here,” says Rosenberg after several meetings with Israeli entrepreneurs. “The people here are different from anywhere else in the world, and it seemed like something to do with their military background and formation of teams. Technologically and from a business standpoint, Israelis think globally from day one – and that makes a big difference. Not many in Silicon Valley and around the world think that way. You see it in the eyes of people here who have a vision and live their dream. “
Can Israel, a small market in the insurance industry, bring change to the world?
Rosenberg: “I think that change will not come from a company aiming directly at the insurance industry. It has to come from the perspective of technology that will integrate the insurance industry. If a company from Israel, as well as other markets around the world, want to attack the world of insurance, it is aiming for a very narrow track – and probably misses quite a bit on the way. Technology is more important. There are companies that are not aware of their potential in the insurance industry, so we meet with startups and examine the option to change their business model.
“My vision is divisible into individuals and corporations. As for corporations, I wonder if insurance would be at all relevant in the future, why not just find partners to make sure everything is done as it should be done. If the machine doesn’t work, you will be responsible that it will work again, according to a forecast the system gave you last week. Instead of holding car insurance – people prefer to know that their car is working properly. The picture is bigger than that”.
What is your big picture?
Rosenberg: “We want to see which companies are taking part in the ecosystem and understand what is happening in them, who pulls the strings and which strings. In terms of technology, we are looking for cyber, artificial intelligence, data analytics and technologies in the field of digital health. We are looking for companies that know how to give an insurance product, for example how to insure drones, which is a new technology. To date, we met one.”
“We are here primarily to build bridges. We bring an alternative for the basic model of investment. For example, we see that there’s a lot of cyber companies directed to the same anti-virus solutions, where competition is high. In this area, for example, we can be mediators to our 5,000 customers. It’s a risk they face.”
How do you think the insurance industry would look like after all the technological changes?
Rosenberg: “The field certainly will change. We will see quite a bit of consolidation in the sector, namely mergers and acquisitions of companies. Some of the organizations that exist today will be the big players in the future, together with new companies.”
“Technology can also be used negatively and raise prices”
When you look at an old field with technology breakthroughs, the tendency is to wonder how regulation will cope with the changes. For example, is there a need to change the way licenses are granted to insurance agents in a world where agents will be digital?
Attorney Ariel Yosefi, associate director of technology department and regulation at Herzog-Fox-Neeman, highlights that “technology does not replace the existing models, but adds new things that did not exist. For example, in the field of collecting private information: If my phone knows when I took the car to the airport and got on a flight, an application can offer me a variety of suggestions – regarding insurance, parking space and regarding my house that is left empty. Regulation needs to deal with the change to enable the streamlining of the insurance.”
Yosefi adds that “with exposure comes the challenge of privacy. Reducing the premium on the basis of information is nice, but the same technology can also be used negatively to increase prices. Someone who is not ready to move forward or disclose information can be discriminated against, because he presents a greater risk. The challenge is to find a balance between the benefits of sharing information and the risk of harming privacy. Therefore, it is necessary to define limitations on the use of information, primarily to ensure the owner of the information can control it – as to what kind of information is collected and for what purposes.”