Working in the insurance industry, it is impossible to avoid the ongoing hype around the industry’s digitalization, commonly called #fintech or #insurtech. According to believers, new insurance startups will rapidly emerge and rule the world, based on superior customer experience. Alternatively, will new technologies reduce the need for insurance altogether? Based on my 20+ years’ experience of evaluating business models, I decided to comment on some themes that frequently emerge. I also wanted to look at it all specifically from a European perspective.

Many of the proposed InsurTech business models are not new, but instead they take advantage of technology that was not previously available. Superior customer experience is an advantage in itself, if it helps people to buy insurance cover. Reduced risk levels are a great advantage to society. Still, in many cases technology will merely shift risks from end-users to service providers. For example, all service providers will desperately need cyber insurance to cover liability and data breaches. There are many steps to go before a startup becomes a sustainable and profitable business.

Smart Health Insurance

The idea: “Heart rate and blood pressure can be monitored by biometric sensors and smartwatches. This provides real-time data and incentives to consumers.”

Insurers may want to use customers’ health data for underwriting purposes. Maybe health problems can be avoided and prevented altogether when individuals are monitored in real-time? This would most certainly bring down the cost of insurance, and, even more importantly, increase the customer’s health and life expectancy. The disadvantage is obviously that for an individual consumer, the gadgets and monitoring costs may well exceed the premium discount.

It is also important to notice that unlike the US, nearly 100% of Europe’s population is under automatic or mandatory primary health coverage. Thus, supplementary health insurance (SHI) is not the first thing on which consumers will spend their money. Finnish researchers recently concluded that SHI was purchased by people with a higher level of education, better health, and higher household income than the average consumer. Currently around 23% of Finnish adults have some sort of SHI, and many of those schemes are actually provided by employers.^1,2

Smart health insurance may be highly interesting for those consumers who are already buying SHI, but the market size might be disappointing for insurers and startups, especially in markets with solid automatic health insurance. On a side note, employers might just be more interested in smart health than they would like to admit. However, the EU’s general data protection regulation will make it costly for service providers, employers, and insurers to manage health-related data going forward. If anything, they will certainly need cyber insurance to cover potential data breaches.

Smart Homes and Property Insurance

The idea: “Homeowners and insurers can take advantage of sensors and monitoring systems to control major risks.”

This is highly interesting. Monitoring equipment that has been in use at industrial sites for decades has now become inexpensive and adapted to consumer properties. Your house can be monitored 24/7 through a simple app, some sensors, and cameras. Typical claims like flooding, theft, and fires can be detected more rapidly. Maybe someone would like to install sprinklers? Underwriters may be able to reward consumers for the increased safety, as they are now rewarding industrial companies for their good risk management.

As with smart health equipment, property monitoring and security systems are also costly. Not all industrial clients have invested in protection despite available technology and their insurer’s recommendations to do so. Overall, monitoring technology will certainly help prevent many property claims going forward. The impact on insurance pricing will come with a few years’ lag, when the installed base is large enough to provide a solid claims history. It is important for startups to have sufficient funding to build up their installed customer base and track record.

We will also see a shift in insurable risks, from the end-user to the service provider. For example, what will happen if the IoT sensor system is faulty, or worse, hacked so that burglars can enter your house freely? Software companies will see an increasing need for cyber liability insurance, which hopefully will be provided to them by the established insurance market.

Driverless Cars and Car Insurance

The idea: “Driverless cars will decrease the number of accidents significantly, and motor liability insurance will become obsolete.”

Yes, the advantages will be enormous! Just think of the roughly 26,000 yearly road traffic fatalities in the EU – mostly related to speeding (30% of all deaths) and drunk driving (25%). Just getting rid of speeding and drunk driving would save 14,000 lives! Of course, there would be big repair cost savings from all the spared vehicles. The brave new world of self-driving cars, buses, trucks, and utility vehicles would certainly look very different, and the traffic-related risks would be extremely low, with driving motor liability insurance down.

The only disadvantage is that this will not actually materialize just yet. The transition time span here is so long that even the slowest of the incumbent insurance companies will be able to adjust without much effort: when the entire car fleet is self-driving, all current auto insurance underwriters will be long since retired. The EU’s car fleet numbers 291 million vehicles, so with the current pace of 15.8 million new registrations per year, replacing the entire fleet would take more than 18 years. And we are still waiting for the first self-driving cars to go live in traffic.³

In the meantime, car insurance might not get much cheaper after all. On the contrary, the cost of motor hull insurance has been on the rise over the past decades due to ever more complicated technologies driving sums insured and repair costs upwards. During the same decades, road safety has improved significantly in the EU.

But when the first self-driving cars do emerge, car producers and their software providers had better have some top-notch cyber insurance in place! Car thefts can suddenly be performed by hacking into the driving system. It is also important to note that legislative issues related to self-driving cars still remain open. Insurance products will be based on the evolving legal liability framework going forward.

Person-to-Person Insurance

What if a group of people agree on a risk-sharing scheme and compensate each other in the event of a claim? In fact this is one of the oldest business models in insurance, also called cooperative or mutual insurance. According to ICMIF,⁴ the 5,000 mutual and cooperative insurers represent 27% of the total global insurance market. I see the difficulty for new peer-to-peer (P2P) schemes to build sufficient trust and capital buffers. Trust is essential: clients need to be sure that no-one is making false claims, that the client’s claims will be fully paid, and that the decisions are fair and transparent. And some of these startups are providing an excellent user interface and customer onboarding experience, making them highly attractive potential acquisition targets for incumbent insurers.

In the meantime, I consider the best new P2P insurance so far to be crowdfunding. Just take a look at the “Accidents & Emergency Fundraising” part of gofundme.com. Tens of thousands of dollars are being crowdfunded for uninsured families who have lost their homes in floods and fires, thanks to this “second chance” service.

Capacity and Specialization

It is normal that many InsurTech startups will develop solutions around lines that are familiar to young entrepreneurs such as car, health, and home insurance. But these consumer lines are just a fraction of global insurance needs. Will we see startups around large global risks? Natural catastrophe? Product liability? Terrorism? Epidemics? I doubt that will be the case because of the large amount of capital and specialty knowledge needed.

Across all sectors and times, capital and specialization have protected businesses from competition. Incumbent insurers and reinsurers with sufficient capacity will most certainly be able to survive the technology shift by adapting their customer experience, investing in digitalization, and acquiring bolt-on technologies.

Specialization will be another winning concept, as technology will shift risks in unforeseen ways. Building up expertise is not easy. All of this requires hard work and strategic patience for incumbents.

On the other hand, startups will also require hard work and a lot of patience before they will be able to acquire the customer base, specialty skills, and capital needed for large-scale operations. There simply are no free lunches.