The insurance industry broadly consists of individual or companies who want to protect themselves against the risk of a negative outcome or insuring against loss by events like fire, accident, storm, hurricanes or theft by paying a risk premium to the Insurer, who guarantee a payment to the Policy Holder if the negative event occurs.
The insurer or the insurance company takes a part of the money to insure itself against over exposure risks thru Reinsurer. The insure hedges the risk of default, not being able to pay, all the claims or a huge claim by insuring against such a situation. In most cases the government regulation demand that the insurer has a reinsurance. For example, suppose the insurer has huge exposure to property insurances in a particular region and then the insurer tries to spread the risk by taking a reinsurance. In the absence of such hedging the insuring company can go bankrupt if in an unlikely event of a natural disaster like earthquake or a hurricane all its policy holders in the region send in their claims.
The insurer also spends a part of the collected risk premiums on administration costs like staff, offices, marketting etc. In legacy insurance companies, the costs of large number of employees and offices for these employees can be significant part of the operational overhead.
The remaining amount of the risk premiums collected by the insurer or the Insurance Float is invested in interest generating assets like government bonds, corporate bonds etc.
There are broadly three different types of Insurance companies:
- Accident and Health insurers;
- Property and Casualty insurers;
- Financial Guarantors.
Disruptive Innovations in Insurance Industry
According to the Business Insider Intelligence report (ref), the global insurance industry is worth almost $ 5 trillion with majority of the business coming from US and Europe. Although legacy insurance companies account for most of the business, they are being increasingly challenged in their turf by nimble Insurtech and Fintech start up companies. The size of these legacy companies means that although they are aware of the need for innovation, they have a challenge of switching over from their legacy business model. Some of the legacy insurance have tried to catch up by buying up startups or their services.
Disruptive Innovation in the Insurance is being done by companies using the following technologies:
- Artificial Intelligence
AI is being increasingly used for automating things which traditionally were being done by humans like calculating the risk-premiums, customer service, processing of claims, fraud detections etc. - Distributed Ledger Technology
Some of the insurance companies are using the Blockchain to take advantage of the distributed ledgers, consensus and smart contracts. The Blockchain Insurance Industry Initiative, B3i, was started by 21 Insurance market participants is building the solutions leveraging the Block - Cloud
Legacy insurance companies like most companies in other industries are moving towards a cloud IT infrastructure. The insurtech startups have advantage in being cloud native from the inception and thus realising significant operational cost savings. - Internet of Things
IoT is increasingly being used for developing highly personalised insurance products for the customers. Auto InsureTech Company, SmartRide, uses a OBD dongle to track the usage and driving trends to adjust the individual risk-premiums. Insurance giants like QBE have been using drones to remotely assesss and settle the insurance claims. - Mobile Connected Devices
Insurance companies are increasingly offering the possibility to buy a insurances on the smartphones and even submit insurance claims directly from the customer’s smartphones. - Value Transfer
Customer experience of Insurance has also been enhanced by the growing number of digital wallet users and innovations in FinTech. Allowing the customers to buy the insurance using the money in their digital wallet and getting payment of the claims in these digital wallets.
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References:
- A Brief Overview of the Insurance Sector (investopedia.com)
- The Connected Insurer (sas.com)
- THE INSURTECH REPORT: How financial technology firms are helping – and disrupting – the nearly $5 trillion insurance industry | Business Insider India
- B3i – The Blockchain Insurance Industry Initiative
- SmartRide – Nationwide
- QBE deploys drones to assess insurance claims – Hardware – iTnews
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