Insurance Fintech

By C.F. Yam

1 April 2016

Presentation for Department of Finance and Insurance Lingnan University

Future of Financial Services

2

• Usual Quote from Fintech Community : ” Fintech disrupts financial services ! ”

• Activities in manufacturing industries have long been STP, whilst in financial services (like

Insurance) remain very human intensive

• Fintech innovations leverage new hardware technologies, advanced algorithms and computing power to automate activities that were once highly manual

• Report on the Future of Financial Services by the World Economic Forum in 2015

has identified 6 areas being impacted by fintech over the coming decades:

– Payments – Deposits and lending – Capital raising – Investment management – Financial markets – Insurance

Future of Financial Services

3

Payments Funding Investment Risk

Management Others

Fintech Innovations

Internet/Mobile Banking Digital Currency

Mobile Payments

P2P Lending & Deposit Platforms Internet Credit

Rating Assessment

Cryptographic Protocols

-- Blockchain

Crowdfunding Platforms Online/Direct Insurance and

Healthcare Services

Aggregators/ Financial Services

Search Engines Online Capital Market Instruments

Exchange Platforms (vs Over-the-counter) Big Data Analytics

P2P Transfers/ Payments Internet

Financing (Mini-loans,

Consumer loans)

Wealth Management

Platforms Sharing Economy/

P2P Insurance

Artificial Intelligence

Robo-Advisers Data Security

Displacement of Cards

(Default Card)

Algorithmic Trading Sensors, Telematics,

Wearable, IOTs

Financial Services Cloud Social Trading

Future of Financial Services

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• Silo business functions and processes in the value chain of traditional financial services

empower fintech to easily attack areas of customer friction

• Re-alignment or re-integration of value chain components with fintech innovations will develop new business models or service provisions for future financial services

• The World Economic Forum Report has quoted that “whilst the most imminent effects of

disruption is felt in the banking sector, the greatest impact may likely be felt in the insurance sector later on”

• Insurance has been a stable business, but often with frustrated customers !

• Insurance appears to customers as money (premiums) paid every year with nothing back

(except for “peace of mind”), which seems not justified by many people

• Often the only time the customer interacts with the insurance company is when something goes wrong. The customer is annoyed and upset at the situation, then on top

adding claim administration, and worse, a claim adjustor whose job is to protect

insurer’s interests

Insurance Fintech for Enhancing Customer Experiences

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• Traditionally, insurance is written

– Inter alia, on the principle of utmost good faith, due to asymmetric information

– with adjustments made at the time of claim with revealed information

– leading to poor customer experiences

• Also, previous design on online insurance was more like to do-it-yourself. Apart from first why to do it, complications also arise on claim administration & product understanding

• Insurance fintech is to enhance customer experiences, and current developments include:-

– E-aggregators (i.e. online/digital aggregators) for premium rate comparison

– Sharing economy/P2P insurance for mutual or captive insurance

– Group purchase for price negotiation

– Connected Devices and Telematics for usage based insurance (UBI)

– Wearable for preferred risk underwriting

– Internet-of-things for added on services

– Virtual insurers for full digital processing

Insurance Aggregator

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• There are 3 models for an online price comparison site, namely:

– Call-center agency (including after sales service and ongoing relationships)

– Traffic generator (sending a potential lead to another site for payment on eyeballs)

– Online quoting front-end (allowing customers to compare prices & purchase online)

• The third model is the common digital aggregator model. It focuses on technology to sell policies without the aid of a commissioned human agent

• Online aggregators now account for 60% of new motor insurance policies and 50% of

personal insurance lines in the UK, e.g. Moneysupermarket.com & Confused.com in the UK compare prices on motor, household and travel insurance

• Digital aggregators are common in the UK and Europe, but yet to achieve similar success in other parts of the world e.g. PolicyBazaar in India provides one stop for loans and insurance (all kinds of general and life insurance)

• E-aggregators provide a platform for new or smaller insurance players to access volume

markets, but usually these are highly price competitive markets, like motor insurance.

Insurance company market leaders use different brands for direct business versus the aggregator channel to preserve their market shares and profit margins

Insurance Aggregator

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• Confused and Moneysupermarket may see peak in business performance as margins

have seen eroding due to intense competition with other e-aggregators and channels

• E-aggregators are conduits and do not own the customer. They earn ‘one-off’ fees and typically ride on high volumes of online leads & maximizing new business conversions

• E-aggregator customers are clearly aware of what they want to buy (i.e. insurance becomes bought) and have been found more price sensitive than other channels

• They have higher expectations for multi-channel access, self-service facilities, more

interactive and dynamic content. But, their loyalty is comparatively low

• Because of no customer relationships for re-sell, major e-aggregators in the UK have

gone head on head on TV screens to flight for market share, leading to higher costs

• Increasing price comparisons by visitors without purchase have jetted up the unit acquisition cost for each successful aggregator deal, potentially eliminating its acquisition cost advantage versus other channels

• UK Competition and Markets Authority has revealed in its 2013 study that consumers

might pay higher motor insurance premiums through purchases on e-aggregators

Insurance Aggregator

• Google in February 2016 announced shutting down its Google Compare aggregator (which was launched in March 2015 with aggregators CoverHound and Compare.com)

• Technical challenges for insurers (especially smaller insurers who are active providers in

the aggregator market) are on their legacy systems to integrate with new technologies

and platforms for speedy interactions, and the costs of updating their infrastructures

• A recent survey in Asia has suggested that some 30% of motor insurance would be

written by digital aggregators by 2020

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P2P Insurance & Group Purchase

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• Peer to Peer (P2P) insurance uses social networks and technologies to implement

the sharing economy business model for individuals to assume and share insurance risk

• For proper risk sharing, especially with asymmetric long-tailed risk, it needs a very sizeable group of members for effective risk sharing to occur. Otherwise, an incidence occurs will cause a big loss to all members that they are unable to afford and pay the claim

• P2P insurance startups usually arrange and administer for the individuals/members to

share only a small amount of risks (e.g. only the initial deductible for motor insurance by

InsPeer in France). The platform administrator would insure most of the risks to the conventional insurers and is remunerated through commission from the insurers

• The platform may create different affinity groups and may act as the coordinator/direct policy owner to subscribe insurance covers for the members of these different groups

• The platform will negotiate with different insurers for terms and rates relevant to the affinity groups, and may line up with many insurers together to structure the total cover

• The platform administrator, in theory, needs good insurance knowledge to negotiate deals offline with insurers (e.g. InsPeer is run by an actuary)

P2P Insurance & Group Purchase

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• Friendsurance in Germany, InsPeer in France, & Guevara in the UK are startups which

combine social technology with traditional insurance products to the connected individuals to reduce insurance costs by refund of excess premiums upon lower claims

• For Friendsurance, small insurance claims up to the support line are covered by the social

networks of its customers. The support line is agreed by the majority of the group from time to time. Friendsurance will insure the risks above the support line with insurers

• Friendsurance claims that there are fewer claims with this kind of set-up as:-

– Friends are less likely to cheat each other

– Social networks are good at making assessments of each other to pick people with less chance of claims

and the optimum group size is about 10 (4 to 16)

• Friendsurance has now linked with some 60 insurers in Germany and had 5 digit numbers

of customers (most of them younger than age 45 and very online-affine)

• These startups in effect are alternative insurance brokers. However, the P2P insurance

arrangements as operated contain mutual or captive insurance characteristics which

need to be run by an authorized insurer. This may easily create compliance challenges

P2P Insurance & Group Purchase

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• Bought-By-Many in the UK is a free, members-only service to help soliciting special insurance quotes that may not be easily available to individuals

• Bought-By-Many may negotiate to create a brand new insurance policy with an underwriter at Lloyds of London

• It effectively involves group purchase and the business model involves a 3-step process:-

– Individuals join groups with similar insurance interests and needs on the platform.

– When the group reaches a ‘critical mass’, it will negotiate with insurers to win the best premium deal for the whole group. The larger the group the better the terms.

– Individuals can then opt to participate in the group insurance contract or not

• Bought-By-Many’s groups are divided into 8 categories: Business & Professional; Motor; Health; Home; Pets; Phones & Gadgets; Sports & Leisure; Travel. Life insurance is missing

• Most interested individuals come from people with specialist insurance needs, like travel

insurance for people with certain medial problems or elderly

• Bought-By-Many now has 277 groups with some 150,000 members on the platform. On

average, a price discount of 18.6% versus individual quotes has been obtained

.

Telematics & Usage Based Insurance

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• On-Board Diagnostic (OBD) devices on autos can collect speed, mileage, oil consumption, machine oil usage, airbag deployment, engine parameters to assess behavioral factors including rapid acceleration and sudden brake as well as usage date & time

• Usage based insurance (UBI) leverages telematics, GPS and wireless communication technologies to collect data in or near real time for premium rate assessment and claims

• In Italy, motor insurance rates due to frauds used to be high. Telematics insurance, with an upfront premium discount plus telematics data for speedy claim processes, has gone mainstream and accounts for 15% of the market. Germany, France and the UK are working on the best pricing approach to increase the penetration rates

• In the US, UBI is common. Progressive basing on driving behaviour to provide premium discount successfully drives down claims. Whilst, Metromile focuses on usage & charges monthly premiums based on a fixed fee plus driving mileage with a cap on daily mileage

• Discovery in South Africa offers Vitality Drive – a loyalty program with a monthly charge for the use of telematics, where the rewards based on driving behaviour provide incentives

• In China, most motor insurers operate at losses other than the largest few. Small to medium sized insurers are expected to move to UBI to price on driving behaviour of the person than on the basis of the motor. 30-40% motor insurance may become UBI by 2020

Wearable & Internet-of-Things

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• Devices and apps to track heart rate and food consumption; gadgets to monitor mood and surrounding environment; biomedical sensors to assess diabetics glucose levels via breath and detect cancer indicators in saliva have allowed the “quantified self”

• South African Discovery’s Vitality shows that wearable technology facilitates health behaviour change and use of wellness programs to incentivize healthy behaviour can lower claim incidence and improve insurance policy persistency

• To enhance customer experiences and convenience, insurers in China have lined up on apps patient education resources similar to WedMD in the US as their service programs

• All these will gradually change life underwriting practice from point of sale to a continuous basis, allowing further fragmentation of life insurance cover driven by solvency regulation

• In the US, Zenefits offers free cloud-based HR software to employers and integrates it into their benefits and payroll systems for employees to choose their health insurance cover and insurers online. Zenefits earns fee from the chosen insurers

• In that cloud-based solution, Zenefits also creates a health insurance distribution platform through technology with insurance brokers, providing HR managers with access to insurance expertise to help designing specific health insurance plans under the Affordable Care Act

Virtual /Startup Insurers

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• Oscar in the US is a startup health insurer established in 2012 with the 2010 Affordable Care Act at its back, using technology as a differentiator. Customers are usually tech-savvy

• The startup is comprised of engineers, designers, data scientists, healthcare experts and others with the vision to lower customer healthcare costs. Its platform empowers users to locate and compare local doctors and services, and make appointments

• Users are able to talk to a doctor and get prescriptions without leaving home. Oscar also offers incentives e.g. Amazon gift cards to users for use of the wearable personal monitor to keep track of their health data

• Zhong An Insurance 众安保险 is the first virtual insurer in China. Not like a channel to launch traditional insurance products online, it changes the insurance value chain for the O2O environment & provides cover against O2O payment, logistics & consumer protection

• It uses data analytics to identify new community needs and innovate insurance designs. Its target markets include all the stakeholders in the P2P, O2O, etc internet finance markets

• E.g. it sells air flight accident cover via WeChat and bases on airport information to pay claims immediately for any flight delay and credit the payment to the insured’s WeChat

• It teams up with Aliyun to launch the first cloud computing insurance in China, where Aliyun users are covered on problems with information security and cloud service

Digital Insurance in China

• 2015 China Online Insurance Premium : 96.6% Life Insurance & 3.4% General Insurance

• 2015 China Online Life Insurance Premium : 2.8% from Own Platform & 97.2% on 3rd Party Platforms

• Endowment (including Universal Life & Unit Linked) : 83.2% of Online Life Insurance Premium

• Online Health Insurance Premium : 86.4% for cover period of 1 year or less

• Online Accident Insurance Premium : 66.1% for cover period of 1 year or less

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0%

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5%

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8%

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10%

Online Insurance Premium Penetration Rate

1st Generation Own Website - Traffic Digitalization

2nd Generation Platforms – eMalls & Product-Service Bundling Channel & Scenario based

3rd Generation Social Media – Conversion Social Networks & Community Development

Development of Ecosystems

Digital Insurance in China

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• 1st Generation –

Own Website

• 2nd Generation –

3rd Party Platform (Virtual Shopping Mall) –

Universal Life Product Sales

• 2nd Generation – Scenario based Product Design &

Purchase –

Online Purchase Return Goods Delivery Cost Insurance Cover

退貨運費險

Digital Insurance in China

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• 3rd Generation – Social Network Conversion : Case Study 1 - Air Flight Accident Cover Background： 1st Social Media Marketing case in China Product： 1 year policy Free $1m Air Flight Accident Coverage Friends can pay $1 as gift to top up with additional $1m Top up to Max $5m per person Highlight： Distributed by WeChat, engaging members in Social Networks Result： 1 million new policy in 1st month 5 million new members involved (direct involvement)

• Social Network Conversion : Case Study 2 – Seeking Care 求關愛 Background： 1st Chargeable Social Media Marketing case in China Product： 1 year policy $1 for $1,000 Cancer Protection Friends can pay as gift to top up and cross insure Top up to Max $100,000 Highlight： Social Marketing, with Ranking Written decent Premium income Result： 50,000 new policy in 1st month, with $500,000 premium 500,000 new members involved (direct involvement)

Digital Insurance in China

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• Social Network Conversion : Case Study 3 – Child Cover 少兒護身符 Background： 1st Social Media Marketing involving agents with KPI Product： 1 year policy Free for $5,000 Critical Illness for Children Friends can pay as gift to top up and cross insure Top up to Max $50,000 Highlight： Social Marketing, Free initially, friend to top up payment Agent promotion with KPI Result： 200,000 registrations in 1st month 500,000 new members involved (direct involvement)

• Social Network Conversion : Case Study 4 – Breast Cancer Cover (Failure Case) Background： Subsequent Product after the “Seeking Care” Success Product： Similar to “Seeking Care” Highlight： Social Marketing, with Ranking Result： Both Registration & Involvement is much lower than expected Reason： Marketing story not well-received

Digital Insurance in China

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Products Distribution Insurer Insurance+

Conventional Insurance Products

+ + + + + on the spot settlement for human distributors

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nti

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al In

sure

rs

e-Broker e-Financial

Supermarket

e-Business Platform

e-Aggregator

P2P Others

Universal Life, Endowment Products

& Conventional

Insurance Products

Motor Insurance

免费1年火车意外保险 免费1年女性乳线癌险 0.1 元 排队宝、过期宝

1元30天地铁延误险 动力保运动意外险+红包 ‘退糖鼓’糖尿并发症保障

18-50周岁,加入计划持续充值9元,获得总额不超过20万元的互助金,每成员每次均摊不超过3元

9.9元癌症预报筛查险、

退货运费险、电商客户信用保险、开网店保证金、QQ运动保证金保险

Summary Remarks

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• Digital platforms/environment in substance remove physical barriers turning financial service providers to become mobile merchants

• Financial services become Customer centric as customers can gather all products (or

merchants) on the platform (in his/her own environment) to tailor-make own solutions

• Provisions/Sales of financial services are to become situation/scenario based or to

integrate with other physical or economic services (like Uber)

• In the digital era with integration of fintech innovations, unbundling of services &

earned media, financial services no longer operate in an own controlled environment

• Collaboration and Partnership skills become important as financial services may

need to work with others in the new world versus the past proprietary practice

• Apart from the edges and capabilities of online connectivity to amass customers,

“Internet plus” & Online to offline (“O2O”) mean what being provided offline matters

• Specialized offline skills and edges are crucial to attract customers and be accepted

as a key player with other service providers in the era of ecosystem

~ Thank You ~