Column: Insurtech, Demystifying The Hype

April 18, 2018

[Opinion column written by Chris Garrod]

I work in the reinsurance world. Wait don’t leave.

Lloyds of London Image Portfolio Feb2011

Specifically, I work in the legal sector, and for whatever reason, it always feels like conference and/or event season. And I’ve been to a number of insurance and reinsurance related events/conferences lately.

And every single one has had one panel [some two] on one particular topic, which they didn’t perhaps last year and definitely not two years ago: insurtech.

Insurtech: what is it and where are we now?

So, you’re in the insurance industry but live under a rock. What is insurtech?

It is just as the name suggests. The combination of insurance and technology. Or, perhaps more accurately, the rise and use of a wide range of technologies within the insurance industry, from underwriting and claims to administrative functions. What has always been an extremely paper intensive industry is now gradually dragging itself into the digital age. The disruption of an age old industry by the onset of a digital revolution.

Insurtech Bermuda April 2018 (2)

Digital transformation. It is what it is. We currently find ourselves in a new industrial revolution – the 4th industrial revolution or “4iR” – though it sounds silly to call it that. As it is anything but industrial. The transformation involves many things: the rise of automation and artificial intelligence within the everyday work process, either replacing employment or enhancing employment, depending on your viewpoint. The use of blockchain technology and smart contracts, simplifying claims management and underwriting processes.

A quick example: Lemonade

A quick example and one of the poster child’s of the insurtech movement: Lemonade Insurance Company. Its CEO and co-founder Daniel Schreiber once stated “The insurance brands we know today came of an age in the era of the horse-drawn carriage, but insurance is best when powered by AI and behavioral economics, which is why we believe that companies built from scratch, on a digital and with a social mission, will enjoy a structural advantage for decades to come.”

Insurtech Bermuda April 2018 (3)

What does Lemonade do? Using a mix of artificial intelligence, behavioral economics and chatbots, it is able to allow its customers to be able to download and use apps, so rather than liaise with human beings when having to deal with an insurance claim – or employing the use of any insurance broker – their policies are handed automatically. It’s most famous claim to fame was its ability to file and pay and claim a claim in three seconds. Plus, a portion of its underwriting profits goes to charity.

At its core, it is digital peer-to-peer insurance, similar to a mutual insurance company, except replacing brokers with AI. Its primary [current] limitation is that it only really can handle small claims.

Embracing technology

Despite Lemonade’s limitations, as an example of the potential of how technology can disrupt a traditional industry, it is a good one.

So… insurance. Paperwork. Tradition. Regulation. Protection.

Innovation? It is slow to move, but even Lloyd’s is progressing into the world of technology. There are many, many new technologies which are becoming relevant to the insurance world. Blockchain, artificial intelligence and machine learning, big data, robotics, healthtech. The internet of things and particularly the use of wearables.

Insurtech can really comprise of a number of things, including insurance vehicles looking to re-invent themselves embracing new technologies, potential new insurers establishing themselves to write insurance in a new innovative way, or simply new ventures that are offering specialized tech products to insurers and other market participants.

A jurisdiction to review: Bermuda

Bermuda, once called the “insurance laboratory of the world”, and its regulator, the Bermuda Monetary Authority [BMA] is now working on an insurtech innovation: it not only provides for an insurtech “Innovation Hub”, which promotes insurtech companies to exchange ideas and information with the BMA, but also an insurtech “regulatory sandbox”.

Insurtech Bermuda April 2018 (4)

The insurtech sandbox approach is an interesting one, given Bermuda’s size within the global reinsurance world [being the second largest reinsurance center worldwide]. At its core, the sandbox allows for the formation of new insurance [or intermediary] entities, either as brand new start-ups or affiliates of existing insurers. These new companies will, for a period of up to one year [which may possibly be extended], operate using and experimenting with their proposed new technologies and provide their insurance products and services to clients in a controlled environment, under the close scrutiny of the BMA, with the BMA determining what legal and regulatory aspects of the existing legislation should apply to them in order to ensure policyholder protection.

The notion is that within or following the one year of progress, an entity within the sandbox could “graduate” from it and become a fully licensed insurer. These insurers can range from either small claims insurers [a la Lemonade] to full blown commercial reinsurers.

The benefits to this approach include various aspects to the proposed entity wanting to enter the sandbox: [1] an opportunity to test its technology before heading into the formal insurance market, [2] allowing it time to work with the BMA as its main regulator to ensure everything being proposed “works”, and [3] helping reduce the cost of regulatory uncertainty a start-up would otherwise face.

These insurtech sandbox regulations are still very formative, so there is still some time to see how they will be implemented and when they are, how successful they will be, but bearing in mind Bermuda’s stellar reputation in the insurance, reinsurance and alternative capital markets, it is hard to see them not being an attractive proposition for both existing players and new start-ups.

The future

So, innovation hubs, sandboxes, blockchain, behavioral economics and AI. Is the reinsurance industry now finally at a tipping point?

There are the naysayers. Innovation hubs are really just means for companies which carry out tech related activities to liaise with regulators within their jurisdictions. Blockchain based, self executing insurance contracts or ones which are done on a peer-to-peer basis using AI are actually pretty dumb and fairly limited to small claims for the time being. And sandboxes will still need a good degree of time to see if they succeed. And the use of a chatbot, robot or any form or AI can never replace the logic and analytical skills which an actual underwriter or claims analyst will be able to provide. In short, the argument is there that the technology driving insurtech is going to take time, not to mention loads of regulatory requirements which underpin the industry.

But relating to that last point. Wherever we are in the existing insurtech revolutionary curve, for now, the need is there for regulators to both innovate and adjust. And for companies to expand and adjust to take into account the needs of their customers who seek quicker and more efficient service.

Whether you are an insurance vehicle which is competing with others, or an insurance jurisdiction competing against similar ones, we are, like it or not, transforming into a new digital era. Soon, the insurance industry will not be paper based. And those insurers who fail to realize that will have to do so soon, like it or not.

- Chris Garrod is a partner at Conyers Dill & Pearman with opinions on digital transformation including blockchain, crypto, insurtech, AI, legaltech, IoT and fintech.


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