The InsurTech wave has just begun and will fundamentally change the industry in the coming years. All parts of the insurance value chain will be challenged by InsurTech players and incumbent players will have to partner with innovative players to embrace these changes.

Although the revolution in place has not yet elected the winning business model(s) of tomorrow, we will focus in this chapter on what we believe will be the fundamentals of the insurance of the future rather than reviewing what we call the technological enablers of this soon-to-come transformation.

By referring to technological enablers, we mean all technologies and tools such as machine learning techniques, artificial intelligence (AI), the Internet of Things (IoT), distributed ledgers, etc. that are not an end per se, but a means that is already in use within the tech landscape, and which does not totally determine the fundamentals of the new paradigm of insurance.

Our assumption is that the new paradigm of insurance will be “invisible” and “parametric”, enabled by several technologies including AI and the IoT.

The concept of invisible insurance mainly addresses the way insurance will be distributed. The direct consequence of being invisible is the need to shift operating models towards “Insurance-as-a-Service” infrastructures and the possible emergence of other types of giant risk carriers.

While invisible redefines the distribution of insurance by minimizing any possible friction, at the other extreme of the value chain we also see change throughout the claims management process. In our view, while several InsurTechs do focus in some shape or form on “solving” problems endemic across claims management in general, our belief is that the problem should rather be tackled at the source: by redefining the essence of claims management to create a situation where it does not need to be managed anymore. This will lead to the second fundamental that will define the insurance of tomorrow, which we call “parametric insurance”.

Some readers might raise questions with regards to a possible third fundamental: “peer-to-peer insurance” (P2P). In our view, the new disruptive P2P business models tend to irritate insurance purists: the roots of insurance have always been in the mutualization of risk. The insurers are essentially an “escrow” account shared by all insureds (so it is already P2P), and some of them already share their profits. In short, “P2P” sounds just like a trendy synonym for traditional insurance.

So, let’s review these fundamentals.

First Fundamental: Distribution Will Be Invisible

Most customers are not interested in insurance. Very few people wake up in the morning thinking about buying insurance. Customers, however, understand the value of it and are just seeking protection, each of them according to his own risk appetite. As a result, insurance should be viewed as a complementary feature to a product or a service rather than a core customer offering. This also means that it is extremely important that insurers consider the technological trends affecting the products and services they insure. Our society is currently shifting from “ownership to usage” with the sharing economy and business models associated to it. And technology enablers such as the IoT, “virtual and augmented reality”, and the “blockchain” are going radically to change the way insurance can be priced, underwritten, and serviced.

Therefore, in a connected world, the insurance industry needs to rethink its distribution model. For example, the driverless car of tomorrow that picks you up should be able to get the right insurance coverage automatically, to protect you and your belongings according to the journey you intend to undertake or the estimated traffic. Once you step out of your home, your smartphone should take over this hassle for you. Those connected devices will invisibly source the most suitable insurance solution for you at any time, or may immediately cover you based on the agreement you made with your microinsurance provider.

Frictionless distribution implies that insurance must become somehow invisible for the insured, fully embedded within the core product or service, and perfectly tailored to the customer needs and very own risk appetite.

In such an “Invisible World of Insurance”, it is paramount to leverage the existing technological enablers such as AI that define what and when you need coverage, IoT that enable connected devices and services to interact, and new ways of distribution to further reduce friction.

Furthermore, embedded insurance must undoubtedly be supported by a strong infrastructure for insurance (see Figure 1) or “Insurance-as-a-Service”.

Insurance-as-a-Service offers a business the opportunity to leverage a digital layer that seamlessly integrates a series of complementary digital insurance coverages to their product offerings or services. The distributor simply deploys its insurance application programming interfaces (APIs), or widely used set of clearly defined methods of communication to accelerate integration among various software components, to a digital managing agent, insurer, or even reinsurer. The distributor can also choose in real time from a library of online features that can turn them into truly digital insurance providers. The insurance coverage is either fully embedded in each product and service or can be purchased as an add-on.

Such infrastructure implies a shift in the distribution of revenues from “insurance providers” such as a direct website, brokers, or agents to the distributor of the core product/service, such as, for example, the driverless car manufacturer or the companies that build the key application used for car sharing. Using Insurance-as-a-Service, all businesses are given the opportunity to take the “fee” or “commission” part of the insurance value chain and offer their customers digital access to value-added capabilities now embedded within core insurance products and services.

However, the biggest challenge for InsurTech companies lies in building the digital infrastructure – meaning developing the digital, legal, and insurance framework to enable such an “Insurance-as-a-Service” distribution model to work. The hard part resides in bringing two fundamentally different worlds together: traditional insurance creation and new underwriting techniques, combined with digital/tech solutions.

Insurance product creation and underwriting require a wide variety of internal capabilities, which include: obtaining insurance licences, creating a legal framework, defining the pricing, dealing with the regulator, and obtaining the delegated authority from risk carriers. Building a product, creating the right pricing, and agreeing on a distribution method remain a gruelling process for an InsurTech startup.

The digital infrastructure needs to be built from the ground up starting with customer experience. Traditional insurers too often “digitize their own products, services, and processes” and simply integrate their inherent complexity into new digital solutions.

Finally, the natural consequence of Insurance-as-a-Service is the emergence of “giant risk carriers” that will directly provide cross-border capacity to InsurTech players that have built the infrastructure to sell insurance solutions digitally.

In such a connected world, with a frictionless distribution and integration model and a clear transparency on coverage and pricing, the premium paid by the customer will get closer to the real technical premium. In such a case, the intermediary will then disappear while some insurers will be at risk of extinction, as the infrastructure could directly source insurance capacity to the reinsurer. What a scary scenario! A wave of consolidation will then need to take place among insurers, while we shall witness the emergence of smaller players at the edge of innovation, partnering with “giant risk carriers”.

Second Fundamental: The Rise of Parametric Insurance

While several InsurTechs are investing in a variety of domains, including developing Internet-first platforms or solutions that enhance the distribution, underwriting, claim handling, and assessment processes (e.g. video-based expertise, AI for fraud …), we believe that the fundamental change resides in redefining the fundamental notion of “what a claim is”.

From our point of view, parametric insurance is the answer. It does not indemnify the loss, but instead an amount agreed ex-ante on the occurrence of a trigger event. Currently, parametric insurance has effectively been used for large risks such as natural disasters and crop coverage, an example being The Climate Corporation, a platform that builds a massive data platform for agriculture in the US.¹ Parametric insurance is currently ideal for low-frequency but high-intensity losses. However, with the rise of the IoT, there is a unique opportunity to open parametric insurance to the whole Property & Casualty market.

Thanks to connected devices, parametric insurance will become the norm. Imagine if your connected car had a collision with a roadside object. The car, fully equipped with thousands of sensors, could automatically assess the damage and instantly evaluate the loss. The self-driving car could immediately be routed to an agreed repair shop and the loss would be instantly compensated.

The possibilities of parametric insurance are infinite but need to follow the pace of innovation of current products and services. The insurance coverage and indemnity will also need to be redefined. This would necessitate an iterative learning process leveraging machine learning insights and data recorded by billions of sensors and connected devices.

Conclusion

The industry will be reshaped through the emergence of two new fundamentals: the invisible and the parametric.

Invisible insurance will require the development of an Insurance-as-a-Service infrastructure that will propose traditional coverage. It will also require a more modular approach through sliced and on-demand coverage. It is about cutting traditional insurance products into smaller, non-overlapping coverage elements. These allow the customer to pick and choose options to build a personalized insurance solution. Such infrastructure will redistribute the stream of revenues from traditional intermediary to any business owning a digital ecosystem. The final objective will be to reduce the remaining distribution-related frictions. This will lead to a wave of consolidation where insurers and reinsurers will become giant risk carriers.

While embedded insurance will become the norm, the final state of insurance would also integrate parametric insurance concepts. Rather than focusing on improving claim handling, the real asset will result from redefining the notion of the claim itself and what the associated loss really means. Parametric insurance is very promising, but it will require a more connected environment equipped with millions of sensors and a long learning curve to better attribute indemnity to each specific claim occurrence.

What happened in FinTech will happen in InsurTech with a vengeance. The InsurTech revolution has just begun and will fundamentally change the insurance industry in the coming years.