Technology Disruption in the Insurance Industry

Technological advancements have been a major catalyst for change in the financial industry, bringing about significant gains in efficiency, despite initial uncertainties. This innovation, commonly referred to as "FinTech," has been driven by emerging technologies and has the potential to reduce transaction costs and streamline service delivery in the realm of intangible financial products.[1] While the finance industry has witnessed ongoing innovation throughout its history, recent developments such as widespread internet connectivity, home computers, mobile devices, and the proliferation of applications have lowered barriers to entry, paving the way for increased competition and potential disruption within the financial sector.[2]

The insurance sector is not exempt from these technological advancements, with technology opening up new possibilities for service provision and enhanced data collection capabilities. This intersection of technology and insurance, known as "InsurTech," primarily focuses on improving services for individuals rather than businesses. It enables better identification and mitigation of risks through enhanced data analysis.[3]

Technology disruption in the insurance industry refers to the rapid transformation of the industry driven by new digital technologies. Some of the key technologies driving this disruption include artificial intelligence (AI), the Internet of Things (IoT), and blockchain. Digital technologies are having a significant impact on the insurance industry in several ways. IoT consists of numerous electronic devices capable of exchanging data over a network without human involvement.[4] This vast network of IoT devices has the potential to significantly impact the insurance industry, offering a chance for early adopters to gain a competitive edge and seize the opportunities it presents. Over the past 20 years, InsurTech start-ups, have achieved a significant portion of the market in the insurance industry which has led to an increase in the investments.[5] InsurTech has garnered substantial investments from venture capital firms, indicating that many start-ups are viewed as commercially viable on a large scale by investors. In addition, insurance companies themselves are strategically investing in these start-ups, thereby gaining a share in their progress and providing the necessary capital for their business development.[6]

With the development of insurtech, insurers have the opportunity to offer a more personalized and streamlined customer experience. Customers can now purchase policies online, file claims electronically, and receive real-time updates on the status of their claims. This has led to greater customer satisfaction and loyalty. Enhancing accessibility to potential clients is crucial for delivering superior service. By using the InsurTech platforms effectively, it becomes possible remove various obstacles that exist between insurance providers and policyholders, thereby facilitating easier and more accessible connections and communication. This lays the groundwork for delivering highly personalized customer service, ultimately leading to increased profits and a higher number of policies bound for insurance companies.[7]

Digital technologies enable insurers to collect and analyze vast amounts of data, including information on customer behavior, claims history, and risk factors. This has enabled insurers to develop more accurate risk models, resulting in more effective underwriting and pricing of policies. However, this brings its own risk. One of the significant upcoming obstacles involves addressing privacy apprehensions arising from policyholders sharing specific personal data, such as data collected from wearable devices. It is crucial to prioritize the equitable treatment of individuals when it comes to the collection and utilization of data, including the development of more sophisticated and precise pricing algorithms that could potentially render certain individuals uninsurable. Moreover, broader concerns regarding the ethical utilization of big data contribute to the challenges faced by the insurtech industry.[8]

Undoubtedly, sales and distribution have been the most impacted components of the value chain due to technological advancements. The application of digital technologies has brought significant changes to the process of delivering services and has transformed the customer relationship.[9] Insurance companies are focused on enhancing communication methods and improving sales activities by designing mobile apps, websites, and official pages on popular social networks. They are also exploring the implementation of technologically advanced systems such as chatbots and robo-advisors for distribution and customer relationship management.

Through the digitization of distribution channels, insurance companies can reduce interaction time, leading to improved efficiency, cost reduction, and more effective pricing policies. Additionally, they can strengthen their market position by carefully managing customer relationships. It is important to note that the distribution of insurance services involves close interaction between insurers and customers, which becomes an integral part of the service delivery process.[10]

During the acquisition and use of insurance services, regular contact between customers and insurers is necessary.[11] The company has the ability to modify how the service is enjoyed, such as adjusting premiums or certain conditions. Conversely, the behavior of the customer can also influence the delivery and utilization of the service, for example, through changes in risk or moral hazard behavior. This creates an interactive process between both parties that contributes to the establishment and maintenance of the insurance relationship. The interdependence of production, distribution, and consumption phases makes the delivery system crucial in shaping the nature of the service and its quality from the customer's perspective.[12]

Digital technologies makes it possible for insurers to develop new products and services, such as usage-based insurance, which offers customized pricing based on a customer's behavior or usage patterns. Different types of insurance vary significantly from one another, and the factors that are appropriate for one type may not be suitable for another. As a result, insurance agents require specialized knowledge in their respective domains, and the internet has been instrumental in facilitating access to such information.[13] However, the integration of machine learning is particularly crucial in this context. Machine learning possesses the capability to acquire and analyze vast amounts of patterns and data. By doing so, it can identify appropriate underwriting clauses and develop tailored insurance plans for individual customers based on the provided information. This has the potential to significantly impact customer perception of the insurance company and foster a higher level of customer engagement, resulting in longer customer retention.

Big data and predictive analytics play a crucial role in combating insurance fraud. They help detect discrepancies and uncover fraudulent activities by analyzing the information gap among policyholders, third parties involved in a claim, and even the online presence and social media activities of insured individuals. By leveraging these technologies, it becomes easier and faster to identify fraudulent claims, which are estimated to contribute to an additional 10% of the total claims incurred by the global insurance industry.[14]

Blockchain which is a cryptographic technology that operates as a decentralized and transparent database, consisting of interconnected blocks of records is another technology that has the potential to transform the insurance industry.[15] Blockchain is a secure, decentralized ledger that can be used to create smart contracts and automate many processes. In the insurance industry, blockchain can be used to automate claims processing, improve transparency, and reduce the risk of fraud. Transactions are executed and verified anonymously within this public ledger. While the Blockchain itself does not involve transaction costs, there are infrastructure expenses associated with implementing this technology.[16]

While the implementation of digital technologies in the insurance industry brings numerous opportunities, including cost savings, increased efficiency and competitiveness, improved customer service, lower insurance premiums, and better risk management, digitalization also poses certain threats.[17] These include increased costs for employee education and infrastructure, the risk of business model replication by competitors, the emergence of new Insurtech competitors, higher exposure to cyber risks, resistance from certain segments of insured individuals and the need for effective customer relationship management due to reduced personal contact. Information asymmetry and ethical concerns regarding data privacy and protection are also challenges. Insurers must address these risks and prioritize cybersecurity measures.[18] The availability of sensitive customer data requires strict data protection measures to maintain trust and comply with regulations like the General Data Protection Regulation (GDPR). While digitalization offers opportunities for better customer experience and increased market reach, it also necessitates significant investments and heightened cyber risk exposure. Insurers should improve their understanding of cyber risks, actively prevent them, and play a role in protecting both their own and their clients' exposure to such risks. The regulation of Insurtechs, prioritization of digitalization efforts, justification of technology investments, and ethical considerations are among the unresolved questions in the industry. Despite the challenges, embracing digital technologies is crucial for insurers to remain competitive and unlock new value for their customers.

[1] OECD (2017), Technology and innovation in the insurance sector, s.8 https://www.oecd.org/pensions/Technology-and-innovation-in-the-insurance-sector.pdf

[2] OECD (2017), s.8

[3] OECD (2017), s.8

[4] Disruption in the insurance industry. https://www.ibm.com/downloads/cas/WVG1BPYW

[5] Cappiello, Antonella. "The technological disruption of insurance industry: A review." International Journal of Business and Social Science 11.1 (2020): 1-11, s. 2

[6] OECD (2017), s.9

[7] https://www.originaffinity.com/the-benefits-of-insurtech-for-the-insurance-agent/

[8] https://www.economicsobservatory.com/insurtech-what-is-it-and-what-does-it-mean-for-insurance

[9] Cappiello, s.5

[10] Cappiello, s.6

[11] Normann R., 2001. Service Management: Strategy and Leadership in Service Business. New York: Wiley & Sons

[12] Cappiello, s.6

[13] Gupta Divyanjali, InsurTech: 5 benefits of technologies in the Insurance Sector. https://www.mantralabsglobal.com/5-benefits-technologies-insurance-sector/

[14] Njegomir, Vladimir, and Tamara Bojanić. "Disruptive technologies in the operation of insurance industry." Tehnički vjesnik 28.5 (2021): 1797-1805. s. 1800

[15] Njegomir, s. 1802

[16] Rosic, A. (2017). What is Blockchain Technology? A Stepby-Step Guide for Beginners. Blockgeeks. Retrieved from https://blockgeeks.com/guides/what-is-blockchaintechnology/

[17] Njegomir, s. 1803

[18] Armeanu, D., Istudor, N., Florinel, S. M., & Burca, A. M. (2014). Analysis of the Romania insurance market based on ensuring and exercising consumers' right to claim. Amfiteatru Economic, 16(36), 550-562

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