by Etien Yovchev and Elena Ivanova
What if..
..we apply first-principles thinking to insurance.
At the most fundamental level, insurance is about protection from undesired financial loss as a result of an occurred risk. Now, starting here, you can go on to build a product that compensates policyholders for the instance of an unwanted event, as most insurers nowadays operate.
But you could also try to prevent the event from happening in the first place. At the end of the day, one of the insurance companies’ main functions is to assess and communicate risk through premiums and other instruments. For individuals, it’s better if they’re alive rather than being compensated for their death, and for insurers and everyone is better if we reverse climate change rather than have more and more claims for wildfire and flood damage.
How would insurance look if it was invented today? Would we still have to spend hours to understand and acquire policies? Would we need to visit branches between office hours and consume tons of paper? Could it be possible to have a claim confirmed and paid in a matter of hours, not weeks? Can we be rewarded for responsible behavior, for example with lower premiums and discounts?
For the past decade, digitalization has already started enabling a better customer experience for users and it’s also helping insurers see an increase in their sales and process efficiency. The Covid-19 pandemic has further accelerated the transformation in the industry but, for the most part, we are still seeing incremental improvements of the traditional insurance product, rather than insurance products built for today’s world. That said, there are megatrends like the rise of the sharing economy, advances in artificial intelligence and prediction tools, and the ever-increasing flow of data from IoT and connected devices that will likely drive more significant changes in the insurance business model, more technology integration, and necessary changes in regulation.
Digital insurance is actually one of the areas where startups in Southeastern Europe have a very clear positioning in terms of the value that can be created in the region. After all, two of the world’s fastest-growing companies providing software for insurance process automation were founded in Romania and Bulgaria, respectively. In 2020, UiPath reached a valuation of $10.2B while Hyperscience raised $140m in less than six months. There are also new local challengers like Boleron, a fully-digital insurance broker that by using automation saves time for users and aims to bring more transparency to the industry. After participating in the Visa Innovation Program in 2020, founder Alexander Tsvetkov is planning an expansion, both when it comes to product portfolio and geography.
So, in this deep dive, we are going to explore why and how’s the conservative insurance industry changing, what are the benefits of digitalization for everyone in the value chain, who’s who in the InsurTech market in SEE as well as around the world, and how will the future of insurance look like.
Why is the conservative insurance industry going digital?
At first sight, the traditionally conservative insurance sector may not seem like a place to look for exciting innovation projects. But as digital transformation brings measurable benefits for insurers and consumers alike, the industry is changing nonetheless. According to a recent Deloitte study, insurance companies in the EMEA region estimate that 23% of their premium volume has resulted from offerings that were not offered five years ago, and that’s just the tip of the iceberg.
Digitalization and advances in data and analytics technology enable insurers to not only assess risk more accurately but also to provide measures that help prevent losses from happening in the first place. Automation brings considerable operational efficiency which in its turn creates space for digital business models that better reflect the current preferences of users.
Less than two decades ago, billions of compact discs (CDs) were sold every year. When consumers liked a song, they had to buy the whole album, no matter whether they wanted the rest of the songs. Then, online streaming came and suddenly music fans with the help of Napster and iTunes had all the power in the world to change the status quo – it was time for personalized offerings that gave you the ability to listen to your favorite track – anytime, anywhere and without having to pay for something you don’t want.
In 2021, similar dynamics can be observed in the insurance sector. Like music, insurance is a product that people would usually want to buy – as long as it’s easy and it satisfies their actual needs. Inspired by the convenience, digitalization brought to many other areas of their lives, consumers are looking for insurance products that are simple, useful, transparent, and can be bought and managed with two clicks or so.
But insurance digitalization also unlocks numerous new value propositions while encouraging healthier lifestyles. For example, British life insurance provider Vitality not only offers lower premiums to those whose fitness trackers show higher exercise activity but also up to 50% discount on gym memberships and free access to meditation apps. With the use of wearables or social robots, a health insurer could provide monitoring for elderly citizens, alerting relatives in the event of a fall or lack of activity. How about connected cows? By using sensors, tech companies like Dutch Connecterra already help farmers easily track whether the cows are healthy and eat normally. This way diseases can be caught early and farmers may not need to lose productivity or go through the emotional stress of losing animals.
When it comes to home insurance, studies show that when leak detection and water monitoring systems are installed in homes, claims related to water damage go down by 96% and when claims did appear their severity was much lower than usual. Insurers like FloodFlash take this to the next level with something that resembles a smart contract – when water reaches a certain point, insurance money gets paid out automatically. At the same time, drones are already able to inspect rooftops and detect problems early, and smart thief alert systems may make the burglar think twice before entering – the consumer’s home is safer, the insurance premium – lower, and unwanted events are avoided rather than compensated.
With cars getting smarter, we can also expect that soon your Tesla would tell you that your risk of an incident has increased significantly because of the dangerous route you’ve chosen and because you forgot to repair your rearview mirror. And, if the car decides to start at all, your insurance premium would most probably go way up.
Even though the scenarios above describe benefits mostly for the end-user, if done right, the use of technology in the insurance industry should be even more attractive for insurers. There are two main ways these companies generate revenue – charging premiums and reinvesting the premiums in interest-generating assets. All who pay the premium are insured and the insurance company uses most of the collected premiums to pay the small part of the population that actually claims the occurrence of a given risk. For this model to work, risk has to be properly measured and priced, so that more money comes in the form of premiums than it’s spent on payouts. And, of course, people need to want to get insured.
In 2021, similar dynamics can be observed in the insurance sector. Like music, insurance is a product that people would usually want to buy – as long as it’s easy and it satisfies their actual needs. Inspired by the convenience, digitalization brought to many other areas of their lives, consumers are looking for insurance products that are simple, useful, transparent, and can be bought and managed with two clicks or so.
But insurance digitalization also unlocks numerous new value propositions while encouraging healthier lifestyles. For example, British life insurance provider Vitality not only offers lower premiums to those whose fitness trackers show higher exercise activity but also up to 50% discount on gym memberships and free access to meditation apps. With the use of wearables or social robots, a health insurer could provide monitoring for elderly citizens, alerting relatives in the event of a fall or lack of activity. How about connected cows? By using sensors, tech companies like Dutch Connecterra already help farmers easily track whether the cows are healthy and eat normally. This way diseases can be caught early and farmers may not need to lose productivity or go through the emotional stress of losing animals.
When it comes to home insurance, studies show that when leak detection and water monitoring systems are installed in homes, claims related to water damage go down by 96% and when claims did appear their severity was much lower than usual. Insurers like FloodFlash take this to the next level with something that resembles a smart contract – when water reaches a certain point, insurance money gets paid out automatically. At the same time, drones are already able to inspect rooftops and detect problems early, and smart thief alert systems may make the burglar think twice before entering – the consumer’s home is safer, the insurance premium – lower, and unwanted events are avoided rather than compensated.
With cars getting smarter, we can also expect that soon your Tesla would tell you that your risk of an incident has increased significantly because of the dangerous route you’ve chosen and because you forgot to repair your rearview mirror. And, if the car decides to start at all, your insurance premium would most probably go way up.
Boleron is a digital insurance platform that launched on the Bulgarian market in early 2020. Over the course of its short existence, the startup has introduced numerous online insurance products and got to participate in the 2020 edition of the VISA Innovation Program. Recently, Boleron received a €500K investment from two Sofia-based VC firms specializing in fintech – Eleven Ventures and New Vision 3.
We talked to Boleron’s founder Alexander Tsvetkov to learn more about the company’s journey so far and its plans for the future.
The Recursive: Where on its path of development is Boleron at the moment?
Aleksander Tsvetkov: When we started the company a year ago, we began with mountain insurance and then introduced our travel insurance and at the moment we are still developing our portfolio of digital insurance products. We have the only insurance policy with an electronic signature in Bulgaria, which clients obtain in a PDF format just like a plane ticket. Moreover, our system allows monthly insurance payments to be made automatically and insurances to be renewed with one click.
What did you learn during the first year of Boleron on the market? How would you assess the digital developments in your industry? What, in your mind, are the main blockers that prevent insurance companies from digitizing?
The insurance industry is among the slowest digital adopters and this trend can be observed not only in Bulgaria but also on a global level. I believe that not too many broker companies will digitalize in the near future because they need to make long-term investments in software and in their brands in order to be successful online. The main obstacles are that brokers need to be tech-oriented and feel very acquainted with the software solutions that they might adopt. Even though the market share of insurances sold through brokers is near 65% for 2019, at the moment insurance companies are more open to digitalization than brokers. Insurers, which typically have to pay commission to the brokers who serve their clients, have seen the benefit of going digital as this allows clients to go directly to the insurer and eliminates the need to pay commission to brokers.
Another obstacle that hindered a faster and more scalable digital adoption in our industry was connected to regulatory restrictions that were in place until 2018. After the changes in the Insurance Codex, which allowed insurance contracts to be made and signed online, the Law on Online Documents and Online Certification Services made it possible for insurances to start providing online services. Moreover, it was not a national law, but an EU regulation – there were a lot of lobbyists who wanted to prevent companies from offering online insurance, so insurers across Europe are still discovering the opportunities that the new law has given them. Being the main driving force of digitalization, Covid-19 has further accelerated the digitalization in the industry – I have observed that many companies that had the needed capacity to start offering online services before the crisis are just now acting on the opportunity. The fact that most of the employees of the insurance companies are conservative people who have been in the industry for more than 20 or even 30 years further hinders the digitalization of the sector.
Can you share some examples of how the Visa Innovation Program helped you develop Boleron?
Since Boleron is a newly-founded company, for us working with Visa, which is a well-established name on the market, has brought us more credibility and trust, and that is a highly-esteemed trait in the insurance industry. As part of the program, we are also expanding our network and meeting more potential partners in the face of banks and other startups. Visa has created an innovative environment that contributes to natural growth, which is mutually nourished by the participants in the program. This allows not only Boleron but the whole ecosystem to grow due to the multiplier effect.
What are the three biggest accomplishments of Boleron until this moment?
During our first year, we developed the first and, to this date, the only one entirely online car insurance in Bulgaria that enables clients to immediately receive a signed insurance policy at any time. Another thing that we are proud of is that our online insurances have saved more than 100k pages of paper only from our first 1k clients.
What comes next for Boleron – what are your main goals and priorities for 2021? How about your long-term vision?
Our aim is to start offering all of the car insurances on our online platform and to expand our portfolio by introducing life insurance as well. We are also planning to set foot on the Romanian market.
Just as every other industry, the insurance industry has seen strong traction in the “as a service” model due to its benefits of accommodating the individual needs and requirements of each client. Insurance as a Service is basically an entirely digital offering that provides an end-to-end service for simple onboarding, claims management, and customer support. The idea behind the model is that clients are able to buy elements of insurance bundles on a subscription basis, which accurately reflects the way they live and allow them to benefit from customization and usage-based pricing. The inertia in user adoption is already here, as a recent EY research outlines, and consumers have become attracted to the convenient bundling of services that the subscription model offers. On the part of the insurers, the answer of how to make this model work has already been disclosed – that is by linking services and engaging their clients around key life events, emerging lifestyles, or multi-faceted financial decisions such as starting a new venture.
Insurance as a Service
The SaaS model brings many advantages to insurers – it helps them to reduce costs, increase employee productivity, customer satisfaction, and loyalty. On the expense side, insurers will have to cover cloud computing costs that are based on usage which means that the need to pay for licensing will be avoided. Moreover, the SaaS models make it easier for insurers to sell because subscription products are normally built on service-oriented architecture where interoperability and compatibility with business systems are much simpler. This cross-channel mode means that employees will have instant access to all the information they need to be on top of their game. And, of course, the customer-centric approach of the SaaS model will solve the issues deriving from the constantly changing expectations of policyholders and their requirements to pay their bills in their preferred time, place, and mode. Customer satisfaction rises as Insurance as a Service solution allows clients to make one-click payments and even sign up for automatic policy renewal services.
Some businesses even use Insurance as a Service offerings to boost their company image and look more attractive in front of prospective employees. Deliveroo, for example, differentiated itself from its competitors with its service-driven strategy to offer “Rider Insurance” to its community of riders. Today, thousands of Deliveroo riders across Europe use the services of the on-demand digital insurance provider Qover.
As customers are already used to being offered customization of virtually every product, insurers are introducing more and more options for the personalization of their insurance products and services. In order to stay ahead of the game when it comes to personalization, insurers modernize their policies based on perceived trends and hard data. What does this mean in practice? For example, a report by Deloitte outlines that 25% of the people in the sharing economy want to get insurance which they can activate and deactivate at any given moment, while 22% indicate that they are interested in receiving automatic insurance to manage the risk when buying or renting products and services.
Besides reacting to consumer demands, insurers are able to proactively look at the needs of every client thanks to the increasing penetration of connected consumer devices such as cars, fitness trackers, home assistants, and medical devices. The future of wearable tech that includes clothing, shoes, and eyewear categories opens up more opportunities for insurers to better understand and accommodate their clients in real-time. What would happen when a wearable that is connected to an actuarial database could estimate a consumer’s risk score based on fitness level and the probability and severity of potential events? Well, it is likely that the abundance of data will lead to the introduction of new product categories and more personalized pricing as well as an increase in real-time service delivery. Furthermore, data from connected devices has one more important use in insurance personalization – its role in insurance marketing for reaching customers with targeted messages, offers, and pricing at the right time.
Personalization doesn’t end with issuing the insurance but goes on all the way to claims processing. Data, analytics, and AI transform the customer claims experience as it offers an end-to-end digitalization of the customer journey – starting from digital claims prevention and digital-first notification of a loss, to digital loss assessment and repair, and digital settlement. As data shows that claims experience impacts the decision to stay with a particular insurer of more than 80% of customers, companies can improve the customer experience with auto and home insurances with the help of IoT sensors, which would trigger an automatic claims processing when an accident occurs.
After the financial crisis and the ensuing period of high regulation for the insurance industry, companies in the sector have been obliged to comply with a list of EU-wide directives and regulations such as Solvency II (it sets the amount of capital that EU insurance companies must hold to reduce the risk of insolvency), the Insurance Distribution Directive (IDD), and GDPR.
In 2021, due to the pandemic crisis, insurers are facing even more regulatory challenges. For example, in light of claims, which are directly related to Covid-19 losses, regulators pay even closer attention to the way insurers are treating the customer cases. Claims disputes are likely to increase as employees are beginning to get back to work and debates over liability waivers will continue to mount. Among the regulatory issues which are not related to the pandemic, there are challenges related to the deployment of AI – regulators are increasingly looking to scrutinize the technology behind underwriting, pricing, and claims algorithms. Cybersecurity, besides providing an opportunity for insurers, poses a challenge with local and global regulators introducing more regulations for data-sharing and customer privacy. The introduction of IFRS 17 in 2021 will mean more work on the side of insurers when it comes to data management strategy and risk processes. After all, increased regulations may present an opportunity for the insurers who are most adept at predicting the trends and adapting to changes.
And despite the number of regulations with which insurers have to comply, the majority of companies report that they feel more challenged by the swiftly changing customer demands and expectations. This hurdle again provides a chance for growth as insurers will have to constantly innovate to offer personalized products and a seamless customer experience.
One thing seems certain – automation has a big role to play in the future of the insurance industry and we will see more and more digital-first, personalized insurance products. Covid-19 has further accelerated this trend. According to a survey of European insurance executives in 2020, 89% of respondents expect a significant acceleration in digitization and it looks like insurers have started exploring a transition to digital models much more actively than before the pandemic.
However, success in both digital automation and insurance are reliant on one very specific thing – data. Insurers have always collected lots of consumer information but with the rise of connected devices, this number is likely to explode in the years to come. While this data can certainly be used to create useful insurance offerings and promote responsible behavior, it also brings privacy concerns. Should insurers know every road and decision we take? It’s important that moving forward decisions in the industry follow the creation of ethical frameworks and clear privacy guidelines.
On a related note, while advances in artificial intelligence can be used to improve the insurance processes, the very same advances can also result in higher cybersecurity threats for consumer and enterprise data. So, insurers should look at this area both from the viewpoint of a security provider and a client. In addition to covering losses from cyber incidents such as data breaches and network damage, cybersecurity insurance could reduce the number of successful cyber attacks by encouraging the adoption of preventative measures in return for more coverage and promoting the implementation of best practices. Yet, despite recent estimations, which predict that cybersecurity will grow rapidly into the $20-$25B range by the early 2020s, global premiums have only risen between $3.5-4B, which means that cyber is still a niche market for both sellers and buyers.
Judging from the steady rise in ride-sharing services and companies with gig economy models, we can expect these trends will have a lasting impact on the insurance industry. As of now not many Uber or Lyft drivers have ride-share insurance but this can soon change due to emerging regulations and requirements. Results from recent surveys show that even though more than half of the freelance drivers plan on getting additional insurance coverage at some point, currently only 20% are insured, keeping in mind that Uber has around 400k drivers around the world. The reason behind this is that personal insurance provides no protection for the driver when the vehicle is used for work, and vice versa, commercial insurance doesn’t cover any personal claims. With this issue being a grey area for so many people, insurance companies have the opportunity to bridge the gaps in their policies.
In addition to ride-sharing, one more trend, which will probably influence the insurance sector, is emerging in the mobility industry – the autonomous driving systems. Even though there are some norms and regulations which have already been set such as, for example, placing the fault on the manufacturer when the driver was not in the car, the process for standardizing insurance for autonomous cars will surely prolong in time. Being confident in its cars, Tesla offers insurance to all owners of its new vehicles, however, cars are still not programmed to recognize whether the fault for a potential accident is in the driver or in the system.
And last but not least, the insurance industry may also be influenced by the advancements in the robotics field and in the additive manufacturing industry. 3-D printing will likely transform traditional manufacturing and will drive the future of commercial insurance trends. In just a few years, 3-D printed houses will be anything but rare to find, so insurers will have to find a way to accommodate their risk assessments. On the robotics side, the rise in autonomous drones, farming equipment, and surgical robots will have a huge impact on our everyday lives – it may change consumer expectations and change risk pools but it could also offer opportunities for new insurance channels and products.
A demanding future – The four trends that define insurance in 2020
Chapter Two: A different roadmap for growth. Deloitte Financial Services
Insurance 2030—The impact of AI on the future of insurance – McKinsey & Company 2021
COVID-19: customer and digitization in insurance – KMPG 20202019 Insurance Outlook Growing economy bolsters insurers, but longer-term trends may require transformation – Deloitte Financial Services
Technology Vision for Insurance 2020 – Accenture
How insurance can prepare for the next distribution model – McKinsey & Company