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Fintech in insurance: A new frontier for innovation

Mansi Joshi July 18, 2017

As India Inc. stands in the midst of technological and digital revolution, the country’s BFSI sector is undergoing a major disruption. Propagated by competition from new digital players, the BFSI sector is aiming a major technological adoption. The insurance sector has always been perceived as a little more traditional in its operational approach, but that’s about to change. The insurance sector is seen as the next opportunity for change. Insurance players are now adopting new technologies when it comes to marketing, analytics and sale of services to reach the untapped population. 

The total market size for India’s insurance sector is expected to touch USD 350-400 billion by 2020, according to IBEF. However, India’s insurable population is anticipated to touch 750 million in 2020. This is being seen as a huge market opportunity by traditional and new-age players. The major reason behind digitization in the insurance space is the Indian government’s policy of insuring the uninsured, thereby increasing insurance penetration in the country. India’s life insurance sector is the biggest in the world with about 360 million policies and expected to increase at a Compound Annual Growth Rate (CAGR) of 12-15 percent over the next five years. 

According to PwC, insurance companies are very much aware of the FinTech revolution: 74 percent of respondents see FinTech innovations as a challenge for their industry. For traditional insurance insiders, FinTech can be leveraged to gain newer opportunities. It can be used to accurately assess risk and gain insights on user behavior with the help of analytics and predictive modelling. 

Fintech revolution in insurance: Behind the scenes

Challenges in FinTech adoption

IT security

Regulatory uncertainty

Financial investment

IT compatibility

Difference in management and culture

Rajya Sabha’s select committee recently approved to increase foreign investment stake to 49 percent equity investment in insurance companies. This is expected to lead to massive investment opportunities for foreign players. Other factors like growing financial awareness and internet usage is also leading to rise in insurance penetration. 

The focus on rural Indian has intensified in the past few years, considering the region’s untapped and massive potential. Government’s Digital India initiative is spearheading change in the rural areas. Aadhaar-based identification, eKYC, digital lockers, Unified Payments interface and the mandate to have e-insurance accounts are other factors driving change in the insurance space. 

People are becoming more tech savvy and are using personal gadgets for banking transactions. This is leading to innovations in the insurance space too, as companies have realized that the best way to reach customers is through personalized services accessible anytime, anywhere on personal devices.  

Insurance space: Goldmine for innovations

Internet of Things: IoT helps the transmission of data across devices, such as connected cars, home monitoring system, health monitoring devices and data collected from wearable tech. 

Big Data and Analytics: Analytics is revolutionizing the insurance space as it leads to newer and more reliable models of risk assessment, claims and fraud detection, cross selling and pricing. 

Machine Learning and AI: Machine learning and artificial intelligence allow insurance processes to use data in real time for events such as vehicle thefts, health issues etc. Machine learning in insurance has immense potential in analyzing and predicting claims also, but it largely depends on the information being fed into the system. AI also provides predictive customer service support in the form of chatbots which give real-time feedback. 

Peer to peer (P2P) insurance: Insurance startups are coming up with new models such as the P2P insurance model based on the sharing economy concept. 

Blockchain: Although a new concept, the adoption of blockchain can lead to transformation of the insurance sector by bringing in a decentralized approach that is more transparent and trusted. A few startups have already started using blockchain in P2P and on-demand insurance. 

63 percent of insurance CEOs believe that IoT will be strategically important to their organization.

Social media: Insurance is one of the most effective ways of tax-saving and post demonetization, a number of Indian users are considering investing in policies. To tap the uninsured population, companies are increasingly adopting social media advertising and marketing strategies so that they can reach everyone who has access to internet. It’s not just private insurance giants in India who are leveraging the social media presence of users, but also government agencies like LIC, which has an active social media presence that contains relevant information targeted at users. There is also a strong push by insurance companies to use social media to create effective ad campaigns. Social media presence is not only limited to a Facebook or twitter account, but companies are developing dedicated apps that address user grievances and provide detailed information about their products at a click of a button. 

FinTech and Insurance: Where do the paths meet?

It is needless to say that with the new technological innovations like IoT, blockchain and machine learning, there’s an urgent need to also think about the security and privacy of customer data. According to PwC, 68 percent of insurance industry players are dealing with FinTech and have taken concrete steps to address the upcoming challenges and/or embrace opportunities. However, only the most innovative ones have FinTech at heart and explore more active ways to participate in the ecosystem, such as venture funds and incubators. 

While 43 percent of insurers claim that FinTech lies at the heart of their corporate strategies, this does not necessarily translate into action: Only 28 percent explore partnerships with FinTech companies, suggests the PwC report. 

The road isn’t smooth for insurance companies in collaborating with FinTech companies. When it comes to challenges, IT security (51 percent) tops the list, followed by differences in management and culture (45 percent). The latter is seen as a prime obstacle for FinTech companies when dealing with incumbents (54 percent). The second most often mentioned hurdle is the uncertainty in operational processes (47 percent), followed by regulatory uncertainty of the financial sector (43 percent).

There is a need for insurance sector to mature beyond the ideation stage when it comes to innovative business models. Customers are eager to adopt cost friendly and easy to use personalized services without worrying about the safety of their data. Insurance industry needs to shift its approach from a traditional and complex process and accept FinTech as the next inevitable chapter in their journey.