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Insurtech: What are the opportunities and challenges?

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Insurtech (insurance technology) refers to the innovative technologies being created and deployed across the insurance sector.

It's a particular strength of the UK. According to McKinsey, the UK has the highest density of insurtech startups globally, with about 280 specialist insurtech companies as of July 2023.

In this article, I explore the impact that insurtechs are having on the insurance industry overall, with a focus on home insurance. We'll look at 4 of the most significant insurance technologies that will impact the industry in the next few years. We won't go into specifics on the companies behind the technology.

Embedded insurance is any cover purchased alongside whatever you're insuring. For example, someone who books a holiday could be offered travel insurance at the point of purchase.

The benefit is primarily convenience: embedded insurance is usually more expensive than sourcing separately. Rather than making multiple separate purchases, customers can bundle the product with the cover.

We've seen this in the home insurance space with Airbnb, which now offers embedded cover for property hosts on their platform. Even if this insurance isn't completely comprehensive, it provides an easy additional service and added value for customers.

For personal home insurance cover, embedded cover isn't popular. According to a global CoverGenius report from 2022, 67% of homeowners, landlords and renters weren't offered protection during their application process. But 36% said they'd prefer to get embedded insurance, rather than buy it through traditional insurance models.

Respondents didn't want to take the "second step" required by an insurance purchase. This typically requires them to manually add data, including the property's age, type of roof, and so on. By offering this as the property is purchased or the lease is signed, this information is readily available.

Despite the convenience, I predict that cost will still be the most important factor in customers' purchase decisions. If customers can easily get a substantially cheaper policy by looking on a price comparison site like Confused.com, embedded insurance will struggle to become mainstream.

We can see a similar trend in motor insurance, where analysts expect to see the most disruption from embedded insurance, largely because of connected cars.

Thanks to connected cars, car manufacturers increasingly have access to data that insurance providers haven't conventionally had. The computers of connected vehicles collect and store information on driving behaviour and vehicle health (just like vehicle telematics).

While all of this data isn't used to inform embedded insurance yet, it could be in the future. As manufacturers can access this data fairly quickly, it might make commercial sense for them to sell cover themselves.

In this example, insurers could also potentially reduce customers' costs while offering them the convenience of a single purchase. Embedded home insurance can add convenience, but there's no cost-saving benefit. As such, I don't see this taking off.

My colleague Louise Thomas has written more about the growing trend of embedded insurance in the car insurance industry.

Artificial intelligence (AI) and machine learning solutions are some of the most exciting and talked about insurtech developments. This technology uses large amounts of data to perform tasks previously done by humans, such as statistical analysis, admin tasks, and more.

The most important area I see AI helping with is processing claims. For instance, imagine there's a home insurance claim for a floor. AI could help analyse evidence of damage and process the admin more quickly than a human, leading to a faster and improved claims experience.

Some insurers are already using AI in their claims management. In our article on AI and insurance claims, we've seen how insurers such as Lemonade are using AI to speed up the process. The company broke the record for the fastest claim processing ever, taking just 2 seconds.

In another example, EY worked with a Nordic insurer to use AI to automate data analysis in the claims process. Human claims teams just had to feed the files into the AI and the tool would do the rest. Yet the technology isn't quite ready yet, as EY found that the tool only read 70% of the files correctly. However, we can expect it to improve quickly.

This is an exciting development from the perspective of customer experience. The Financial Ombudsman Service (FOS) found that, in 2023, the largest population of complaints about insurance were about claims delays.

So, I expect AI would have a tangible impact on the customer experience if it could reliably reduce claims speeds. Reducing insurers' labour costs could also reduce consumer costs in the long run. AI could free up claims handlers to handle more complex tasks.

Another area in which I expect AI to become useful is customer service. AI Chatbots could help customers quickly assess the information they need on their policies or find the right policies for them based on their preferences. For instance, home insurance customers could tell the chatbot what they need from their cover, and the bot could generate them a personalised policy.

So far, customers haven't been keen on chatbots. Before generative AI (like ChatGPT) became widely used, Gartner research found only 25% of customers who had used a chatbot said they'd use one again. However, AI chatbots are significantly more powerful than older chatbots.

For AI to become widespread in insurance, the consumer has to trust it. In a 2024 Guidewire study, nearly 49% of respondents said they were uncomfortable with AI being used to make decisions about the price of coverage without human intervention. 26% said they were "very uncomfortable".

However, we may start to see consumers becoming more comfortable with AI, as it starts to become a part of many areas of our life.

Another area where the insurtech industry is having an impact is smart home insurance. This type of policy uses data collected from Internet of Things (IoT) smart devices, such as smart doorbells, leak sensors, and thermostats.

These devices collect data from their surroundings and optimise their functionality based on that data. They've been around for a long time but haven't been well integrated into insurance.

However, we're now seeing home insurers start to offer packages with proprietary smart devices.

Devices such as smart doorbells and indoor cameras can improve the property's security. For example, a smart doorbell can detect and possibly deter intruders, while leak detection devices can alert customers to an ongoing leak. Ultimately, this reduces the risk of the customer having to make a claim, as it reduces the risk of damage or intrusion.

In the future, insurers could use this data in real time to speed up the claims process. For instance, using real-time data from smart leak detection devices, insurers could be alerted immediately when there's a leak, instantly starting the claim.

These benefits could be transformational for home insurance. This insurtech promises a world of more secure properties, fewer claims, and a better understanding of what's happening in a home. In the long run, this could mean lower costs for insurers (and, in turn, customers).

However, cost may be prohibitive to smart home insurance becoming mainstream.

Smart home policies are typically more expensive than standard home insurance policies. That's because the smart devices themselves are typically included in the cost of the policy. As cost remains the most influential factor in insurance purchase decisions, how many consumers are willing to pay for smart tech remains to be seen.

Many consumers already have smart devices in their homes, such as smart doorbells. However, it's challenging for an insurer to implement existing smart devices into an insurance plan.

As it stands, these devices are usually proprietary to the insurer. But this may be frustrating for customers, as they'll likely want to use the devices they've already purchased and set up.

In short, smart home insurance offers the opportunity to make homes more secure and reduce claims for those who can afford them. But the cost could pose a significant obstacle for customers: particularly during the cost of living crisis.

The final insurtech innovation I want to discuss here is digitisation. Many analysts, such as KPMG, suggest that the COVID-19 pandemic sped up progress towards a digital transformation in insurance. Yet, in many ways, insurance still lags behind other industries, as it has long relied on analog customer interactions.

The insurtech sector has the potential to improve digitisation for customers and insurers. We've already mentioned how AI can help make the digital user experience more fluid by improving chatbot functionality. In the future, smart home devices could automatically alert insurers to any leak or intruder, allowing them to kickstart the claims process without customer intervention.

Yet the biggest impact of digitisation in insurance could be much simpler. Many insurers don't have a useful app, for instance. This could be extremely useful for customers, particularly those who want to manage their policy easily and have a frictionless way to make a claim.

For example, imagine a home insurance customer who wants to make a claim. They have to wait in a phone queue before they can speak to an advisor. With an app, they could tap a button to initiate the claims process and upload photos of any damage to support their claim.

The benefits of digital customer experiences for insurers are well-studied. McKinsey found that the best insurers for customer experience outperformed their competitors by 65% in total shareholder revenue and had stronger revenue growth.

Again, convenience is the main benefit for customers, in the form of faster claims, simpler renewals, and easier access to policy information.

But insurers will need to make sure that the changes they make in terms of their digital experience solve problems that customers want solved. According to a 2024 Guidewire study, customers may actually prefer traditional ways of interacting with insurers. 66% of respondents prefer phone contact in the event of a claim, while 50% prefer email.

This suggests that nondigital channels are still important in the insurance experience. This makes sense. If a customer has been in a car accident, or experienced a break-in at their home, they could be distressed. Sometimes, a human on the phone can help process the claim while reassuring the customer.

However, these preferences might change as generations change. For instance, Gen Alpha is expected to have higher expectations of digital experiences than older customers.

Insurtech offers some exciting innovations for the insurance industry. Yet there are challenges that need to be considered before these technologies and transformations take off. As I've highlighted throughout this article, there are two concerns that stand out in particular.

1. There has to be a customer benefit

The purpose of insurtech is to solve a problem. But the real benefit for customers has to outweigh the cost of investment.

Take embedded insurance for example. It's more convenient, but it's typically always more expensive. UK consumers are driven mainly by price. Is that improved convenience enough to convince them not to take the cheapest deal? I don't think so.

The same goes for smart home insurance. It may offer additional security, but consumers must decide whether they're prepared to pay more for it. This is especially true if they're invested in smart tech, such as doorbells and smart thermostats.

Further, while AI chatbots are far better than what we're used to, do consumers really want them? If customers do prefer to speak to customers over the phone, as Guidewire's study suggests, we shouldn't force them to use a chatbot.

In short, insurers must implement insurtech with the customer benefit in mind, and make sure there is still choice. However, insurtech can add features and doesn't necessarily need to take anything away from the current system. For instance, by offering a powerful AI chatbot in addition to talking on the phone, insurers can appeal to more policyholders.

2. There has to be clarity over what happens with personal data

Most of the insurtech I've considered here uses customers data and will likely use even more as they develop.

For instance, while embedded insurance, as it stands, is currently simply insurance added on at the point of sale, it could become far more data-hungry.

If connected cars are sold to a customer with embedded insurance from the manufacturer, we could see a resurgence in telematics. It would be simple to share driving data with a manufacturer and could offer more accurate insurance policies for the policyholder.

Similarly, while smart home insurance doesn't currently share real-time data, it could in the future. This added automation could improve the claims process. For example, a connected smoke detector could alert insurers to possible damage to the property.

As this example illustrates, more data could make for an efficient customer experience. But there's a real concern among customers about how that data is used and shared by insurers. And this poses a real challenge to insurtech. If customers don't trust insurers to use their data responsibly, customers might not be willing to share that data at all.

So, what can insurers do to unlock these benefits and win over customers?

Firstly, they can continue to be clear on what they're doing with customer data and why. This transparency will build customer trust and let insurers showcase customer benefits by highlighting their data-reliant services.

Secondly, give customers powers to authorise specific data uses. For instance, customers may be happy to authorise data analytics tracking for a smart leak detection device in the home in order to have automated claims. Yet they may be less happy for an AI tool to have access to their medical history.

By being completely upfront about how they use data, insurers may increase trust and adoption of new insurtech innovations.

In this article, I've explored four examples of insurtech that are having an impact on the insurance industry. From smart home insurance to AI, these innovations can potentially transform home insurance as we know it.

Yet the future of a more tech-driven insurance industry will only happen if customers want it - and if the convenience it offers outweighs additional costs. With this in mind, insurers should focus on building products that benefit the customer above all.

To read more about the latest insurance trends in insurance, find out more about what we do at Confused.com.

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