“The most imminent effects of disruption will be felt in the banking sector; however, the greatest impact of disruption is likely to be felt in the insurance sector.”¹

This quote highlights that innovation across FinTech was and still is in the spotlight of the media and academia, but that the digital revolution across the insurance sector will slowly but surely step out of the dark. This chapter will review emerging models and innovations impacting the insurance sector and their somewhat disruptive potential, if any, on the industry.

Innovation along the Insurance Value Chain

To understand the impact and the degree of digitization and/or disruption across the insurance sector, we need to review the traditional insurance value chain and its five key elements:²

• Product management deals with the planning, forecasting, and marketing of a product at all stages of the product life cycle.
• Sales and distribution encompasses marketing channels and promotion means to bring the product to the customer.
• Underwriting and risk management is at the core of the insurance business where the insurance company evaluates the risk of potential clients and guarantees payment in case of damage or financial loss.
• Claims management offers the service to advise the client, compensate the loss, and cover litigation of the insured person.
• Customer service is the provision of service before, during, and after a purchase, which can also include the vital part of customer retention.

With the evolution of new technologies such as artificial intelligence (AI), blockchain, distributed ledger technologies (DTL), and data mining (DM), so-called InsurTechs have started to re-engineer these five elements and combine them in ways that make buying, claiming, and managing insurance intuitive and relevant for customers. For each element of the value chain (except the first one) a selection of most innovative startups³ and their unique offerings are introduced.

Innovation or Disruption?

Having a close look at these InsurTech examples, the question that comes to mind is whether these innovations have the potential to disrupt the insurance sector or whether they will just digitize existing processes along the insurance value chain.

Coming back to basics, disruption represents the genuine change in traditional business models and their replacement with new ones, mostly driven through technological innovations. Digitization or innovation introduces new ideas, devices, or methods to run processes more efficiently. In Ryan Hanley’s words: “Disruption changes the game, digitization simply improves the game.”¹²

Based on the InsurTech examples shared earlier, two groups of innovations emerge.

One group of startups tends to introduce incremental change like automation or digitization of processes. For instance, Ladder allows faster and easier access to insurance products. Knip and Motionscloud transfer traditional insurance processes like policy and claims management onto digital means to deliver transparent and trusting relationships.

Some other groups of startups have developed alternative business models combining very specific parts of the insurance value chain. As noted, P2P startups Lemonade, Guevara, and Friendsurance drive value through social participation and group claim sharing. Trov’s business model has itemized risk insurance and Discovery focuses on prevention instead of protection by its behaviour-linked loyalty program.

These examples are facilitating more efficient insurance processes – particularly where insurers fail – by means of advanced technology or redefining much-targeted elements of the insurance value chain, rather than disrupting or reversing the entire insurance industry.

Is the Peer-to-Peer Insurance Model a Revolutionary Idea?

This brings me to the P2P insurance models offered by Lemonade, Guevara, and Friendsurance, which were celebrated as the new business model of the twenty-first century. But is the model really revolutionary or is it reviving an old market concept?

Most new P2P insurance propositions offer personal lines insurance against a flat fee, which represents the commission paid to the product provider. A group of people pays premiums into a claims pool. When an insured event occurs, claims payment is triggered first from the pool and then for larger claim incidents from reinsurance arrangements. If there is a premium surplus at the end of the insurance period, the money is returned or paid into a fund based on the agreed terms of the proposition.

This is a “refreshingly different” approach to insuring because conflict of interest during the claims process are minimized as the insurance provider is only paid from an agreed fee or commission and is therefore incentivized to pay claims.

Still, three critical remarks need to be made:

First and foremost, the idea of P2P insurance is not new. At the end of the seventeenth century “Hand in Hand Fire & Life Insurance Society” was established as the first mutual insurance office, that is a company owned entirely by its policy-holders. It was founded in London to protect its members from losses incurred by fire while Lloyd’s of London, created slightly earlier, focused on ships and cargos. In the US, the first successful mutual insurance company, the Philadelphia Contributionship, was founded by Benjamin Franklin in the eighteenth century. This clearly means that P2P business models are not new.

Secondly, the only true “peer” element in the P2P insurance model is the sense of community it creates between friends and families, who are then connected through social media means. Peers merely pay the first low-value claims, before the reinsurance agreements step in to take over the larger bulk part. Furthermore, the P2P solutions do still involve brokers – the P2P insurer is acting as both broker (charging a flat fee) and carrier (paying the claims) at the same time.

Lastly, every hype levels off after it has reached its peak. My belief is that after a few years of business, P2P insurers may not be able to pay all claims incurred, and create disappointments among customers because every innovation reaches its plateau. Still, such startups can offer other useful value to customers.

In light of these remarks, Lemonade, Guevara, and Friendsurance’s true benefits include fast and easy access to otherwise highly administrative and burdensome insurance capabilities, packaged and offered through fully-digitized and mobile means.

While innovation opportunities will come from shaping and remodelling the value chain, disruption opportunities will come from identifying truly revolutionary business models. However, it is likely that this change will be facilitated by disruptive technologies such as the blockchain and artificial intelligence/machine learning. Blockchain will deliver massive cost savings through smart contracts. These smart contracts will include the support of new intercompany transaction models, customer-led ID checks, or the launch of truly innovative and cost-effective microinsurance offerings. Artificial intelligence/machine learning supported by advanced analytics algorithms will provide a platform to create interesting pre-sales insights, deliver a multitude of refined and automated customer engagements, and reduce the potential risk of adverse selection.