For many decades, the traditional insurance business model proved to be resilient. On the back of deep capital reserves and well-honed underwriting skills — built on many years of experience as well as proprietary data — the industry enjoyed more stability compared to other segments of the financial services industry that faced more intense competition.

The incumbents of the insurance industry are now seen to be closing the gap as it invests more heavily in new technologies — insurance technology, or insurtech — to avoid disruption by smaller, more agile upstarts. The momentum received a further boost amid the pandemic, as insurers joined many other traditional businesses and sectors to digitalise for the sake of business continuity, says Peter Miller, CEO of insurtech firm Fermion. This gave greater focus to the adoption of insurtech.

“The pandemic obviously came as a real shock to the insurance industry, whose business previously relied heavily on face-to-face sales. It was a real wake-up call for these companies who had to play catch-up to ensure that their profit margins were not severely affected,” says Miller in an interview with The Edge Singapore.

Alex Kimura, a partner at management consultancy McKinsey, says that prior to the pandemic, the insurtech space was growing incrementally, before being greatly accelerated following changing customer demand for more integrated experience. “On top of that, the traditional insurance models were really under pressure for four different reasons — technical differentiation, cost pressure, increasing demand for personalisation and future challenges to business resilience,” says Kimura.

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According to McKinsey’s Global Insurance Report 2022, both premium growth and profits declined in 2020 by 1.2% and 15% respectively from the previous year. Profit decline in Asia Pacific was the sharpest at 36%, driven by falling profits in life insurance.

“Demand for fee transparency as well as intensive competition stemming from new providers offering lower-cost options are putting pressure on the traditional operating models, causing headwinds on revenue growth,” says Kimura.

In fact, after decades of stable returns, insurance is now a value-destroying industry in which half the players do not earn their cost of equity, McKinsey found. More than half, or 54% of listed insurers, representing 52% of the global industry’s equity, had a return on equity (ROE) below their cost of equity over the past few years. The average ROE for insurers in developed Asia, for example, was 10% in 2021 compared to 12.4% over the past half decade.

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Investors in the public markets have taken note — about 50% of listed insurance companies worldwide have consistently traded below their book value over the past five years. The consulting firm says this is clearly a vote of no confidence in the industry, raising questions about the long-term future of several players as standalone entities.

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The insurtech landscape

Insurtech as a term is not new — in fact, it emerged in 2010 as an offshoot of a similar endeavour in banking known as financial technology (fintech), according to the Insurance Information Institute. It is mostly used to refer to the use of apps, wearables, big data, machine learning and other transformative technologies to automate and improve processes across the insurance value chain.

Kimura notes that in recent years, the insurtech scene has seen some notable changes, the first being garnering a larger share of private capital. “Venture capital had not really focused on insurtech until the last five years. It could be because they initially did not really understand it, but it wasn’t within their radar.”

McKinsey found that investments in insurtechs worldwide grew to US$14.6 billion ($19.8 billion) in 2021 from US$7.2 billion in 2019. “Over the past seven or eight years or so, there has been over US$25 billion invested in insurtech — 2021 was a record year. Most of that is going into marketing and distribution. People want to focus on the front end — getting to the customers quickly in a more relevant and frictionless way,” says Kimura.

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There is also a full spectrum of involvement in the different subsectors of insurance across the value chain. Most insurtech companies focus on providing tech services on either the front, middle or backend of insurance, plugging onto the “mothership” which are the large incumbent insurance companies. They had to do this as most of these insurtech companies do not have a licence to offer insurance products, Kimura explains.

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From left: Fermion CEO Peter Miller

Fermion is one such insurtech company which does not offer its own insurance products. Instead, the subsidiary of software company Silverlake Axis, which is listed on the Singapore Exchange, provides end-to-end value chain services to all insurance-related businesses including life, non-life, takaful, health, insurance, aggregators and broader ecosystems.

Miller says: “Eight years ago, the group bought Merimen and Cyber Village. The former operated the largest insurance software-as-a-service business in Asia, which allows us to provide our services to every single line of non-insurance or property and casualty (P&C) business — be it retail or commercial. Our services cover sales, claims, predictive analysis, artificial intelligence and surveillance, among others.”

Meanwhile, companies like Indonesia-based PasarPolis works together with insurers like FWD, Allianz and Lippo Insurance to provide micro insurance policies. Funded by names such as Gojek, Tokopedia and International

Finance Corp, PasarPolis claims to be the largest insurtech in Southeast Asia, having issued over one billion policies since its inception. PasarPolis’s insurance offerings range from health, vehicle, accident, and P&C.

Founder and CEO Cleosent Randing says that PasarPolis has insured roughly 11% or 25 million Indonesian consumers, most of whom are working in the gig economy and have never experienced getting insurance products before. “We are able to do this because we collaborate with our partners to address the markets that the larger incumbents are unable to do. We create affordable insurance products and distribute them via partners like Tokopedia, Shopee, Bukalapak and Lazada,” he adds.

Typically, insurtech companies like PasarPolis are able to provide its customers with unique, bite-sized and personalised products that incumbents may not want to offer due to its small profit margin. For instance, PasarPolis’ flagship product is a crack-screen protection for smartphones, which was enabled by its partnership with one of its investors, Xiaomi. The company also provides instant claims, something that incumbent insurers are struggling with.

Another category of insurtech companies provide so-called “full-stack” services. These companies are full-fledged licensed entities that are able to control the full end-to-end value chain on top of offering insurance products to consumers. Kimura says these full-stack companies are coming at a digital disruption angle, trying to capture the younger customers.

“That is going to be the way forward for insurance companies — acquiring the younger generation. Can incumbents adapt to that from their distribution, product development and interaction perspective? That is the big strategic question for the industry and something that insurtechs can unlock as they move forward,” says Kimura.

Insurtech start-up Igloo is a full-stack company operating in Singapore. Founded by Grab’s former chief technology officer Wei Zhu, the company had raised US$19 million in its Series B funding round which Singtel’s venture capital arm participated in.

Similar to PasarPolis, Igloo collaborates with incumbents such as MSIG and Sompo to offer a wide range of insurance products, including health insurance solutions for gamers, personalised pet protection solutions and e-wallet insurance.

Igloo co-founder and CEO Raunak Mehta says there are very few full-stack insurtech companies in Southeast Asia as insurance is a highly regulated field, causing the entry barriers to be quite high. With data and technology at its core, the company aims to “infuse new life” into the 300-year-old industry to make it more relatable to the younger generation.

“We work with partners across the region, be it e-commerce platforms, e-wallets, telcos, and banks by co-creating products with them and making it available to themselves and their consumers. We are largely operating in the non-life sector — for instance, we provide property and casualty insurance to cover the risk of items that can get lost or damaged in transit,” he says.

While many incumbent insurers work with smaller insurtech players to improve their business operations, it does not mean that these large corporations are not doing anything to ramp up on their digital transformation, says Kimura. In fact, these companies are investing heavily in insurtech solutions of their own.

“These companies obviously have a lot of capital to work with on top of a sizeable customer base to test, pilot, and roll out innovations. So we should not underestimate these large incumbents. In fact, the ones that invest now will be the winners of the industry moving forward, deeming those who do not innovate as irrelevant,” says Kimura.

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When it comes to gaps and challenges in the insurtech landscape, Kimura says that regulators are not one of them. Globally, regulators have been supportive and ensure that the customer’s interest is always protected and the right solutions are being delivered in the industry.

Many countries such as Australia, Hong Kong and Malaysia have done this in the form of regulatory sandboxes. Singapore, for example, launched its fintech regulatory sandbox in 2016 to encourage and enable innovations for financial products and services. The first entrant and graduate of the sandbox was insurtech company PolicyPal, which has since been acquired by AMTD Digital, a unit of Hong Kong’s AMTD Group.

In 2019, the Monetary Authority of Singapore (MAS) introduced Sandbox Express to provide firms with a faster option for market testing in pre-defined environments. This year, it started offering Sandbox Plus, which entails three enhancements to provide more effective one-stop assistance for firms looking to innovate products and services regulated by MAS.

These enhancements are expansion of eligibility criteria to include early adopters of technology innovation, streamlined application with financial grant for first movers and an option to participate in Deal Fridays programme, a platform for deal-making opportunities.

“Singapore is a great example of a market where regulators have put a lot of emphasis on fintech and insurtech to help these companies thrive. So I think regulators have been playing and are continuing to play a big role,” says Kimura.

Despite this, there is one clear challenge in the insurtech space — creating an effective omnichannel experience for customers. Kimura observes that for many people, insurance is a product that is pushed onto them. This means that many insurance customers are not sure whether they are being offered the right product, which has to do with the lack of data.

“That being said, no one likes to be asked a lot of questions — the last thing you would want is answering a 30-question survey to get an insurance product. So, I think the whole experience will change to become a more personalised, tailored solution, like how Netflix is able to recommend us the next movie to watch.

“While the insurance industry has not gotten to that point yet, I don’t think it is far off. The tools, the capabilities and the data analytics expertise are there. It’s all about packing it together end to end, which should be coming soon. And when that happens, we will see a major transformation in the industry,” says Kimura.

Concurring with Kimura, Igloo’s Mehta foresees three challenges that are hindering further growth in the insurtech space. The first is awareness, as Southeast Asians’ take-up for insurance and their awareness of specific insurance products are still very low. Life insurance penetration, for example, is at approximately 1.2% to 3.4% of GDP in Southeast Asia excluding Singapore, according to EY.

“The penetration is of course similarly low in non-life products. So, how do we make the common man aware of the insurance products that are available to them? How do we tell them what they need? This is something we need to figure out, aside from how to make insurance products more accessible — how do we embed it into people’s daily lives? This is the second challenge,” Mehta says.

The third challenge, he adds, is that insurance companies are still fairly traditional in nature. They rely on a set of risk assessment tools and methodologies, which may not be attuned to the risks that customers face today. This results in a self-serving loop where insurance companies prefer serving only a select set of customers.

“Large companies would generally want to … maximise their profit and give better returns to shareholders. But at the industry level or society level, a good chunk of the population then stays under-insured. It is a combination of lack of innovation on the product side and lack of entrepreneurial spirit on the traditional incumbent side. Of course, there has been massive improvement, but I cannot say that is happening in aggregate — it is happening in pockets,” says Mehta.

As the insurtech industry continues to grow, there is still a lot more innovation that can be done across the value chain, says Miller. Products are still not thoroughly personalised, distribution channels are not fully trusted, and the buying process for certain products are still tedious.

“Currently, parts of the system are still very fragmented. We hope to play a bigger role in ensuring that the experience is improved and that the larger insurance industry benefits from it as well,” says Miller.

How DeFi can change insurance

In early 2020, there was a large hype in the cryptocurrency space surrounding decentralised finance (DeFi), which aims to liberalise the way the financial industry is operated by using blockchain technology.

DeFi seeks to replicate what exchanges, banks and other financial institutions are doing, but execute them in a more direct and convenient manner using smart contracts via decentralised networks such as the Ethereum blockchain.

According to analytics firm DeFi Pulse, DeFi’s total value locked as at June 1 is over US$55.23 billion ($75.81 billion), with the top three largest protocols being credit platform MakerDAO, liquidity protocol Aave and decentralised on-chain protocol Uniswap.

Igloo co-founder and CEO Raunak Mehta says the smart contracts technology has the potential to bring in a lot of efficiency to the insurance ecosystem, aside from making it more robust and transparent. “There’s an oxymoron in the insurance industry — customers want to buy insurance from a trusted insurance company but at the same time they do not trust that these companies would pay out their claims. This is something we commonly hear.

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Photo: Igloo co-founder and CEO Raunak Mehta

“I’m hoping that with DeFi, it is possible for the insurance industry to have autonomous organisations with complete transparency in terms of how each claim is adjudicated. It is going to be fairly binary in nature and not depending on the whims and fancies of a centralised institution,” says Mehta.

There are certain areas of insurance that are ripe for DeFi which Igloo is currently researching into, such as parametric insurance — a non-traditional insurance product that offers pre-specified payouts based upon a trigger event.

“The policy management or disbursement can be completely automated. In fact, even the claims part of it does not require manual intervention — a claim is adjudicated depending on certain parameters, whether it is an approval or rejection — this can be taken on-chain.

“Of course, we do not want to move things on-chain just for the sake of moving on-chain. It will only be done if we see greater scale of efficiencies coming out of it. I am waiting to see this space evolve and I am sure that Igloo will play a very important role in it,” says Mehta.

Will this spell some regulatory problems, given how insurance is a highly regulated industry? Mehta does not think so, as the use of blockchain will purely be from a technology standpoint rather than a speculative trading standpoint. “Our goal is to make insurance more efficient, automated and transparent. Hopefully this is something that we can bring to the market and help take off,” says Mehta.

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