Concerns regarding oversight and accountability in relation to decisions made involving artificial intelligence (AI) will continue. The insurance market is already using AI in applications across the value chain, including identifying customers, distribution through the use of chatbots, pricing risk, analysing claims and fraud detection. Questions such as inbuilt bias and ethical decision making will be increasingly relevant as AI products are used more extensively and become more non-deterministic in nature. We expect regulators to increasingly require firms to explain automated decisions and to focus on transparency and accountability regarding the use of AI.
Data use in a GDPR world
In the retail context, terms such as “screenscraping” and “targeted marketing” describe practices leveraging publicly available data to assist with customer acquisition, underwriting decisions and claims assessment. Boundaries are continuing to be pushed and such practices give rise to a number of issues from a data privacy, IP and moral hazard perspective. GDPR and enhanced regulatory awareness mean that firms will need to be exacting in relation to privacy notices, data subject consents and contractual terms with third parties giving them access to and use of the relevant data.
Back office is the new front office
Many of the most acclaimed InsurTechs are now offering services targeted at the claims administration end of the value chain. 2019 is likely to see a continued shift in focus from InsurTechs from product and distribution to what are perhaps less overtly glamorous aspects of insurance. Significant capital costs and regulatory complexity around product development and customer acquisition continue to favour incumbents in established markets. This is driving start-ups to focus on services offering cost savings to insurers through offerings such claims platforms, data analysis and AI efficiency generating AI products, rather than competing for customers.
Incumbent / InsurTech collaboration
Some attribute the InsurTech industry’s relative time lag behind FinTech to the regulatory and capital hurdles involved in launching an insurance business and product, which has meant that collaboration with incumbents has been needed. There is now an abundance of options for start-ups looking to work with and co-develop ideas with established insurers, incubators and other start-up programs concentrated on facilitating the entry of disrupters into the market. Insurers and InsurTechs are now also starting to fully comprehend where each can add value to the other. We can expect more of the same in 2019.
Regulation and global co-operation
Brexit will bring regulatory challenges for start-ups, particularly if passporting rights are lost, as more limited financial resources may inhibit their ability to make contingency plans in the way that most established market players are doing. Co-operation between regulators will remain important as they each work with industry to close the knowledge gap in relation to market innovation and address the sometimes evident regulatory lag. The FCA has been supportive of innovative businesses through its sandbox program and we are likely to see an increased prevalence of InsurTechs in future cohorts. Regulators will also need to continue to co-operate at a global level to address complexities posed by technologies such as blockchain and formulate an appropriate regulatory approach to the treatment of digital assets, which are likely to become increasingly prevalent in the insurance industry.
Some products – in health, motor and connected home in particular – are becoming increasingly reliant on data from connected devices. To date, pricing related to these products has been on the basis that customers will get a better product or price in exchange for the data provided. These products effectively offer customers an upside for providing more data and insurer control through using that data to assess and mitigate risk and inform behaviour. The FCA has previously announced concerns regarding big data and related pricing practices and stated it is monitoring the market. This will be an area to watch as these products proliferate and the provision of data through devices becomes the norm for all customers, creating the temptation for insurers to force those opting out to pay higher premiums.
Blockchains and DLT
Expect success and failure in both the commercial lines and retail space for projects underpinned by distributed ledger technologies (DLT). The hype around retail businesses in this sector will need to translate into stable and profitable business models if they are to attract next stage investment. There are a number of consortia in the insurance space looking at using DLT in insurance value chains. 2019 is likely to be a pivotal year for some of these projects and the year we will see if the benefits of shared R&D costs and potential for increased network effect are considered worth the potential reduction of pace and efficiency caused by large groups of financial institutions, each with their various internal demands and processes, working together.
Novel products and smart contracts
It looks like many exciting parametric products – spanning markets such as ILS, agriculture and disaster relief – will continue to come to market in 2019 as businesses with the data and modelling capabilities push the boundires of how an insurance contract can operate within existing regulatory frameworks. We expect to see genuine progress on this front as existing contractual frameworks are part automated and processes are accelerated through data connected devices and third party data feeds.
Exits, M&A and failures
Valuation expectations were high in 2018 but also often met. In 2019, some early stage businesses buoyed by these valuations and corresponding investment may well fail as the promise of an idea fails to translate into the more traditional later stage investment criteria of positive cash flow generation and revenue growth. Fund dynamics might also start to dictate exit pressures on investments, which could lead to more later stage M&A activity in the space in relation to some of the more established InsurTechs.
Continuing investment activity
Technology investment activity still continues to be made at record levels. VCs are likely to focus on establishing specific InsurTech funds, while insurers continue to develop their disruptive technology investment arms, looking to target InsurTechs and other technology businesses which may complement wider business strategies and increase institutional know-how. Disruptive technologies have also provided alternative forms of fundraising, including peer-to-peer and raising funds in cryptocurrencies digital assets. Start-up capital tables are getting increasingly complex – as are the side letters accompanying seed and early series funding rounds - as usually longer term exit buyers look to invest at an earlier stage.
A version of this article was published in Insurance Day on January 10, 2019. 2019 Informa plc.
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