Insurtech: Creating Value and Opportunity in the Insurance Industry through Digital Innovation

Technological advances have spurred a golden age of innovation in the insurance sector, creating value and opportunity for players inside and outside the industry―including Citi and other large financial institutions.

Historically, the insurance industry has been slow to innovate and reluctant to prioritize technological investment. That is changing, however, as insurers and other players embrace and capitalize on emerging technologies to find new growth opportunities, increase customer satisfaction, reduce costs, and maintain a competitive edge in a rapidly changing world.

Improved analytics, artificial intelligence (AI), and machine learning (ML) are giving insurers new and superior tools to assess risk and underwrite customers. Digital distribution is growing, allowing firms to reach and build relationships with customers in novel ways. Meanwhile, smartphones and automation are making claims management and client service more efficient and effective. For example, filing auto insurance claims traditionally required time-consuming phone calls, paperwork, and visits to body shops—but now mobile apps from companies specializing in claims management can complete the entire process in a few hours.

Taken together, these innovations are powering a vibrant insurtech ecosystem of rising challengers, evolving incumbents, and entirely new entrants including major technology companies. Investors in the global fintech sector are taking notice: Between Q2 2019 and Q2 2020, insurtech investments totaled $7.6 billion, with 11 deals valued at over $40 million in Q2 2020 alone.

Data-Driven Underwriting

In banking and insurance, the underwriting process of evaluating customer risk and setting appropriate premiums is the lifeblood of business success. Digitization is helping insurers do this in three ways:

1. Data collection and management: Insurers are collecting large amounts of data from novel sources—including public records, sensor-equipped Internet of Things (IoT) devices, and even the behavior of industrial workers—to identify and understand trends and patterns. Auto insurers traditionally have set insurance rates through pricing algorithms based on demographic data including customer age and ZIP code. New entrants into the auto insurance space are collecting customer smartphone data to assess driving behaviors such as braking, turning, and phone use while behind the wheel. Similarly, other companies in the space have begun giving discounts to home insurance customers who install an IoT home sensor kit to monitor motion, temperature changes, water leaks, and alarms—helping prevent home damage and reduce insurance claims.
2. Advanced analytics and predictive modeling: AI and ML help insurers better analyze increasingly large and disparate data sets. For example, one new insurance company has begun using ML and behavioral science insights to decrease fraud and increase trust among policyholders—an approach that allows the company to approve claims in a fraction of time compared to legacy methods.
3. Decision making: Collecting and analyzing more data helps insurers make informed decisions—such as calculating premiums, screening applicants, creating customer risk profiles, detecting fraud, identifying target markets, and predicting customer behavior. This data in turn can inform a company’s forecasting and prevention models, which can help them save significant costs and accelerate claims processing.

Digital Distribution

Human agents remain the top distribution channel for insurance industry products and services. However, digital channels including online, social media, mobile, and e-commerce partnerships are quickly gaining share and importance, making omni-channel marketing a must.

For tech-savvy Millennial customers, seamless digital signup at price comparison websites and insurance exchanges is leading to higher conversion rates. A 2017 analysis of major U.S. property-and-casualty carriers found that one online-only carrier was converting prospects at a much higher rate than other insurers. The same report estimated that an auto insurer with $10 billion in annual premium income could generate $400 million in additional premiums by boosting its online conversion rate 20%.

We're also seeing some insurers form alliances with digital partners to offer discounts to customers, as well as insurtechs allowing customers to purchase insurance through basic mobile phones. This helps them reach a broader customer set, including those in developing countries who lack access to the internet.

Claims Management and Client Service

Technology is also driving new efficiencies in claims management, the process of checking the merit of a customer's claim and assessing an appropriate payout. AI, ML, and robotic process automation (RPA) are saving insurers money by automating claims, underwriting, sales, and service tasks. Moreover, digitization is improving record management—reducing manual processing, improving compliance, and simplifying claims settlement.

Insurers also are leveraging self-service apps and tools to lower costs and increase customer engagement and retention. For example, many companies are allowing customers to share pictures with their claim submission through the company's mobile app, allowing the insurers to easily inspect the damage. This assists in claims processing, appraisals, and adjustments.

Emerging Opportunities

As insurtech comes of age, startups are focusing on niche products, data-driven insights and automation, and superior customer experiences. Incumbents, meanwhile, have three key roles to play within emerging digital insurance ecosystems:

1. Participation: Offering a service by integration with a digital platform. For instance, large insurance players are integrating with popular virtual assistants, thereby entering consumers' homes and daily lives.
2. Orchestration: Bringing together services from different ecosystem participants on a single platform. For example, one financial services provider developed an account portal that offers customers healthcare consultations, auto sales, real estate listings, and banking services, and has converted millions of those accessing the portal into insurance buyers.
3. Creation: Developing new ways to bring participants together to reduce business process friction and make insurance faster, cheaper, and better. For example, many large global insurers and reinsurers have created a consortium that provides insurance solutions on a blockchain platform.

These ecosystems also offer business and growth opportunities for large financial institutions such as Citi. Citi Ventures is actively assessing insurtech investment opportunities, particularly around digital distribution solutions.