CC BY
1266
INSURTECH: CHALLEGES AND DEVELOPMENT PERSPECTIVES
Volosovich Svetlana
Professor, Doctor of Economics, Professor of Finance Kyiv National University of Trade and Economics
ARTICLE INFO
ABSTRACT
Received 27 October 2016 Accepted 12 November 2016 Published 15 November 2016
KEYWORDS
FinTech,
InsurTech,
start-up,
blockchain,
smart-contract
© 2016 The Author.
The article is focused on analyzing the current status and perspectives of financial technologies use by insurers. This research points out the trends of insurance technologies flows among participants of the insurance services market, discusses the differences between insurance companies and start-ups services. The article has focused on the statement that Blockchain-technology is the basis for the application of technological innovation in the insurance market. It is proved that automation of claims handling, operation a reliable and transparent payout mechanism for the customer can be considered as effective ways of applying blochain-technologies in the insurance services market and can be used to enforce contract-specific rules. It has been determined current challenges for InsurTech as the following: insufficient knowledge of start-ups regarding the functioning of the insurance market, the lack of consumers' rights protection concerning the insurance services, the inability to attract officials for the cooperation. At the same time the article emphasizes the main perspectives of blockchain-technology application, it should be used as a reliable platform for clients control of their personal data, P2P (peer-to-peer) insurances and smart contracts.
Discussion. Global convergence process of conventional and virtual assets is activated in the current conditions of the financial sector development; the new era is launched when consumers can access financial services anywhere using digital information and analytical resources, portal shops, social networks and payment systems. Financial services sector which is at the heart of the digital revolution sparked the revitalization of new participants - startups. Financial technologies are the basis of their activities. Using a combination of technology, user-oriented services and flexible business practices new companies reduce the cost of doing business expanding their customers' base at the cost of competitors' market share. This also applies to the insurance market, InsurTech caused by FinTech development were a powerful incentive for its innovation.
Results. In 2015 investments in FinTech have increased by four times compared to 2014. So, according to a Currencycloud Whitepaper (2016), if in 2010 the volume of FinTech investments was $ 103 billion, in 2011- $ 149 billion, in 2012 - $ 399 billion, in 2013 -$ 434 billion, in 2014 - $ 879 billion, whereas in 2015- $ 3.464 billion (Fig. 1) [1].
Fig. 1. Global investments in FinTech The source: A Currencycloud Whitepaper (2016)[1]
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According to DigitalTech International Database (2016), in 2016 global investments in FinTech include more than $ 2 billion of Insurtech investments which is three times more than in 2014 [2]. In accordance with DigitalTech International Database (2016), at present there are 974 Insurtech-startups [2]. Table 1 examines the differences between the services provided by insurance companies and start-ups.
Table 1. Differences between the services of insurance companies and start-ups
Characteristics Insurance companies Start-ups
The main goal of marketing activities Attracting customers is products oriented. The focus is placed on offering better product than the competitor's one. Attracting customers is process-oriented. The emphasis is put on offer the best experience of receiving the product.
Type of communication between the seller and the consumer of services Indirect connection Direct connection
Approaches to service provision Mainly focused on the product development and then - on its distribution. Startups first try to promote the dissemination of information about the product among the right people at the right time and right place.
The source: elaboration of author
New market players are particularly important in the Asian financial sector due to significant investments of venture capital investors. Asian FinTech startups are the most powerful in the world and determine the trends of start-ups developpment in other parts of the world. The development of Asian FinTech startups was caused by the lack of financial regulation that reduced operating costs of such services in the region. Startups in exchange for support and guidance offer investors a certain level of access to their technology or service, sometimes in exchange for shares. These programs also indicate general support for InsurTech solutions by insurance companies.
London begins to play a significant role in the FinTech development including InsurTech development in the European area. Although Silicon Valley is the main source of investment, startups are located mainly in London. In particular, it concerns the most renowned companies in the field of Bitcoin -Blockchain and Coinbase. The liberal legal framework and the availability of state financial support to digital converter technology in the amount of 10 million pounds are the main reasons of this development. The funds are invested in government-funded research institutes such as Research Councils, Alan Turing Institute (studies large amounts of data) and the Digital Catapault (non-profit organization that helps small businesses in matters of communication). At the same time the Treasury of the United Kingdom together with the regulators of financial services (Financial Conduct Authority and the Prudential Regulatory Authority) is planning to develop normative legal regulation of companies of financial and technology sector. Principles of AML FATF will be the basis for this regulation.
According to a Currencycloud Whitepaper (2016), the share of investment in FinTech in the UK and Ireland is more than two-fifths of total European investments [1]. Their activity is an indicator of market trends for other European platforms. In accordance with a Currencycloud Whitepaper (2016), in 2015 about 60% of all European FinTech startups were located in the UK [1]. Nevertheless, the diversity of financial legal and regulatory environment in EU member states remains a limiting factor in the overall European growth in this area. In any case the European Commission in Green paper (2015) supports the growth of innovative, consumer-oriented technology and committees to make them available for a wide range of customers, both in Europe and possibly in the border areas [3].
In order to save their market share, the insurance companies should:
1) ensure the growth of the competitiveness of their services;
2) maintain partnership with competing start-ups on the basis of InsurTech. This is based on the integrated platforms functioning and integrated services providing. Instead of competing insurance companies merge with start-ups to create new innovations in partnership.
Blockchain-technology is the basis for the technological innovation application in the insurance market. There is an opinion that the appearance of blockchain technology is the biggest technological revolution since the advent of Internet. The introduction of blockchain as the basis for the Bitcoin digital currency transactions in 2009 was considered as experimental and obscure. However, according to PwS Database (2016), about five years ago financial institutions and central banks showed their interest in blockchain-technologies, that will reduce banks' infrastructure costs in the range of $ 15-20 million per year by 2022 [4]. In 2015 more than 1.5 billion US dollars were invested in blockchain-technology companies [4]. According to the Global FinTech survey (2016) 22% of the insurance business and asset management business have prospects for growth and lead from other market participants due to the
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application of financial technology [5]. Moreover almost three-quarters of respondents, leaders of the insurance market, consider that insurance will be the most active industry in this direction [5].
In the insurance sector blockchain technology will help to solve the following process automation tasks:
- creation and monitor of insurance history,
- operative access to certificates of the state bodies,
- insurance events accounting, their instant fixation,
- insurance contracts conclusion online,
- expertise and preliminary risk evaluation,
- interaction between brokers and sales network,
- transparent regulation and response to customer requests.
Blockchain is a dispersed registry to store records of static and / or dynamic data transactions without central coordination with the help of mechanism based on consensus for authentication operations. As Bitcoin base, blockchain was the first solution to the problem of double spending, which does not require the existence of a central administrator. This technology is suitable for applications that require transparency of records with the continuity of time and date such as law, history of documents and notary services.
All transactions in Blockchain are recorded as a permanent record, including information about time, participants and volumes of each transaction. Each trust agent in the network has a complete copy of Blockchain and in case of e private consortium Blockchain, agreements are tested by using modern cryptographic algorithms. Mathematical principles also ensure automatic and continuous accord of target agents about the current Blockchain state and every transaction in it.
Application of Blockchain technologies can be compared to the presence of a notary at the conclusion of each deal. This provides each participant with an access to one source of information that supports a high level of confidence in the technology. This is accompanied by in advance rules programming for policyholders and beneficiaries in Blockchain. It enables to avoid bureaucratic procedures in the future for those who adheres to these rules.
Blockchain-technology will boost the efficiency of insurers in three directions:
- improving clients attracting;
- growth of opportunities for offering cost-effective products for emerging markets
- stimulation of the development of insurance products sold online.
Application of blockchain-technologies as a reliable platform for clients control of their personal data, p2p (peer-to-peer) insurances and smart contracts are perspective directions of their use.
Smart-contracts will probably be the first step for Blockchain-technologies application by insurance companies. Smart contracts with blockchain have the following advantages: automation of claims handling, reliable and transparent payout mechanism for the customer contract-specific rules enforcement.
The conclusion of such type of contracts will be followed by search, identity confirmation and creation of new structural mechanisms in which parties do not have to know or trust each other. Automation by using smart contracts results in a significant reduction of bureaucratic procedures and saves an incredible amount of time for accountants, controllers and insurance companies as a whole.
Smart contract based on blockchain is transparent and flexible claims management mean for insurers. Contracts and claims are recorded on blockchain, confirmed in network and provide the payment only for justified claims.
Smart contracts are the basis for insurance p2p model. The insurance platform implements a mathematical algorithm to the risk-based model, which calculates the size of the insurance premium for the client. According to the risk-based model and calculations consumers can choose the most favorable insurance option. Smart contract is programmed in advance that in the case of an insured event payment occurs without any third party, i.e. without the insurance company. By using blockchain technology management and payment processes become easier and almost completely automated, which makes them more transparent and cheaper.
Now banks are more active than insurers in the use of Blockchain technology, together with more significant investments in them. Although such European insurers as Axa, Aviva and Allianz as well as American and Asian MassMutual Ping An perform successful investing in start-ups, which can be related to their core business. However, according to researching Richard Kastelein (2016), only 13% of insurers' innovative investments performed in the technology during 2010-2015 have been used in the direct activities of insurance companies [6].
As evidenced by the joint research of Venture Scanner and Connected Insurance Observatory connected insurance initiatives took the largest share (30%) in Insurtech structure which accounts for 80% of the Insurtech funding [4]. Online purchases took the second place in the Insurtech structure.
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Now InsurTech faces the following challenges:
1) lack of knowledge about the way of insurance market functioning, that is at the same time the basis for cooperation between existing insurance market participants and start-ups;
2) insufficient protection of the rights of insurance services consumers that involves the emergence and strengthening of regulation for this insurance market segment;
3) inability to attract officials for cooperation. This point confirms the importance of all open innovation initiatives of the last times: from hackathons to co-creation labs, from incubators to accelerators. They are all fundamental to allow start-ups to access incumbents and vice-versa.
Insurance companies should not just copy existing Blockchain-technology, but as well as banks and brokers of the stock market they should carry out experiments in the framework of the insurance sector. They should work with Blockchain-focused accelerators and incubators, like outlierventures.io in Europe or Digital Currency Group in the US and connect to recently established start-ups and technology.
In Asia Aviva has created a special space in Singapore in which technicians, creative designers and commercial groups are exploring, developing and testing new insurance ideas and services that make financial services more adaptable and accessible for customers.
At the same time there is also an interest of governments in the application of Blockchain-technologies in the Asian region. Thus, China is a striking example of Blockchain studying by government authorities. In August 2016 it was announced an establishment of a working group on Blockchain issues, the aim of which is to accelerate the development and implementation of technology in the economy. In September 2016, the Chinese government announced the launch of work on Blockchain solutions for payments in the area of social security.
In October 2016 it was published «Guide for Blockchain technology and application development", such companies as Alibaba Ant Finance, WeBank, Ping'an Insurance Group and the Institute for Standardization and study of digital technology participated in its development. Ministry of Industry and Information, National Committee for Standardization and China Forum on industrial development Blockchain led the development of this publication. This document focuses on the use of Blockchain-technologies in the financial sphere. At the same time there were designed scenarios of possible Blockchain implementation in supply, finance, entertainment, social security, education and employment.
In Europe the Dutch company Aegon, Swiss companies Swiss Re and Zurich, as well as German companies Munich Re and Allianz have teamed up for the creation of their own Blockchain Insurance Industry Initiative. The purpose of this association is to explore new technological opportunities that will allow insurance companies to provide their customers with more protected and higher-quality services.
Thus, in order to increase their competitiveness insurers should use technological innovations in particular Blockchain. Despite existing challenges Blockchain technology is capable to provide innovative solutions for all segments of the insurance services market, offering high-speed, full control and transparency of operations. In this case there are three types of insurers' behavioral strategies: investing in the establishment of start-ups; consortia on research of innovative technologies and their adaptation to the conditions of the insurance market; copying of Blockchain-technology used by banks and stock market participants.
REFERENCES
1. Currencycloud (2016) Whitepaper "Banks and the FinTech Challenge: How disruption has been a catalyst for collaboration and innovation". Available at: https://www.currencycloud.com/files/2016-Banks.and.the.Fintech.Challenge.pdf
2. DigitalTech International (2016) The insurtech revolution: the next big wave is connected insurance. Available at: http://insurtechnews.com/insight/the-insurtech-revolution-the-next-big-wave-is-connected-insurance .html
3. European commission (2015) Green paper on retail financial services. Available at: http://lists.w3.org/Archives/Public/public-webpayments-ig/2016Mar/att-0003/green-paper_en.pdf
4. PwS Database (2016) Blockchain: The internet revolutionised the way we exchange information. Available at: https://www.pwc.co.uk/blockchain
5. CFA Institute (2016) FinTech Survey Report. Available at: https://www.cfainstitute.org/Survey/fintech_survey.PDF
6. Kastelein R. (2016) Blockchain Technology and the Insurance Industry. Available at: http://www.the-blockchain.com/2016/01/19/blockchain-technology-and-the-insurance-industry/
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