As financial technology startups continue to take the banking industry by storm, some experts predict that fintech insurance innovations will be the next major disruption. The U.S. insurance industry represents the largest in the world, with an annual revenue (think insurance premiums) of more than $1.2 trillion. However, there have been few major technological innovations in this massive industry, making it the perfect target for financial technology startups.
To make matters worse for traditional insurers, the industry suffers from a 40% turnover rate each year, thanks to customer dissatisfaction. According to Accenture research, 67% of insurance customers said they would buy coverage from a non-insurer, including 23% who would buy from online service providers such as Google or Amazon. Considering these statistics, the insurance industry is ripe for disruption – and fintech is certainly up to the task. (For more, see 10 Fintech Companies to Watch in 2016.)
Fintech Insurance Innovations: Ready to Disrupt
Fintech, short for financial technology, became one of the hottest industry buzzwords in 2015. That’s when of a number of digital startups emerged, raised millions of venture capital dollars and pronounced that they would disrupt the financial industry, from established banks to payment firms.
As it turned out, these startups weren’t all talk. In 2015 financing for global fintech startups surpassed $20 billion, a 66% increase compared to 2014. Fintech companies serve up a variety of financial solutions, including payments, peer-to-peer lending (P2P), crowdfunding, investment advice and blockchain technology. (For more, see Blockchain Technology to Revolutionize Traditional Banking.) Now quite a few fintech startups have their eyes set on the insurance industry.
Insurance companies are well aware of the fintech threat, though only some have confronted it directly. According to a PwC report, 90% of insurers fear that they will lose business to a fintech startup; 43% have already put fintech at the heart of their corporate strategies. The report went on to point out that the rise of fintech in the insurance industry (aka insurtech) is a disruptive force that should not be ignored.
In fact, one in three insurance executives believe this fintech invasion could cause the loss of more than one-third of traditional insurance business, according to the report. Despite the looming threat, a mere 5% of insurers have launched their own insurtech subsidiary, and only 5% have acquired a fintech company – the lowest in the financial services industry.
Up-and-Coming Insurtech Startups
Fintech’s disruption of the insurance industry has already begun, kicked off by two successful startups, Oscar and Metromile. Oscar, which offers “simple health insurance” and “smart health care,” was valued at $1.5 billion less than two years after its launch (see How Does Oscar Work and Make Money?).
Metromile offers pay-per-mile car insurance, primarily to urban residents. Based in San Francisco, the startup launched in 2011 and offers policies in seven states, including California, New Jersey, Illinois, Oregon, Virginia, Pennsylvania and Washington. According to the company, drivers who travel less than 10,000 miles a year could save hundreds of dollars on annual premiums by using Metromile. (Learn more from Metromile Insurance Review: Is Pay-Per-Mile Worth It?)
Both of these insurtech startups offer user-friendly mobile interfaces and greater transparency than traditional insurance companies – two factors Millennials find extremely appealing. And this is just the beginning of insurtech; industry experts predict major disruption in every type of insurance, from home to life to P&C.
The Bottom Line
In fact, the World Economic Forum predicts that the most significant fintech disruption will take place in the insurance sector. While 90% of insurers fear this technological revolution, many insurance companies are beginning to see fintech not as a threat but as an opportunity. Quite a few traditional insurance providers are embracing fintech and incorporating innovative new technologies into their offerings.
Fintech's power to improve the efficiency of everything from underwriting to customer acquisition to insurance pricing is increasingly evident. As Jonathan Howe, U.K. insurance leader at PwC, told Insurance Journal, “If the long-term mindset and experience of insurance companies can successfully be partnered with the creativity and agility of start-up companies, the industry as a whole will make progress in solving problems and bringing truly innovative products to market.” (For more, see Fintech Firms Preparing for Regulatory Changes.)