Category: Blog

Key takeaways:

• Compliance is a critical aspect of the insurance industry, ensuring regulatory adherence and consumer protection. However, traditional insurance platforms often struggle to meet evolving compliance standards.
• Next-generation insurance platforms offer a transformative solution. By harnessing technologies like artificial intelligence (AI), blockchain, and cloud computing, these platforms revolutionize compliance practices. They automate and streamline processes, improve data accuracy, and enhance operational efficiency.
• Regular collaboration between next-gen insurance platform suppliers and regulatory bodies facilitates staying informed about regulatory updates, adapting solutions accordingly, and contributing to the development of industry standards and best practices.

Compliance is a critical aspect of the insurance industry, ensuring regulatory adherence and consumer protection. However, traditional insurance platforms often struggle to meet evolving compliance standards. Enter next-generation insurance platforms, which leverage emerging technologies to revolutionize compliance practices. This blog aims to delve into the hurdles encountered by conventional platforms, the emergence of next-generation solutions, and their significant contributions to enhancing data security, streamlining regulatory reporting, improving fraud detection, and fortifying customer due diligence. Throughout the article, we will examine the specific challenges faced by traditional platforms, the transformative potential of next-gen solutions, and the diverse ways in which they enhance various aspects of compliance in the insurance industry. By shedding light on these crucial topics, readers will gain insights into the evolving landscape of compliance and the benefits that next-gen platforms bring to the table.

Traditional insurance platforms have long grappled with compliance challenges. Regulatory reporting, data privacy, anti-money laundering (AML), and Know Your Customer (KYC) processes often become complex and time-consuming. Manually collating data from various sources, leads to errors and delays in regulatory reporting. Manual KYC processes can be time-consuming and prone to human errors, hindering efficient customer onboarding.

The prevalence of manual processes significantly raises the risk of errors, delays, and inefficiencies. As a result, it becomes imperative to adopt a fresh approach to compliance that aligns with the demands of the digital age.

Next-generation insurance platforms offer a transformative solution. By harnessing technologies like artificial intelligence (AI), blockchain, and cloud computing, these platforms revolutionize compliance practices. They automate and streamline processes, improve data accuracy, and enhance operational efficiency. These platforms provide intuitive user interfaces and seamless workflows, making compliance tasks more efficient and user-friendly for insurance professionals. The integration with cloud computing technologies enables scalability, agility, and real-time updates to meet changing compliance requirements. These platforms empower insurers to stay ahead of regulatory changes and provide a seamless experience for both customers and stakeholders.

Data security and privacy are paramount in compliance. Modern insurance platforms prioritize the protection of sensitive information by utilizing encryption, secure data storage, access controls and multi-factor authentication. By implementing state-of-the-art security protocols, insurers can instil trust among customers and meet the requirements of data protection regulations, such as GDPR.

Streamlining regulatory reporting processes is further facilitated by next-generation insurance platforms. Leveraging advanced analytics and automation, these platforms generate accurate and timely reports. By eliminating manual data gathering and report creation, insurers significantly reduce errors and enhance compliance efficiency. Real-time monitoring and analytics capabilities enable insurers to identify and rectify compliance issues promptly.

With AI and machine learning algorithms, modern systems enhance fraud detection and ensure compliance with anti-money laundering regulations. Real-time monitoring and analysis of large volumes of data enable the platforms to identify anomalies, flag suspicious activities, and provide early fraud warnings. By incorporating robust AML compliance measures, insurers can mitigate risks, protect their business, and uphold regulatory standards. Integration with external data sources, such as sanction lists and criminal databases further enhances AML compliance.

Next-generation platforms revolutionize customer due diligence and KYC processes by harnessing AI, data analytics, and advanced identity verification solutions. These platforms automate identity verification, risk scoring, and background checks, providing a seamless and efficient onboarding experience. For instance, AI-powered facial recognition technology compares customers’ facial features with official documents, ensuring accurate identity verification. Risk scoring models analyse customer data and behaviour to assess risk levels, streamlining the client due diligence process. Additionally, blockchain-based digital identity solutions offer secure and tamper-proof storage and validation of customer identities. By leveraging these streamlined and advanced techniques, next-gen platforms not only ensure compliance but also enhance the overall customer experience.

Collaboration with regulators and compliance authorities is a high priority for next-generation insurance platforms. By doing so providers of these platforms ensure adherence to evolving regulations and industry best practices. They actively engage with regulatory bodies, participate in industry forums, and collaborate on compliance initiatives. Through regular communication and feedback, they foster a transparent compliance environment, enabling insurers to quickly adapt to regulatory changes. By building trust with regulators, demonstrating a commitment to compliance, and actively participating in compliance-focused partnerships, next-gen platforms navigate the complex regulatory landscape effectively. This collaborative approach facilitates staying informed about regulatory updates, adapting solutions accordingly, and contributing to the development of industry standards and best practices.

Continued compliance training and education are indispensable for insurance professionals, and next-gen platforms are at the forefront of supporting their learning. These platforms offer a range of educational resources, including interactive tutorials and training modules, to keep insurance professionals up to date with evolving compliance requirements. User-friendly interfaces and intuitive workflows within these platforms make it easy for professionals to adopt and understand compliance processes. Additionally, next-gen platforms provide real-time alerts and notifications to ensure users are promptly informed about regulatory updates and changes in compliance obligations. By offering such comprehensive educational support, these platforms empower insurance professionals to stay informed, implement best practices, and navigate compliance challenges effectively.

In the ever-evolving insurance landscape, compliance remains a critical aspect for insurers. Traditional platforms often struggle to meet the complex demands of regulatory requirements, data security, and fraud detection. However, the rise of next-generation insurance platforms presents a transformative solution. By harnessing emerging technologies, these platforms offer enhanced data security, streamlined regulatory reporting, improved fraud detection, and strengthened customer due diligence. The collaboration between these platforms and regulators fosters transparency and ensures adherence to evolving compliance standards. By embracing next-gen platforms, insurers can unlock new opportunities, enhance operational efficiency, and build trust with customers and regulatory authorities in an increasingly compliant and digital insurance ecosystem.

Key takeaways:

• Insurance companies are prime targets for cybercriminals due to the economic value they possess and the sensitive data they hold.
• The human vulnerability being at the origin of the vast majority of successful cyber-attacks, employee education and training are essential to repel most fraudulent tentative.
• Modern insurance platforms strengthen cybersecurity further, leveraging advanced technologies and best practices.

In the current era of digital advancements, cybersecurity for insurers holds immense significance. Insurance companies are prime targets for cybercriminals due to the economic value they possess and the sensitive data they hold. As guardians of valuable customer information, insurers bear a heightened responsibility to safeguard personal data from constantly evolving cyber threats. By implementing robust cybersecurity measures, insurers not only protect themselves but also prioritize the security and trust of their customers. This proactive approach helps maintain client confidence and prevents the potentially costly consequences of data breaches and other cyber incidents.

IBM Security and Ponemon Institute measured the average cost of a data breach to be $5,6 million in 2021; with expenses related to incident response, investigation, customer notification, legal support, and regulatory compliance. Phishing and social engineering attacks are prominent in the insurance industry with 96% of phishing attacks involving credential theft, as indicated by the 2021 Verizon Data Breach Investigations Report. These attacks typically exploit human vulnerabilities, leading to unauthorized access to sensitive data.

In this blog post, we will discuss the good practices that insurers can implement to face off against cyber threats effectively. We will also delve into how modern insurance platforms are enhancing cybersecurity to protect customer data and build trust in the digital landscape. A cyber incident is the result of laxity and lack of action.

Below are 4 best practices that turn cybercriminals’ lives more difficult:

1. Employee Education and Training:

The human vulnerability being at the origin of the vast majority of successful cyber-attacks, employee education and training are essential to repel most fraudulent tentative. Regular training sessions will educate employees about common attack vectors, phishing emails, social engineering techniques, and the importance of following security protocols. This empowers employees to act as a strong line of defence against cyber threats.

2. Robust Access Controls and Authentication Mechanisms:

Implementing strong access controls, including multifactor authentication and user permissions management, ensures that only authorized personnel can access sensitive data, and reduces the risk of data breaches.

3. Proactive Risk Management:

Conduct regular risk assessments to identify vulnerabilities and potential attack vectors within the organization’s infrastructure. Implement proactive monitoring, intrusion detection systems, and vulnerability management to promptly detect and address security weaknesses.

4. Incident Response and Business Continuity Planning:

Develop a comprehensive incident response plan to guide the organization’s actions in the event of a cyber incident. This plan should include protocols for containing, investigating, and recovering from cyber-attacks. Additionally, create and test business continuity plans to minimize disruption and ensure a swift recovery.

How does a Modern Insurance platform strengthen security and reduce the risk of cyberattacks:

1. Robust Infrastructure and Secure Development:

Modern insurance platforms are constructed upon a foundation of secure infrastructure that encompasses encryption protocols, firewalls, and intrusion prevention systems. Furthermore, these platforms adhere to secure development practices, including periodic code reviews, rigorous penetration testing, and a steadfast commitment to industry standards such as OWASP (Open Web Application Security Project).

2. Continuous Monitoring and Threat Intelligence:

These platforms employ advanced real-time monitoring tools and technologies to detect and respond to cyber threats. They leverage threat intelligence sources to stay updated on emerging threats, ensuring timely mitigation, and preventing potential breaches.

3. Data Encryption and Secure Transmission:

Contemporary insurance platforms incorporate robust encryption algorithms to safeguard data both at rest and during transmission. This ensures that the compromised information remains incomprehensible and unusable to unauthorized parties in the event of a data breach.

4. Emphasis on Vendor Management and Security Assessments:

Insurance platforms understand the importance of scrutinizing their vendors and partners. They conduct thorough due diligence and assessments to ensure that third-party providers maintain high cybersecurity standards. This proactive approach helps minimize potential vulnerabilities arising from external dependencies.

5. Implementation of User Access Controls and Authentication Mechanisms:

In the realm of modern insurance platforms, strong user access controls and authentication mechanisms are put in place to ensure that only authorized individuals can access sensitive data. These encompass multifactor authentication, role-based access controls, and the enforcement of stringent password policies. Through these measures, platforms minimize the risk of fraudulent access and data breaches, fortifying the overall security posture.

6. Adoption of Incident Response and Business Continuity Planning:

Insurance platforms recognize the inevitability of cyber incidents and prepare accordingly. They have comprehensive incident response plans in place, which outline the steps to be taken in the event of a security breach. These plans facilitate a swift and organized response, minimizing the impact of an incident. Additionally, platforms develop, and test business continuity plans to ensure that essential operations can continue seamlessly during and after a cyber incident.

In conclusion, modern insurance platforms employ a range of advanced technologies and best practices to enhance cybersecurity. Through robust infrastructure, continuous monitoring, encryption, vendor management, user access controls, and incident response planning, these platforms strive to safeguard sensitive data and protect against cyber threats. By adopting these measures, insurance platforms bolster their security posture and inspire trust among their customers in an increasingly digital world.

To attend to its corporate goals, satisfy its stakeholders and meet changing customer needs and expectations the organization faces pressure from the market (see Why modernize? – Pressure from the market) and internal challenges which may be favourably taken up by a modern core insurance system. These challenges or pain points are valid for the organization as a whole or specific to functional areas, as seen below:

Common challenges faced by the organisation:

Across the board:

• Improve customer experience
• Drive panoptic personalization to create personalized offerings
• Ensure structured and cost-effective innovation across the value chain
• Ensure compliance, including Schrims 2 alignment in the day-to-day operation
• Stay competitive and grow market share
• Capture and analyse data for insights on clients, offerings and processes
• Automate processes, make them faster and drive costs down
• Scale with the same number of staff
• Autonomy from IT for innovation
• Monetize ecosystem opportunities
• Provide Insurance as a Service

Sales and Marketing:

• Access new distribution channels and partnerships
• Create new flexible products with a quick time to market
• A strong value proposition both for distribution partners and end client
• Sustain customers and grow their engagement
• A 360º view of clients

Underwriting:

• Use of big data to ensure micro-segmentation and underwriting for new innovative products
• More data points to better price and underwrite
• Grow prevention and customer proximity

Claims:

• Improve customer experience on claims
• Low-cost and automated claims handling
• Reduce fraud
• New triggers of claims (UBI, parametric, …)

IT:

• Technical debt
• Lack of specialized resources knowing legacy programming languages
• Lack of APIs and integration capabilities

Support Services:

• Analyse and Automate processes

A significant difficulty of many traditional insurers is the technical debt related to legacy systems that keeps on growing in proportion [i] and that ties up a big part of the IT personnel “to simply keep the lights on” – as put by McKinsey [ii] – and that may not work on innovation.

Summing it up, time for a modern insurance platform

To correspond better to customers’ evolving needs and expectations, to counter competition from new entrants that are more technological and agile, and to be competitive and avoid slowly by surely losing their position in the market, insurers must adapt their processes and innovate.

While in the past innovation consisted in a big part in altering covers and processes, in a world where people and things are increasingly connected innovation has become much more technological.

A study by Forrester [iii] highlights that:

“to stand out in a sea of insurers that offer similar products: 79% of respondents surveyed believed the performance of their core systems differentiates their firms in the broad insurance marketplace, and another 62% believe their core system modernization initiatives are the most critical component of their digital business strategies”.

Nevertheless, the same study indicates – see below – that organizations often are not modernizing their core systems to their fullest expectations, due to a lack of skills and the scale of the task.  Hence the longer they wait, the bigger the gap will be.

The reward for insurers going forward is great. McKinsey [iv] shows the potential gains to be: 0.5 to 1% in GWP increase and retention, 42% in operations productivity and 41% in IT costs.

Next to these direct quantifiable gains referred to by McKinsey, an important aspect of adopting a modern core system or platform is the openness and flexibility that turns innovation much easier for the organization.

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Sources:

[i] From 2012 to 2017, technology’s average share of operating costs rose by 24 per cent (for P&C) and 12 per cent (for life) – In: Tonia Freysoldt, Sylvain Johansson, Christine Korwin-Szymanowska, Björn Münstermann, and Ulrike Vogelgesang, “Evolving insurance cost structures,” April 11, 2018, McKinsey.com

[ii] In: McKinsey & Cy, Reaching the next normal of insurance core technology, June 2020, p.72

[iii] In: Core System Modernization: Time For A New Roadmap, Forrester commissioned by Red Hat, May 2020, p.3ii]

[iv] In: McKinsey & Cy, Reaching the next normal of insurance core technology, June 2020, p.112

‘From maintaining relevance in the face of InsurTech disruptors to addressing the needs of today’s more demanding consumer, insurers looking to avoid disruption and stay competitive should be fast-tracking the adoption of flexible, scalable, and customer-centric next-generation solutions for their core systems’

– Sibylle Fischer [i], Director Strategic Venturing / Startup Scouting at Baloise Group

‘Insurers across the region must differentiate through innovative products such as parametric and usage-based insurance, enhance their customer-centricity, explore alternate distribution channels, increase their operational agility and seek ways to adapt to business changes. As insurers navigate these disruptions, many have realized that their existing policy administration system (PAS) or core system does not have the capability required to keep pace.’

– Extract from Cognizant 20-20 Insights [ii]

Core systems have been running insurance companies smoothly for a long time, processing transactions and ensuring all is recorded. These monolithic systems, usually proprietary platforms running on mid-range and mainframe computers were developed and deployed years or even decades ago and have been updated and extended to reflect changing needs. Nonetheless, transforming dated technologies has its limits and attends difficultly to modern days customers’ expectations nor provides easy access to third-party information providers or leading-edge Insurtech technologies. The effort spent in terms of time, personnel, and money, to maintain and develop dated systems that utilize legacy languages, databases, and architectures, has become unsustainable for many companies.

An investigation by Deloitte and LIMRA identified the top 5 factors driving the Core System Transformation strategy of insurers to be [iii] – in decreasing order of importance:

1. Product strategy and objectives — speed to market, distribution driven

2. Technological relevance/risk—required to access enabling technologies

3. Service enablement—digitizing services (enhanced user experience)

4. Growth (policy/contract volumes, new markets, new distribution model, new geographies)

5. Expense reduction

Completing the view above and underlying in many aspects is the necessity for carriers to have a system that is open, flexible and facilitates innovation. In this blog we look at some of the forces that pressure insurers to modernize legacy administration systems to keep pace with the market.

Customer expectations

As we explained in Customer experience in the driver’s seat of insurance transformation technology has entered our lives and is shaping our expectations. In an ever more connected world, the rise of the big tech platform accustomed us to seamless interactions and responsive operations. Tech giants such as Facebook, Linkedin, Instagram, Google, and Amazon are dictating the way forward. The COVID-19 pandemic forced a remote way of living upon us and made society realize the convenience of buying and transacting digitally. Post-pandemic policyholders are now, more than ever, looking for a frictionless digital experience throughout the insurance process too.

A widening gap between customers’ needs and expectations is creating a business opportunity for grabs that is catered by more agile technological startups that are appearing. As the Voice of the Customer Survey of May 2021 [iv] showed, willingness to explore coverage from new players, such as BigTechs rose 11% between 2020 and 2021. In reaction forward looking Insurers have been collaborating, partnering or acquiring InsurTechs that have the expertise and technology to better engage customers via Convenience and Reach.

As Capgemini & EFMA put it [v], insurers are now considering technology solutions to hedge against further disruption by enriching their engagement channels, creating WOW-factor impact, and delivering stellar customer CARE.

New trends in products and business models

‘The industry must extend beyond core products and services to retain customer base. The traditional protective products sales approach is nowhere near enough for the insurer of the future. Growth will come from new service-based models, innovative products, and a greater focus on prevention.’ 

– Katrien Buys [vi], Director Strategy, Innovation & Sustainability, Grupo Ageas Portugal

Problems related to customer loyalty and business profitability, and an incomplete response from the industry to the customer’s need for protection, have led insurers to look beyond insurance [vii]. In a world where, in the eyes of the consumer, insurance products seemed very similar and the price the only differentiating factor, innovative insurers adopt a strategy going beyond insurance to differentiate their offer, reduces risk and multiply customer touch points, making him more loyal and profitable. Beyond insurance offers contribute to satisfying better the client’s desire for security against a certain risk, which includes providing access to services such as prevention and early detection of an event to minimize its negative impact. Bringing together all the entities that offer products and services to satisfy the need for consumer protection benefits everyone and leads to the creation of ecosystems – see below figure from Bain & Company [viii]

Insurers are not the only ones to have thought of ecosystems to complement their product and service offer to clients. Many other industries such as banking, travel & hospitality, mobility and health, just to mention a few, are following the same movement and setting up digital platforms and marketplaces to make services available to clients and orchestrate the system. It is thus natural that insurers have here too an opportunity to embed and sell their products.

Novelties on the product side have also emerged with the development of our connected world. IoT and telematics have established a more direct and immediate correlation with the insured object. An increasing number of consumers are finding it normal to pay an insurance premium based on its use. Covers must be turned on and off (on demand), as and when needed for objects or covers such as travel, mobile digital equipment, drones, or personal accident. A premium must vary, if, where and how one drives (UBI – usage based), and the conditions of life and health policies should take into consideration how healthy a life one leads.

As much as connectivity renders it possible to link premium to usage, digital triggers, smart contracts and parametric turn automatic the activation and settlement of a claim. Finally, and just to mention a few of the external factors pressuring insurers to equip themselves with a modern core, one must mention Artificial Intelligence (AI), Machine Learning (ML) and Robotic Process Automation (RPA) as technologies that leverage many of the elements mentioned above to optimize processes throughout the insurance value chain.

Today’s consumer has come to expect a similar customer experience as the one he has been offered by the GAFAMs and other front-runner industries. IoT and connected devices have opened new opportunities for product development. Technological newcomers have appeared with offers to upgrade incumbents’ insurance offer or replace it (neo-insurers).

In reaction, to adapt products and processes insurers have been patching their (sometimes decade-old) existing systems, which over the years have become unstable and very expensive to maintain. Nonetheless, legacy systems have their limitations. To respond efficiently to the market and provide customers with the products and experience they are looking for while optimizing processes and costs internally, insurers need to select and adopt modern insurance platforms.

‘Customer Needs Won’t Wait; Core System Modernization Won’t Either – More than ever before, insurance businesses depend on modernized core systems as a result of shifting customer needs in a changing market… While modernizing core application systems isn’t easy, insurance executives must understand that the time is now’ [ix]

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Sources:

[i] In: What’s Next for Innovation in Core Insurance

[ii] In: How APAC Insurers can modernize with Next-Gen Digital Policy Administration Systems, Cognizant 20-20 Insights, Jan 2020, p.2

[iii] In: Legacy systems and modernization, Deloitte & LIMRA, 2017, p.3

[iv] In: Capgemini, World Insurance Report 2021, Voice of the Customer Survey, May 12, 2021

[v] In: World InsurTech Report 2021, Capgemini & EFMA, p.6-7

[vi] In: World Insurance Report 2021, Capgemini & EFMA, p.30

[vii] In: The Digital Insurer, Beyond Insurance – the new strategy for incumbents?

[viii] In: Bain & Company, Customer Behavior and Loyalty in Insurance: Global Edition 2017

[ix] In: Core System Modernization: Time For A New Roadmap, Forrester commissioned by Red Hat, May 2020, p.2

In our blog Parametric insurance, delighting customers and carriers, we explained how this type of insurance, also called index-based, charms customers and carriers by offering them a simpler and more streamlined experience than traditional insurance. A straightforward “IF-THEN” type contract, stripped from complex wording, will trigger an (almost) immediate payment of claim if and when an insured event reaches or exceeds predetermined values of a given parameter. What are the factors that drive parametric insurance (PI) forward and how does it contribute to developing the market is what we here wish to elucidate further.

On top of favourably resolving the drawbacks of traditional insurance with regards to the specificities of its processes – risk assessment, contract wording, and claim management – covered in the blog post mentioned above, PI innovates and provides protection where traditional insurance stops.

In hard markets, clients strive to get insured or simply cannot because of carriers’ refusal to cover a peril at a “normal” price. Such is the case with climate risks, following the increase in natural disasters and extreme weather events. The coverage insurers are willing to provide is getting narrower, and the supply of insurance becoming lower, which ultimately leads to spikes in insurance costs.

Traditionally insurance is designed to repair the material or physical damage caused by an event. Nevertheless, some do not produce material damage but lead to operational loss. Such is the case with business interruption originated by pandemics or dysfunctions in the supply chain, for instance. Traditional insurance dogma is therefore limited and simply not fit for purpose.

A third case in which parametric insurance has provided a solution for protection is microinsurance. To be profitable, these small-scale insurance policies offered in developing markets must have low administrative costs related to the claims adjustment process, which traditional indemnity policies cannot offer.

While parametric insurance has traditionally been used for protection against natural catastrophes, new sources of data are now enabling more types of parametric coverage. Advances in technology and data collection are empowering it. High-quality, granular data means we can track events better than ever before while helping to improve our understanding of perils.

Once the ‘parameters’ are agreed upon, cutting-edge technologies are employed to monitor how things evolve around the indexes. To monitor the on-site threats and see if the threshold is met in near real-time, data sources such as IoT, satellite imagery, stationary sensor, radar, or sonar data, are installed in the insured area or collected from open sources such as public authorities and agencies.

While allowing the monitoring of threats related to specific contracts, data collection further contributes to building knowledge. Combined with machine learning algorithms, image recognition techniques, and advanced statistics, the data is interpreted to generate new or update existing models. In doing so, insurers may create parameters that are proxies for underlying risks.

The travel and holiday industry is one of the scenes where innovation related to index-based insurance has been significant[1]. In 2019 the insurtechs Wakam and Koala partnered to provide flight delay and cancellation insurance embedded in airlines booking websites. By doing so, customers could choose to add insurance at the point of purchase, with their chosen level of compensation for delays. Connected to live flight information, Koala uses it as a parametric trigger to automatically pay out a defined financial compensation when a customer’s flight is delayed or cancelled. In 2021, Wakam would replicate with Setoo (now Pattern Insurance) to design and launch a similar cover for ferry delays and cancellations in Greece.

The Blink Lost Luggage product uses parametric technology to offer real-time financial compensation to airline passengers whose checked luggage cannot be located following an airport arrival[2].

Arbol designed a weather protection program for vacation rentals. If it rains for more than half of the holiday, the renter is refunded their selected coverage amount. Another product of Pattern Insurance is a policy that reimburses skiers for poor snow conditions on their vacation.

In risks related to the climate, Flood Flash in England achieved a record payout time of under 10 hours following a flood that triggered the parametric cover in 2021³. Descartes Underwriting is another example who designed a parametric hailstorm cover for a solar energy plant that traditional insurers refused to cover following the occurrence of a claim[3].

Of all areas and technologies creating new opportunities for the expansion of parametric insurance, Web 3.0 and distributed ledger technology (DLT) – and more specifically the blockchain – are perhaps the ones presenting the most potential. There is a natural connection between parametric insurance and DLT, especially when considering smart contracts. Smart contracts enable automatic, immediate transactions that are independently verified without the need for third parties to do so. The automatic payments built into parametric insurance require trusted data sources and secure transactions. DLT and smart contracts ensure this trust while automating the payment and speeding up the process even further.

It is blockchain technology that GoodsID uses in the theft insurance solution for engagement rings that Wakam set up for the jewellery brand Courbet[4]. In case a client logs a theft within two years and the report is validated, Courbet automatically starts to produce an identical replacement for the customer.

To engage effectively in parametric insurance carriers need to harmonise a value chain where a series of stakeholders are called to intervene. Historical data only not being enough to predict the probability a new or changing risk occurs, one must understand its underlying factors as well as find the appropriate sources of measurement. In climate risk, for instance, to design a frost protection parametric insurance for vineyards valid in the month of April, the client, his broker, a specialist in viticulture and the insurer need to collaborate. Occasional frost in April being normal, a specialist in viticulture will explain why today, due to climate change, vineyards in some years suffer more. The client’s master of culture will share how much of the grape is destroyed if the temperature falls to -1ºc, -1,5ºc or -2ºc. Together they will eventually come up with a parametric contract defining a specific pay-out corresponding to 10%, 15% or 20% of production if the temperature in the vineyard (measured by meteorological stations placed by the insurer) falls to -1ºc, -1,5ºc or -2ºc respectively, in April.

This example shows the capabilities that are necessary to come up with the appropriate parameters, that need to be reflected on, modelled, and calculated to become exploitable insurance data. As appropriate, brokers may then participate in the popularization of cover and price the risk with the client.

Next to the fluidity and communication that is needed between all stakeholders, technology plays a central role – see the illustration below. To propose parametric insurance to their clients and offer them a seamless experience similar to that of digital leaders such as Lemonade, Uber and Trov, insurers must adopt modern software architecture. Modular solutions that include API-based functionalities (external, internal and data APIs) may then consume structured/unstructured data, facilitate transactions in real-time and leverage AI engines built around machine learning.

Parametric insurance is growing and will continue to do so, limited only by risk professionals’ creativity and access to meaningful data. As aerial imagery, sensors, connected devices and other technologies continue to become more sophisticated, they create newer and more accurate streams of data to be used for analysis and application. This new wave of insurance products being very technological, to design, set up and manage game-changing products and delight their customers, insurers need adequate IT technology. Modern insurance platforms provide them with the necessary capabilities that will permit them to do so and reap the benefits of a promising movement in products.

Sources:

[1]. Wakam’s embedded parametric solutions for travel insurance, POSTED ON JULY 21, 2021 BY INSIGHT. HENRY GALE, From <https://www.instech.co/insight/wakams-embedded-parametric-solutions-travel-insurance>

[2]. https://www.the-digital-insurer.com/award-application/blink-parametric/

[3]. Parametric Insurance Is a Tonic for Insurers and Their Customers, From https://u.plus/insights/parametric-insurance-is-a-tonic-for-insurers-and-their-customers#parametric-insurance-is-a-tonic-for-insurers-and-their-customers

[4]. Risque Climatique : un enjeu majeur pour l’Assurance ? Jeudi 16 février 2023 – 12h00 (WET), https://www.youtube.com/watch?v=ZuyCluINlyc

[5]. Cognizant 20-20 Insights, How APAC Insurers Can Modernize with Next-Gen Digital Policy Administration Systems, Jan. 2020

Traditionally associated with natural catastrophes, agricultural risks and other major events like pandemics, parameter insurance is on the rise and seeing its scope of application widening. An increasingly connected world and the data thereby generated constitute a favourable turmoil for the development of parameters to be used to trigger insurance covers of existing and new risks.

In a nutshell, parametric insurance – also called index-based insurance – may be described as financial protection against a risk whose occurrence is associated with an event that may be detected and measured by predefined parameters or indexes. The event will trigger a claim when the associated index reaches or surpasses predefined levels.

The parameters agreed upon and defined by the client, the carrier and the broker determine the policy. They need to correlate with the underlying risk they seek to cover and be measured by reliable independent sources and/or institutions.

Examples of trigger indexes include:

• Number of infections during a pandemic
• Earthquake magnitude and shake intensity
• Hurricane wind speed
• Flood water levels
• Market index
• Crop yield
• Power outage
• Reported data breaches

While the risk covered is usually the loss incurred by the direct damage caused by an event – like earthquake, floods, hurricane, drought, … – it may also be a non-damage business interruption type risk, regardless of the tangible or intangible nature of the loss.

Neither better nor worse, parametric insurance complements traditional insurance in one or two ways. It is better suited for specific risks for which getting financial protection is often hard or impossible because of the magnitude of the potential losses and/or the difficulty in assessing them. It may also be combined with traditional repair-based insurance and fill the protection gaps left by elements such as deductibles, excluded perils, scarce capacity, or pure financial risks where the insured has no control over the underlying asset – like contingent business interruption for instance.

Such as traditional insurance may not cover all the damage caused by an insured event if the object of the policy is not correctly evaluated or defined, parametric insurance may be insufficient if the loss incurred is not adequately correlated with the chosen parameter and the threshold set. This is called the basis risk. For example, if an earthquake hits a region, causes damage but is of a magnitude that is inferior to the level set to trigger the claim (i.e. a magnitude of 6.5 on the scale of Richter when the trigger is set at 7).

While customers may be happy to get insurance coverage for risks that would otherwise be unprotected, it is just the first reason for their contentment. The mechanism of parametric insurance is much simpler and more streamlined than traditional insurance in many aspects.

Underwriting is simple and bespoke.

The indemnity of index-based insurance is the payment of a predetermined sum of money when a predefined index is reached or surpassed, once the triggering parameter and values are agreed upon, the contract wording is straightforward and close to an “IF-THEN” statement. It is hence stripped from the potentially complex assessment of an existing situation and associated terms and phrasing related to inclusions and exceptions. Quotation and enrolment are thus streamlined, and efficient, and provide a good experience to both the client and insurer.

As the underwriting process is more efficient and both parties are privy to the same relevant data about the probability of a risk happening, the insurer may more easily and with more confidence determine the rate to apply and turn pricing more competitive.

Still, it is in the moment of truth that customers appreciate parametric insurance most. Once the covered event occurs, meets or exceeds the predefined parameters and is confirmed by the independent designated entities, the conditions of the trigger are fulfilled and the pay-out may take place. Whereas in traditional insurance a claim needs to be documented and the loss or damage assessed before any indemnity reaches the insured, the pay-out of parametric insurance may happen instantly. Instead of having to wait long, sometimes up to 18 or 24 months in the event of natural catastrophes, insured of index-based insurances receive the promised amount, when they need it most, in a matter of days. This rapidity in claims handling is often critical and may determine the continuity of business – in the case of SMEs for instance.

While delighting customers, index-based insurance further charms carriers. Since the amount of payment is unaffected by the total loss, the insured still has an incentive to minimize losses, reducing the insurer’s exposure to moral hazard. The risk of insurance fraud is also reduced or inexistent for larger contracts because payment is standardized, and the event is large-scale and independently verified.

By increasing speed and certainty to deliver an outstanding customer experience, insurers please their customers, which builds trust and loyalty. On top of complementing traditional insurance products, parametric insurance solutions can achieve things that are not possible otherwise on an actual loss-sustained basis. Doing so they push the envelope of insurability, eliminate all complexity of a loss investigation process and give customers confidence when it comes to liquidity and speed of pay-out.

‘With the technology that has been used by insurers for decades, and even with many modern legacy core systems deployed just a few years ago, it is impossible to add a usage-based or episodic insurance product. It is equally difficult to sell a bundle of different types of insurance products in one go or bundle insurance and non-insurance products to add unique value. Those modern legacy systems were designed for a more traditional era of insurance. They served their purpose for yesterday, but tomorrow will be quite different.’ [i]

Having previously covered the technical aspects of a Modern Insurance Platforms: What to look for in a previous blog, we here wish to present qualitative advantages insurers may expect.

Customer-centric

Most (older) core insurance systems are product-driven, their heart is the policy admin system (PAS). As insurers switch their business models to focus on clients, modern insurance platforms need to accommodate and have the same focus. One of the main differentiating factors of modern core insurance platforms is, therefore, to provide the foundation to build a digital insurance ecosystem for a 360-degree view of customers, across services and products.

As Manikandan Natarajan, VP of Technology at Simpelsolve, said[ii]

 ‘A truly modern core platform is always customer-centric, cloud-native, built on a flexible tech stack of containers, microservices and open APIs that will support ecosystem partners and a fully digital experience.’

Providing a great experience to customers, agents, and users

While bringing the customer front and centre is paramount and attracting much attention, caring about the insurance agent experience is just as important. It is the agent that in many cases guides the customer experience. By improving the agent’s experience, a carrier will have the double benefit of heightening customer satisfaction and the agent’s loyalty.

New customer-centric technology is enabled by persona-based applications that connect to a consistent data set. Therefore, any other persona – an agent in our case – may benefit from a similar experience as a customer but tailored to his needs.

Furthermore, a modern core insurance platform with access to external third-party data for a 360º view of the customer may arm agents with intuitive CRM tools for acquisition and retention, as no legacy system may.

Modern, Next-Generation or Coretech Platforms

The future of insurance is all about collaboration, not only with the traditional external stakeholders of insurers such as agents, brokers and adjusters but also with new partners such as insurtechs, third-party services and providers, amongst which drone technology, IoT, embedded insurance or weather information, just to mention a handful.

To strive in such a world an insurer needs a platform that brings together the core operational and digital insurance capabilities needed to support emerging business models and leverage insurtech innovation and data for growth in emerging B2B and B2C ecosystems. The term coretech has also emerged to call these new technology platforms that are cloud-native and rich in microservices and APIs.

As illustrated by Accenture in the drawing below[iii], Open API Ecosystem Require Good Partnership Management for Success, enabled by coretech, modern ecosystem-enabled insurance technology platforms.

Self-sufficiency and Independence from System Vendor

In the past decade, to free themselves from the hurdle of maintaining and developing custom-built legacy systems, insurers opted for standard commercial off-the-shelf (COTS) core systems. By doing so, they became dependent on the vendor to alter or modify much, if any, of the software, thus reducing their self-sufficiency and independence.

Modern platforms have emerged to respond to such constraints and offer best practices for reducing the risk of implementation. Configurable by the client, these modern platforms offer the required flexibility, agility and scalability for companies to implement their corporate objective, autonomously from the system vendor.

Whether the corporate strategy is an expansion in a new market or cost reduction through process review, as we will see in the next section, a modern system integrates the necessary capabilities and functionalities that may be leveraged for speedy development, testing and implementation.

Key (digital) Capabilities Available

As we’ve mentioned, next-gen platforms integrate many capabilities and features, differentiating them from traditional Policy Administration Systems.

Cognizant presents in the two tables below[iv]:

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Having these capabilities readily available, insurers may configure them easily and autonomously to be up and running in a short time frame.

Access Relevant and Granular Data

The more digital our world becomes; the more data is generated. Open, a modern insurance platform may be fed with data of all kinds. Next to transactional data relative to operations with internal and external stakeholders, the internet and other connected devices deliver data from weather channels and social media, for claims and fraud detection purposes, for instance.

Once these datasets are defined in a platform, they are automatically exposed and available to any other functionality or module, internal or external via APIs, for analysis and/or action. This also means that records of a given field are easily extracted and/or analysed giving insurers a 360º view to be utilized for reporting, scenario building, AI and automation purposes, amongst others.

Compliance as easy as a click

Regulatory compliance has become a challenge for insurers. A growing number of rules to obey and run a business make it necessary for insurers to have growing teams to assess, report and mitigate the risks imposed by new legislation and system evolution.

Modern platform vendors integrate tools in their solution that facilitate the task of organizations needing to comply with stringent Know Your Customer (KYC) standards, General Data Protection Regulation (GDPR), anti-money laundering (AML) regulations, or other solvency regulations. As regulators issue new rules, insurers need not spend their time and money programming their system for compliance. Their software supplier takes care of it, develops the necessary functionalities and makes them available via regular software updates, thus automatically reducing the ever-growing compliance risk of insurers.

No More Technical Debt

Despite a multitude of definitions of the concept of “technical debt”, all relate to ageing code and/or infrastructure that become inadequate as well as the sums of money that are spent fixing it instead of being spent on a more resilient and adequate solution.

Some technical debt is inevitable, but it moves from an important topic to an urgent one when it adversely impacts the balance sheet. When systems are closed, unable to connect to innovative technology and insurers build under-efficient patches giving the impression of business as usual, technical debt is piling up in terms of complexities and costs.

Connecting a new modern core that is open and evolutive reduces the technical debt and builds resilience for evolutions to come.

Another way to look at it [technical debt] is the difference between an insurer with a high-performing tech stack and another with what has thus far been perceived as an ‘average’ performing tech stack. If you are spending 70% on business as usual (BAU), 20% on innovation, and 10% on other incidentals, then you are part of the ‘average’ Insurers. Compare this with High Performing Insurers who spend 40% on BAU and 50% on innovation. [v]

Open, Flexible and Innovation-ready

Having to collaborate with a growing number of internal and external stakeholders, Insurers’ systems of today and tomorrow need to be open and have a library of connectors ready.

Furthermore, their systems need the flexibility to adapt to varying partners and an ever-changing environment. Having been a talk for the last decade, flexible modular IT is now becoming mainstream along with associated management practices such as agile and cross-collaboration – in the table below McKinsey illustrates how modular IT is now technically possible.

Coincidentally, Cognizant recognizes [vi] an increasing understanding among insurers that the foundational components of yesterday’s PAS – architecture, tech stack and functionality – contribute to reduced flexibility, scalability, and digital readiness.

By building solutions on an architecture that is open and flexible, vendors of modern platforms make them accessible to the technologies and innovations both of today and tomorrow, making them future-proof. By adopting these platforms, incumbents become thus better equipped to satisfy the expectations of their customers and compete with the surging tech-native insurers.

Quick time to market (and value)

In a world where the internet, social media and mobile have accustomed consumers to have want they want there and then, timing is paramount. A quick time to market a new product or a quick implementation of a new distribution agreement is expected. Implementation of a new insurance platform follows the line.

Simplifying and quickening its implementation, modern platforms are made up of low-code or no-code modules that connect with each other and the rest of the world through a library of ready-made APIs. Requiring very little or no coding, the modules comprise all necessary parameters that are easily set up to reflect business rules. Depending on their specialization, vendors also propose templates of life, non-life, individual, commercial and/or group products quickly configured and implemented, contributing to a quick implementation time.

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Sources:

[i]‘Coretech’ Can Help Incumbents Compete, Anthony Grosso, September 1, 2021

[ii] Modern Insurance Core Platforms – Smarter, Faster, Better? Post by Manikandan Natarajan, VP of Technology at Simpelsolve Inc., April 12, 2022

[iii] In: How APAC Insurers can modernize with Next-Gen Digital Policy Administration Systems, Cognizant 20-20 Insights, Jan 2020 , p.6

[iv]How APAC Insurers can modernize with Next-Gen Digital Policy Administration Systems, Cognizant 20-20 Insights, Jan 2020

[v] What it Takes to Reduce Technical Debt in Insurance Systems; posted by Manikandan Natarajan, June 28, 2021, SimpleSolve

[vi] How APAC Insurers can modernize with Next-Gen Digital Policy Administration Systems, Cognizant 20-20 Insights, Jan 2020

Reflecting on innovation across sectors, McKinsey states the following analogy[i]:

“The question is not how fast tech companies will become car companies, but how fast we will become a tech company.” This is how the board member of a global car company recently articulated the central issue facing most incumbents today: how to operate and innovate like a tech company… IT is not a cumbersome estate “that gets in the way,” but an enabler and driver of continuous innovation and adaptation… These platforms are each managed individually, can be swapped in and out, and, when “assembled,” form the backbone of a company’s technology capability… This modular, platform-based IT setup of tech companies is what enables them to accelerate and innovate. They can experiment, fail, learn, and scale quickly: they can get products to market 100 times faster than their more lumbering peers (think weeks instead of months).

Sibylle Fischer, Director Strategic Venturing / Startup Scouting at Baloise Group, adds[ii]:

‘Today, cloud-based software and software platforms, open-API technologies, microservices, machine learning and A.I. are all helping to redefine everything we know about insurance — from the way we onboard customers, to how we process claims, to how we sell products and services. But to succeed and make the most out of the ever-evolving opportunities new technologies offer, insurers need to take decisive action. That means:

1. Moving fast and pursuing aggressive strategies that roll out digital acceleration in core tech that touch on virtually all aspects of their business;

2. Forgoing their traditional, on-premise systems for next-gen cloud-native platforms that will help future-proof many of their most essential business functions, and;

3. Looking across their business units (beyond IT) at where and how they can adopt next-gen core platform solutions to accommodate the kinds of open, real-time, personalized multi- and cross-channel experiences today’s customers demand.

The companies that can succeed at doing so will be in the best position to scale, compete, and introduce new revenue streams and business models into their ecosystem – now and in the future.’

Five to six years ago, when CIS modernization was being talked about for half a decade already, a study by Deloitte and LIMRA[iii] showed that the top 3 influential factors of core system transformation were – and probably continue to be:

1. Product strategy and objectives or being able to launch new products and/or alter existing ones easily and fast and make them available via the right distribution channel;

2. Technological relevance. Built on ageing languages, databases, architectures, and legacy systems lack flexibility and carry significant technological debt;

3. Service enablement and the capability of digitizing services to deliver an improved customer experience.

In 2020, when Forrester[iv] questioned insurers on what they thought were the most useful integrations capabilities – a basic aspect of any system – as they underwent core system modernization efforts, the responses emphasized facilitators related to:

• Deployment: simple, out of the box and range of options
• Maintenance: the cloud, low-code capabilities, continuous updates
• Ecosystems
• Library of configurations

The advantages of SaaS

While insurers easily consider it for peripherical functions, some are still sceptical about considering SaaS products when the subject is core modernization. Differentiating themselves in the market by the uniqueness built into their core, the fear of losing this difference by adopting a standard software makes them hesitant.

Not looking at SaaS, and with building their core on-prem out of budget, insurers turn to Commercial Off The Shelf (COTS) solutions. While cheaper and fast implemented than modern homebuilt systems, due to the standardization of many of the core insurance processes, COTS core systems tend to be very similar between vendors. Extra coding is then necessary, which seriously impacts initial investment, and timeline while cluttering the code base.

The advantages of SaaS when compared to other types of core system solutions are:

• Standard modules,
• APIs library to easily connect, including to low-code differentiation layers such as digital interfaces (e.g., mobile apps, bots, voice apps, etc.);
• Quicker and cheaper onboarding

In addition to standard processes and products that may be made unique through differentiation layers, choosing the right SaaS partner saves costs, improves service capabilities, and helps you meet your customers’ expectations.

Cloud as an enabler

“Products that are built with true cloud-first approach will usher in the next disruption in insurance core systems space … Big opportunities and next wave of transformations await products that are built on foundations of cloud and SaaS best practices and principles.” [v]

McKinsey figures [vi] that cloud adoption enables carriers to standardize, automate and benefit from:

• 30 to 40% reduction of IT overhead costs;
• Optimized IT asset usage by scaling processes up and down as needed;
• Improved overall flexibility of IT in meeting business needs through the use of business features made available by cloud providers;
• Increased quality of service through the “self-healing” nature of the standard solutions (i.e.: automatically allocating more storage to a database).

Overall, Cloud-native technology accelerates innovation, simplifies operations, works seamlessly with other systems and helps deliver personalized products and better customer experiences.

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Sources:

[i] In: McKinsey & Cy, Reaching the next normal of insurance core technology, June 2020, p.73

[ii] In: What’s Next for Innovation in Core Insurance

[iii] In: Legacy systems and modernization, Deloitte & LIMRA, 2017, p.3

[iv] In: Core System Modernization: Time For A New Roadmap, Forrester commissioned by Red Hat, May 2020, p.7

[v] SaaS core systems will enable Insurers to differentiate; Post by Sankar M, Associate Director at Cognizant; February 16, 2020

[vi] In: McKinsey & Cy, Reaching the next normal of insurance core technology, June 2020, p.40

Microinsurance, a small-duration, low-premium, high-volume insurance product appeared at the end of the twentieth century as a solution to cover the risks of populations belonging to the financially weaker section of society, mostly in developing countries. For a small premium, low-income populations have access to financial protection to offset the negative impact of an unexpected event, accident, injury, illness, or death. As explained in Microinsurance: The Drive of Technology, technology is paramount to reducing transaction costs, making this insurance easily accessible to the most and achieving the volume necessary to turn microinsurance viable.

Mobile microinsurance, for instance, consists in leveraging mobile network operators’ infrastructure to improve parts of the insurance value chain – such as product design, pricing, marketing and sales, policy administration and claims management. It is a technological innovation that contributed to boosting microinsurance in Asia, Africa, Latin America and the Caribbean islands, where the total covered population reaches an estimated 179 to 377 million, accounting for a share of 6 to 14% of the target population[i].

While a faster growth of insurance in emerging markets has attracted global insurers’ attention, microinsurance is also appearing in mature insurance markets.

In its original version, the philosophy of microinsurance is related to supplying populations with a social and economic net to soften the acute hardships of an unexpected negative life event. Another type of microinsurance has appeared that takes care of the day-to-day risks.

In line with the evolution of a society that is more and more digital, where convenience and immediacy prime in a changing risk environment, insurance is innovating and bringing about novelties the likes of:

i. Smart doorbell – where insurance is embedded in a doorbell so that when a parcel is delivered to the doorstep it is protected for a few hours until it is picked up by the person it is intended for.

ii. If the food you ordered for delivery is late, your food is free.

iii. If it rains so many days in your holiday, automatically receive some sort of compensation.

These products, which mix concepts such as microinsurance and parametric insurance, are embedded and sold in a customer’s journey when buying a non-insurance product or service.

Embedded insurance, estimated to reach a $29 billion market value in Europe[ii], is considered by many as the future of insurance for several reasons.

• It reduces the protection gap.
  • In insurance, context is key and often a trigger of purchase. Traditional providers are not meeting the demand for coverage across the wide-ranging categories in which consumers are interested.
  • Consumers are open to offers made by brands they trust that leverage data to offer insurance meeting their needs, when and where they need it.
  • Offering insurance at a time and place that is relevant to the very thing the consumer is looking to protect is appealing. Not having a direct and seamless route to obtaining insurance coverage may lead to neglecting it.
  • Making the decision, enrolment, and payment process of a relevant insurance cover as easy as ticking a box in a customer journey makes it a no-brainer and maximizes conversion rates.
• It brings down the cost of acquiring new customers
  By utilizing affinity partnerships and the primary product’s pre-existing channels to attract customers, embedded insurance experiences a substantial reduction in cost.

Experience in emerging countries shows that a successful digital embedded microinsurance strategy relies on mindset, strong partnerships, and technology.

Partners must have in mind to simplify the cover and facilitate the subscription process to a maximum. They must be prepared to iterate the process several times before coming up with the optimum solution.

The partnership that brings together the carrier and distribution partner must be meaningful and deep.

• The distribution partner must have a large customer base.
• Clients must use the service frequently. Frequent use and interaction mean the brand is trustworthy.
• The distribution partner must have a clear and important business problem to solve through the partnership. The sharing of risk and of profit is vital to align interests. It helps parties leverage their strengths and experiences. A strong partnership plays an important role in delivering tailor-made products that meet the needs of customers. Embedding microinsurance in a distribution partner’s offer needs to respond to a strong drive, which may be turning his offering more attractive, gaining market share, reducing churn, or having an extra revenue source.
• Any friction on payment must be removed.

A third element that is a threshold to engagement in a digitally embedded microinsurance strategy is technology. It must remove friction and provide a seamless customer experience facilitating subscription. In line with the mindset referred to above, the microinsurance offer must be simple and available for enrolment without the need for extra data, at the risk of lowering the conversion rate. The technology used must therefore be integrated with the distribution partner’s system to collect data, process and complete the sales seamlessly.

Technology should not only be integrated to offer customers a seamless purchase experience. It needs to offer the capacity to analyse data and make alterations in near to real-time. Microinsurance, a small ticket, one-size-fits-all, small duration cover, cannot be subject to extra data collection to price. It is a take-it-or-leave-it option that needs accompanying to make necessary alterations based on ongoing analysis. The duration of the cover typically ranging from a few minutes to a maximum of 30 days, changes have a close to immediate effect.

In a changing society and environment, where risks and customers’ needs are evolving microinsurance constitutes a renewed innovation. Technology aiding, a small ticket, small duration insurance with inception in emerging economies is now addressing new risks in mature insurance markets. The potential of digital embedded microinsurance is great and still being discovered.

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Sources:

[i] In: Europe Embedded Insurance Business and Investment Opportunities – Q1 2022 Update

[ii] In: The Landscape of Microinsurance 2021, <https://microinsurancenetwork.org/the-landscape-of-microinsurance>

Unlocking the potential of MicroInsurance, Richard Leftley and Niels Trzecieski, march 16, 2023

Microinsurance, a low premium, low margin and high-volume insurance has been the object of redoubled attention for a year or two. Why are insurers focusing their attention on a type of insurance uncommon in our more developed economies? What is microinsurance, how did it originate, and what is key to a successful implementation? While these are the questions we will answer in this article, in a future blog we will explain how it is being introduced in more mature insurance markets to innovate, as well as what makes a successful distribution strategy.

Microinsurance originates in developing economies in Africa and Asia, to offer protection to low-income populations with low-valued assets. To influence favourably the economic and social sphere, this instrument provides cover at an affordable cost to a vulnerable population. For a low premium, in line with their budget, populations may reduce their risk exposure with insurance covering life, funeral, health, property, crop or livestock.

The concept of microinsurance dates back to the turn of the century and is linked to microfinance with which it shares the common belief that very small loans or insurance can make a disproportionate difference to a poor person. While Micro Finance Institutions (MFI) were the first to respond to this challenge through a commercial offer, they soon realized that unforeseen events affecting the lives or belongings of their low-income clients or respective family could deplete their financial resources, affect their payback capacity, and induce them to close their savings account. To safeguard their clients against this risk, MFIs began to complement their banking products with insurance tailored to their clients’ specific needs.

As a result, microinsurance was originally developed by informal organizations or MFIs, the likes of Grameen Bank in Bangladesh, founded by Muhammad Yunus, winner of the Nobel Peace Prize in 2006 for the pioneering concept of microcredit and microfinance.

A main contributor and amplifier of the concept were MicroEnsure (originally Micro Insurance Agency). Founded in 2005 as a subsidiary of Opportunity International, one of the world’s largest MFIs, MicroEnsure started out providing credit life insurance to Opportunity International’s client base. It soon identified the need for other types of products as well as the need for larger client networks and therefore set up itself as a separate entity in 2006. It then moved on to work successively with local insurance companies, as a third-party administrator before becoming an insurance intermediary and a consultant designing low-cost insurance products. In 2012 MicroEnsure insured a population of 4 to 5 million low-income clients, which turned to more than 60 million spread throughout 12 countries in Asia and Africa, by 2020.

Given the specificities of insurance for low-income populations, Arthur D. Little[1] explains that a successful microinsurance strategy in emerging markets must:

• Simplify products
• Offer in-kind benefits
• Engage in public-private partnerships to improve local infrastructure and quality of life for consumers
• Partner with microfinance companies to offer bundled services
• Ensure applications and claims forms are simplified and accessible to consumers
• Use technology (mobile point-of-sale devices, smart cards) to overcome distribution challenges

Selling, underwriting and claims management not being proportionate to policy value and being the most significant costs related to insurance, minimizing these transaction costs with the aid of technology is as paramount in microinsurance, as is defining a product that adequately satisfies a dire need for a population.

A technology that contributed greatly to the spread of microinsurance is mobile telecommunication, given its penetration in developing countries. This gave birth to mobile microinsurance which refers to any type of microinsurance product that leverages the mobile channel to improve a part of the insurance value chain – such as product design, pricing, marketing and sales, policy administration and claims payment – be it linked or not to a mobile money platform[2].

Understanding the usefulness of mobile telecommunication, organizations such as MicroEnsure partnered with mobile network operators (MNO) to benefit from their installed infrastructure.

The communication channels (voice, SMS, USSD), offered by MNO made the promotion, sales and enrolment of insurance cheap and accessible to a great part of the population while facilitating claims handling.

Not always familiar with insurance and/or lacking confidence in the carriers’ brands, MNO’s retail sales and distribution networks of airtime dealers and mobile money agents can be leveraged to educate potential clients.

MNOs offer a set of solutions to the challenge of collecting premiums and paying out claims from or to often unbanked populations with irregular cashflow and poor access to traditional payment mechanisms.

The lack of historical data is another major difficulty for insurance practitioners in designing and pricing new products. However, real-time rendering of insurance and mobile transaction information can greatly improve this process by providing insurers with reliable data to find patterns necessary for better understanding their customers, ultimately leading to more appropriate product design. Mobile transaction histories can also be used to identify customers with low-risk profiles or a need for a particular insurance product, improve record-keeping, eliminate redundant processes, reduce fraud, and make claims settlement more efficient by reducing the amount of documentation required.

Finally, brand and trust being crucial, a prospective client will often recognize and trust more an MNO than an insurer. An MNO will benefit from greater brand awareness in the client’s market and regular (positive) interactions will induce him to buy insurance from him rather than from an insurance carrier.

Now that technology has helped microinsurance pick up pace in emerging economies, the determining factor in insurers’ growing interest in microinsurance is its potential versus the limited growth prospect of insurance in developed markets. While emerging markets account for around one-fifth of the total global premium, they represent 80 per cent of the world population[3].  Furthermore, as Swiss Re’s sigma World insurance study for 2020 on world insurance markets reports, premium growth in developing markets tends to outpace growth in advanced markets which is close to stagnant.

After emerging within the economic and social framework of developing countries marked by the disengagement of states from public health services and welfare plans and by the rise of civil society and the NGOs involved in sustainable development actions, microinsurance’s attractiveness is growing amongst global insurers from developed economies. Mobile telecommunications have been a trigger for the development of this recent type of insurance in developing countries and is now attracting further attention for its intrinsic growth potential in developing countries. As we shall see in the following blog, the same technological factor is making room for the development of microinsurance in the mature insurance market too.

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Sources:

[1] In: MAKING MICROINSURANCE SUSTAINABLE AND PROFITABLE

[2] In: “M-Insurance: The Next Wave of Mobile Financial Services?” by Jeremy Leach (available at http://www.microensure.com/news.asp?id=47&start=5)

[3] In: Background on: microinsurance and emerging markets, From <https://www.iii.org/article/background-on-microinsurance-and-emerging-markets>