No longer in fear of a revolution, traditional life and health companies can work alongside insurtechs for mutually beneficial results, say Tim Smith, Patrick Kosmützky and Lisa Balboa.
Disruption: the most overused word of the early days of insurtech. Tech-focused start-ups wanted nothing less than to revolutionise the insurance industry. This seemed not only obvious but also necessary. Why shouldn’t insurance be as easy to disrupt as other industries? The music industry, the travel industry and even basic retail has been transformed in recent years. And with the lower interest-rate environment, capital for new ideas was readily available.
The life industry, in particular, seemed to have a lot of potential for disruption. Communication with customers was outdated and processes were form-based and mostly manual. The ability to sell policies and manage customer relationships online, let alone through smartphones, seemed distant for the more traditional insurers.
As a result, many newly founded insurtechs set out to become full-service insurers and attempted to modernise every area of the value chain all at once. However, while they found plenty that could be improved, some of the things that the traditional players do well are hard to replicate.
For example, financial strength and strong risk management capabilities are fundamental to an insurance offering, with customers wanting reassurance that the insurer will be there to pick up the pieces if things go wrong. The regulatory and operational burden is also considerable, disincentivising new entrants to the field – for instance, gaining a licence for writing long-term life insurance products is a huge task.
Finally, building a strong brand and market presence takes time and investment. Insurance tends to be sold rather than bought – particularly when it comes to long-term products. Products are often complex, and the average consumer needs guidance to navigate the options. Sales is one of the most important departments at an insurer, and there are areas of the process that could and should be improved, but acquiring and optimising every piece of the jigsaw to excel in this area can be daunting.
Faced with these challenges, many insurtechs have stopped trying to do everything and instead focused on improving specific areas of the insurance value chain.
There is also the market backdrop of increasing yields, which have driven up the return on capital demanded by investors. After a sustained year-on-year rise in insurtech investment during the decade to 2021, insurtech investment fell in 2022.
However, insurtechs still have many advantages over traditional insurers: they tend to be more tech-savvy, to have easier and more natural access to suitable talent, and can be nimbler and more experimental. The industry must recognise that insurtechs are not the competitor but a force that, harnessed in the right way, can complement the existing offering and take things forward.
In recent years, insurtechs have concentrated on the sales process for protection business (such as life, critical illness or disability insurance). One particular focus is engaging with younger policyholders, who are less likely to buy protection via traditional methods such as talking to a financial adviser. Another focus is using technology to improve underwriting, either by shortening the application journey or delivering deeper insights into applicants’ health risks.
With the typical Gen Z customer set to purchase property later in life, if at all, one of the biggest protection sales opportunities is under threat. Some insurtechs have focused on distributing to this generation, working to understand what digital distribution means in protection. Social media marketing has been front and centre in these efforts, with the potential to target individuals who are experiencing life events that make them more amenable to the message – such as the birth of a child. While the rationale for advertising in this way is intuitive, the marketing is not cheap, and it is challenging to bring the acquisition cost of new customers to a sustainable level.
Another area of focus is upselling and cross-selling to existing policyholders. Some insurtechs’ advances in behavioural economics have led to sophisticated analytics techniques that use the insurer’s own data to identify policyholders who need additional cover. Such firms can also design campaigns that will engage these customers and effectively communicate the value of the cover, maximising conversion rates.
There are also some health-focused initiatives that could solve pain points in both distribution and underwriting – for example integrating smartwatches into policies. The technology can both engage potential customers and provide the insurer with information on key risk factors. While wearables have been used for some time, an emerging example is current work on transdermal optical imaging.
Several insurtechs are working in this field, leveraging the technology that most of us carry around in our pockets – mobile phones – to engage and collect data. By capturing a video ‘selfie’ of someone’s face, transdermal optical imaging technology can measure blood flow by focusing on the light refracted from below the skin’s outer layers. With this information, it is becoming increasingly possible to measure indicators such as heart rate, heart rate variability, blood pressure or even HbA1c – a measure of blood glucose that can be used by underwriters to detect diabetes and evaluate how well-controlled the condition is.
As the technology develops, its potential in underwriting is clear: data could replace some of the questions asked during the traditional underwriting process and thus speed up distribution. It also has potential as a policyholder engagement tool, with video capture and subsequent health insights used to engage with potential customers.
There are also opportunities for insurtechs to help insurers build their in-force management capabilities. These include persistency management, improving health throughout the policy lifetime and providing a positive customer experience at point of claim.
In terms of persistency management, data analytics can identify those policyholders who have a high propensity to lapse so that the insurer can mitigate this risk. Some insurtechs are already established in this space and are supporting insurers with effective outbound communications. Many insurtechs also offer customer engagement tools, providing an ongoing service to policyholders in areas such as fitness and activity tracking to help them see the ongoing value they gain from their life and health insurance policies.
Engaging customers throughout the policy lifetime can also lead to opportunities for insurers to partner with insurtechs, helping them understand and even manage claims risks. Some insurers have integrated wearable technology propositions in which premiums are continuously adjusted to reflect the policyholder’s engagement with their health. Technologies such as the transdermal optical imaging discussed above also have potential here, providing ongoing insights into health that could help policyholders improve health outcomes.
Insurers could also partner with providers that offer annual blood testing through home-testing kits to ensure blood biomarkers such as cholesterol are well-controlled. In some markets, insurers are partnering with predictive genetic testing companies to give in-force policyholders access to lifestyle and health-based genetic insights. These can be offered together with personalised health and lifestyle coaching to help customers improve their wellness through diet, exercise and nutrition. Based on test results, targeted health screening could also be offered for conditions such as cancer or stroke. Providing policyholders with health-related insights could enable them to take corrective action where early signs of disease are present, and thus enjoy good health for longer.
Clinical services that help customers with physical or mental health conditions can also be offered. A number of insurers have integrated with virtual GPs or second medical opinion services to help customers access clinical services, and some insurtechs are integrating digital triage tools for conditions such as musculoskeletal problems or poor mental health. These allow customers to self-serve initially, but triage to virtual or in-person clinical expertise if the health need is more acute. Such services could ensure customers live longer and more healthily by improving clinical health. There is also an additional benefit to the insurer, as prevented or lower severity claims will improve loss ratios.
There are also insurtechs that aim to improve the customer journey at point of claim. Some insurers have integrated with specialists that support the customer through the claims journey, for example in navigating cancer services. Insurers can also realise efficiencies through artificial intelligence tools that analyse medical documentation to help claims handlers turn claims decisions around more quickly.
Insurers need to evolve and grow their propositions to meet the digital age. Integrating with insurtechs’ breadth and depth of services could accelerate this change and bring benefits to both consumers and insurers. However, the many services offered and problems solved mean there is the potential for muddled execution.
It is important for any traditional insurer to be clear about its strategy when it comes to evolving its value-chain capabilities. Just as not every insurtech needs to be a fully-fledged insurer, not every insurer needs to be fully digital in all processes, or to develop everything itself. Partnering with insurtechs can be a simple, fast and sensible approach to finding the right answers to innovation challenges. Consider the following questions:
- What level of digitalisation does my business model require?
- Which parts of the value chain need to be optimised?
- What can I develop in-house and where do I need external experts?
Answering these questions will help you identify what is important to you. Defining a clear strategy first will allow you to see through the ‘insurtech fog’, focus on the right part of the value chain and deliver the greatest value for your firm and your customers. There is significant value out there but without direction it is easy to get lost.
Tim Smith is head of protection at Hannover Re UK Life Branch
Patrick Kosmützky is a senior actuary at Hannover Re and co-founder of Hannover Re’s ‘hr | equarium’ insurtech innovation platform
Lisa Balboa is head of Hannover Re’s Life and Health Digital Business Accelerator