Until recently, FinTech meant innovation in payments, finance and banking. The “tech” part of FinTech refers to the cost, speed and security of transactions and, for peer-to-peer models, has allowed the crowd to connect over the internet, making it quicker and easier to lend and borrow at a time when traditional lenders are unwilling or unable to lend, and interest rates are still at an historic low.
The big guns of disruption are now being trained on another important segment of the financial services industry – insurance. Here we look at some of the innovations in so-called insurtech, and what effect, or application, it might have in business lending.
P2P lending is easy to grasp – if I want to borrow, I input my details into a P2P lending platform and, if there is enough appetite from lenders, the offers roll in, the platform aggregates them, and I get my money. If I want to lend as a way of investing, I can choose to lend to any number of borrowers who are available on the website; I lend my money, and it (in theory) gets returned to me in full, together with interest to recompense me for the risks.
Insurance works the other way round. Regulatory issues aside, if I agree to insure someone against something, I’ll receive a modest payment up front. If I’m lucky, I get to keep it. If I’m unlucky, I’ll have to make a payment so large I’ll lose my shirt. So, how can the crowd sensibly agree to insure anyone against anything? The answer is surprisingly simple, relatively cheap, and hundreds of years old. Large crowds can participate in mutuals and friendly societies, and small crowds can form captives, much in the same way as such societies were formed in a well-known coffee shop in the 18th century.
So, is P2P insurance a thing yet? There are some platforms out there, but it hasn’t taken off in any meaningful way, and I don’t envisage any threats or benefits to the business lending community from this form of insurtech.
Insurance distribution in a sharing economy
Technology is making it easier to buy and sell insurance against very particular risks, for very short periods of time. If I want to borrow a friend’s car to go shopping, or I want to test drive a second-hand car before buying, I can use my phone to get an hour’s worth of insurance within minutes.
Platform technology is also driving down the cost of insurance by aggregating the purchasing power of the crowd. If I want to take advantage of this, I can join a crowd that’s buying insurance for a common type of risk, instead of buying insurance for my particular risks. The group premium is often lower than the aggregate of the individual premiums, and the cover can be wider and deeper.
Groups can get bespoke insurance more quickly and cheaply than individuals, and a crowd can also share the cost of meeting insurance deductibles, if the platform puts appropriate arrangements in place first. In some cases, the insureds pay their deductibles into a pool, up front. If the group has a good claims year, the balance of the pool is distributed to the crowd as a reward, or it’s used to reduce the cost of insuring again next year.
Some platforms will allow you to form a small crowd with people you know, while others will allow you join a much larger crowd, which is more likely to generate cashback returns. Again, it’s difficult to see the application of this type of business model to business lending.
Innovative technology providers
This part of the insurtech world is wider, deeper, and more diverse than the others, for now. Service providers, and some insurers, are using technology known as telematics to monitor the cars and drivers they insure. The data they gather is used to make sure that premiums more accurately reflect risks – so careful drivers, motorway drivers, and non-rush-hour drivers generally pay less for their cover. If something unexpected happens, the same technology can be used to automatically check driver and passenger safety, before alerting the emergency services in appropriate cases; and the same data can be used to defend third-party claims.
Technology is enabling insurers to more accurately estimate and measure their actual and potential risks, as well as adjust their reserves. It’s also being used to more efficiently manage claims, and to improve every customer’s buying, claims and renewal experience, to reduce the cost of sales.
Innovative distribution models, partnering with the incumbents
We are now seeing most of the big insurance players partnering with FinTechs and insurtechs to inject some blue-sky thinking into their stale business models. Aviva now has its Digital Garage to explore and develop all things digital, and Euler Hermes has a digital agency focusing on and investing in insurtech.
One such company that has partnered with an incumbent, Munich Re, is nimbla. This start-up provides free predictive cashflow and risk analysis which allows SMEs to better understand their customer relationships and risks. It also provides a credit control function that automates payment chasing and debt collection. Both of these are additional functions to the real product on sale – invoice protection. The nimbla platform allows the SME to select single invoice cover at the click of a button, or to purchase whole book protection. There is no long-lasting commitment and there are no large up-front fees, making the whole process transparent and cost-effective.
This type of insurance distribution play looks like it is here to stay, and there is surely an opportunity here for business lenders to not only tap into additional sources of information on their customers’ debtor books, but also to plug into the payment flows associated with pay-outs under credit insurance.
Jonathan’s article is in the February 2018 edition of Business-Money magazine.