Innovation in insurance: are we looking the wrong way?

TechCrunch, the technology news site, recently declared that Insurance is the Next Frontier for Fintech.  But the $3 billion of investments made in financial technology  in 2014, which included support for developments in lending, equity financing and digital payments, were mainly focused in the banking industry. Insurance innovation was under represented, so has its time now come?

Despite generating insurance premiums of over $1.1 trillion during 2014 in the US alone, there are few examples of real breakout innovation in insurance. Technological developments such as drones, driverless cars and our increasing fascination with measuring our body’s performance with digital devices such as Fitbit, are all touted as future disruptors for insurers but there’s no threat of an Uber-like monster coming over the hill just yet.

TechCrunch may be partly right in its declaration, but perhaps not in the way that it suggests.  One of the largest European accelerators, Startupbootcamp recently launched its first accelerator programme focusing on disruptive insurance innovation.  Applications for the programme are now closed, with a Demo Day planned for April 2016. It will be intriguing to see what they come up with. Early indications suggest there will be a strong focus on data and distribution, aimed at consumer markets.

What about telematics?

Telematics, or “Blackbox” car insurance is perhaps the most widely known example of what could become truly disruptive innovation that has appeared in recent years. By directly measuring a driver’s behaviour, this approach should result in a far more accurate understanding of the risk and hence enable much more differentiated premiums based on individual driving patterns. But this technology remains in its infancy. Building accurate pricing models requires access to many millions of vehicle-years of data and thousands of claims. This is not yet available.  Costs of the equipment and installation remain high, and there are concerns about privacy issues. Until there is a meaningful differential between the cost of conventional insurance and the savings represented by telematics, growth will be slow and of marginal benefit to all but a highly differentiated minority, such as younger drivers, or those that drive very infrequently. If insurance is the new frontier of Fintech it could be a long and difficult journey to get there. 

75% of property losses are not covered by insurance

On average, only 25% of the total costs of catastrophes are covered by insurers.  Some of the balance is picked up by governments, but major losses from hurricanes, earthquakes and flood destroy entire economies and much personal wealth every year. In the developed world, 60% of our losses are covered by insurance.  The average for the developing world is less than 10% and in some areas there is effectively no insurance cover.  Underinsurance, known as the ‘protection gap”  is a major issue globally, and getting worse with rapid urbanisation. For many, insurance premiums that reflect the true risk make cover unaffordable.  Adding to the challenge of those who can’t insure, is the problem of those who won’t insure.   

Most of us give little thought to renewing our own insurance cover. Unless we move house, make a claim, or see our premiums dramatically rise, we probably spend less than an hour a year thinking about it. And many of us prefer not to think about it all. Every Californian knows that they live in an area of high earthquake activity; many can afford the coverage, yet 90% choose to have no earthquake insurance at all. Unlike flood risk, there is no requirement for homeowners in California to buy earthquake insurance when taking out a mortgage. Since 1996, the California Earthquake Authority (CEA) has been the primary provider of earthquake cover in the state.  It’s expensive (but getting cheaper) and the cover isn’t great, but surely it’s better than nothing? If there is such a lack of concern with a real and present danger in a country with the highest GDP in the world, is there any hope of closing the global protection gap?

The rise of mobile microinsurance 

It’s unlikely that any Hollywood blockbusters will be made about an African farmer losing his farm. But a couple of years of low rainfall can lead to crop failure, causing a farmer to default on the loans he took out to buy seed and fertilizer, forcing him into poverty. Despite the lack of innovation in traditional insurance markets, innovation has been successfully driving change in parts of Africa and Asia. Today, over 200,000 farmers are covered by a new type of insurance for crop failure that offers a hint of what innovation may look like for insurers in the future. 

Microinsurance in its current form has been around since 1999 but grew very slowly at first and was heavily reliant on subsidies.  In 2010, Embu County, 75 kilometers north-east of the Kenyan capital Nairobi,  became the first example of a community to receive a large scale insurance payout through a microinsurance scheme enabled by mobile phone technology. The widespread use of mobile phones in developing countries has taken off, avoiding the need for investment in traditional land-lines. Making cashless transactions via mobile phones, only now starting to arrive in the developed world, has been prevalent for a number of years in Africa and parts of Asia. This convergence has spawned mobile microinsurance, which is now showing signs of standing on its own in commercial terms.

What happened in Embu was possible because of a partnership initiated over five years ago that includes seed wholesaler Kenya Seed, agribusiness Syngenta, the Kenyan insurance company UAP, Swiss Re and mobile phone company Safaricom.  Innovation built on local practices, rather than trying to work around them, has enabled programmes like this to thrive.

How does the Embu microinsurance scheme work?

When a farmer buys seed or fertilizer, an additional five percent is included in the price to cover part of the insurance premium.  The dealer scans a barcode and a new policy is automatically registered with UAP.  Solar-powered weather stations measure the rainfall levels, triggering a payout if the rainfall is too high or too low. The cash is automatically credited to the farmer’s mobile money service. No loss adjusting, no claims submission and no paperwork.

Over 263 million people globally now benefit from microinsurance in various forms. Innovation is working and there is a lot more opportunity for growth.

Solving the Global Insurance Protection Gap

Late in 2014, the Geneva Association published its recommendations to address the Global Insurance Protection Gap.  The 55% of the world’s uninsured population represents an additional $40 billion of potential premium; microinsurance currently only targets five percent of that. Achieving further breakout growth will be difficult but momentum is building.  In 2015, we have seen the launch of some high profile initiatives that will provide funding and expertise to drive further innovation.

• 2015 started with the announcement of the formation of a microinsurance venture incubator (MVI), now named Blue Marble Microinsurance. The consortium of AIG, Aspen, Guy Carpenter, Marsh & McLennan, Hamilton Insurance, Old Mutual plc, Transatlantic Re, XL Catlin, and Zurich Insurance has committed to launching ten microinsurance ventures over the next ten years to address the risk management needs of the underserved.
• In February, AXA Corporate Solutions announced a partnership with the World Bank’s Global Index Insurance Facility (GIIF), a multi-donor trust fund, to support the development of parametric insurance in Africa, Asia, and Latin America, with a focus on maintaining food security after natural catastrophes.
• In July, the EU announced funding for climate monitoring and data collection as part of  €88 million funding over the next five years to implement a programme called ‘Building Disaster Resilience to Natural Hazards in Sub-Saharan African Regions, Countries and Communities’.  One of the four initiatives will promote the development of better financial strategies to deal with disasters when they strike.

 What next?

There still remains massive opportunity for commercial growth in the near future by applying new innovation to address under insurance in the more developed areas of the world. With the gap between insured payouts and economic loss exceeding 50 percent in many countries, and not far off this figure in the US and UK, insurers have the potential to double their addressable market if they can find the right solutions and overcome our inertia as consumers. The problem is, most people don’t really care too much about insurance until they experience a loss. Regulation has played a role in property and motor insurance in requiring us to purchase protection, but market forces have lagged behind.

Change happens slowly. There has been one Silicon Valley based technology company that has been very successfully providing innovation to the property insurance industry for 25 years.  Mobile microinsurance shows what can be done to overcome what were once seen as insurmountable barriers in the developing world. This is an industry that has huge potential for growth, and to improve the quality of life for millions, if not billions of people.   It’s good of TechCrunch to have faith in insurance as the next frontier of innovation in Fintech. Will our industry be able to attract the creativity required to achieve the real breakout growth, and at scale, that has characterized success in so many other domains?