What is insurtech? The future of insurance, technology and finance explained

You may have heard about the growing number of insurtech companies out there. But what does insurtech mean? As its name suggests, insurtech is short for insurance technology. In a broad sense, insurtech consists of the ever-changing technologies and new products that get used in the insurance industry. Though insurance companies have been using insurtech for a while, the new technology has more recently been opened up to policyholders, too.

Insurance is a contract between an insurer and the insured (a policyholder). The insurer will guarantee payment for an uncertain future event, such as a flood, car accident or death. In return, the insured pays a smaller premium – usually in monthly or annual installments – in exchange for that possible future protection. Insurance companies have traditionally used fairly broad data to assign customers into a risk category. Of course, it makes sense for the insurance company to want to make money, but that sometimes leads to people paying more than they should because of the groups they’re put into, since it’s most profitable for the insurance business.

How insurtech works

That’s where insurtech comes into play. The term is inspired by fintech, which is a technological innovation in finance. The two techs certainly intersect, but should we look at it as insurtech (insurance technology) vs. fintech (financial technology), or is it more of a collaborative effort? In most cases, evolution in technology leads to lower costs and higher efficiencies. For example, the various bank alternatives that have emerged in the fintech space – companies like Chime and Kabbage – make life easier for mass consumers, whether through personal finance, investment opportunities or newer trends like Bitcoin. Insurtech aims to do the same thing, making the insurance industry more accessible and smoother for customers and businesses alike. 

Why the rise in insurtech startups now, though? For one, consumers are starting to get savvier about their insurance options and expect to be able to compare alternatives in a simple and trustworthy way (we encourage policyholders to do thorough research and review their policies every six months). Insurance companies are also starting to become more aware of insurtech innovators, as well – with 86 percent believing their revenues will be at risk thanks to future technological disruption. 

Just as in fintech, smart insurance companies will look to collaborate with insurtech on their insurance products. So, how is insurtech reshaping insurance? A few major ways include the IoT, machine learning and AI.

Internet of things (IoT)

The Internet of Things continues to grow, with more wearables and smart sensors than ever before. But newer technology is playing a major part in insurtech trends, too. For instance, drones can access remote areas and easily run advanced aerial image analysis, giving insurers a clearer picture of affected areas without needing to physically send someone to the area.

As a result of the IoT, insurers have access to gobs of data, allowing them to better understand risk, view trends and enable proactive modeling. This enhanced data means insurance companies can provide a better overall experience for their customers, such as tailored premiums, personalized service and faster compensation.

Machine learning

Of course, having all of this data is only useful if companies are able to analyze it properly. That’s where machine learning comes in – algorithms can quickly identify patterns and trends and provide insights on customers and potential risks. For example, machine learning can help with:

• Claims processing. Vehicle data can identify something like an aggressive brake or harsh turn, which helps provide a clearer picture for crash scenes. Telematics, for example, have been a revolution in big-data for more accurate insurance policies. As a result of better understanding driver behaviors, car insurance companies can process claims more quickly and efficiently. 
• Risk modeling. In the past, insurers had to craft policies based on very rudimentary data on the policyholder and their vehicle. But thanks to machine learning, algorithms can now create personalized risk profiles. If a driver regularly speeds, that gets factored into a company’s risk model. 
• Underwriting. Insurance companies can do things like outsource their underwriting to computers, allowing them to focus on improved customer service or offering special features for loyal policyholders. 
• Detecting fraud. A company like Shift Technology uses machine learning algorithms to highlight suspicious claims from large datasets, improving its own pool of data.

Artificial Intelligence

We’re also seeing more uses of AI in insurtech, which can have lasting impact throughout the industry. It helps that AI is playing a larger role in cars themselves. With advancements like connected cars, autonomous vehicles and ride sharing apps, there’s plenty of room for insurtech to make its mark.

For example, the auto insurance company State Farm’s Drive Safe & Save feature uses AI to analyze in-car camera feeds, providing feedback on any unsafe behavior. Couldn’t wait to answer that text until you got home? Your car will know about it, and your insurance will be affected.

Why is insurtech important?

Plain and simple: Insurtech improves the customer experience. In the past, insured parties had to deal with salespeople driven by earning commission, not getting individuals what’s best for them. There was also a large volume of paperwork, and the entire process could take weeks, or even months. That’s all changing thanks to insurtech – insurance and other financial services are becoming more accessible.

Policyholders can now research options and even purchase insurance online. Through the internet and apps, individuals can compare and find what works best for them. No need for mountains of forms or setting foot into a physical business that doesn’t have your interests in mind.

Additionally, rating factors are becoming more about the person and less about the money. Thanks to things like the IoT, AI and machine learning, companies can better segment policyholders based on their actual driving habits, rather than more generally. That can also mean lower premiums, or at least ones that more accurately reflect you as an individual. 

Finally, insurance is cheaper, both for insurers and policyholders. That’s typically true of traditional insurance, but we’ll expect to see more “short-term” insurance models, too. For example, coverage for a two-day weekend trip to a city three hours away should cost less than a monthlong excursion into an Australian volcano. Likewise, if you don’t have insurance and just need to borrow a friend’s car to pick something up, it wouldn’t make sense to invest in a six-month plan; you’d only need something like an hour or two of coverage. Insurtech is improving the flexibility of a traditionally monolithic industry. 

The value of insurtech for businesses

Insurtech is quite valuable to businesses, too – and funding trends back this up. In 2012, according to CB Insights, companies had invested $348 million globally in insurtech companies. Just six years later, that investment had risen to $4.15 billion. 

That kind of growth is incredible. Think about when did insurtech start – only in 2010, when the company Friendsurance created the first peer-to-peer (P2P) business insurance model. Insurtech has continued to grow since then, as customer demands continue to rise. They seek speed, convenience and customization. Insurtech provides all of those options.

Meanwhile, businesses can shop for different types of coverage all in one place. What’s more, they can ensure their customers’ information is safe, through features like encrypted personal data and smoother customer identity verification. Insurtech also opens the doors for smart contracts – businesses generally don’t enjoy mountains of paperwork, either! 

That kind of flexibility isn’t limited to larger companies. As the space continues to grow, how can independent insurance agent involve in insurtech? For one, customers and small businesses searching for insurance online can easily browse independent agents, complete with reviews and expertise. Insurtech also speeds up the submission process; agents no longer have to be present when collecting data, which makes things easier both for them and their potential customers.

Just how more profitable will insurance become with insurtech? That remains to be seen, but one thing is clear: An industry that’s long been set in its ways is starting to see a positive disruption. That’s better for customers and businesses, and there’s plenty of innovation yet to come.