How Insurtech is going to save Capitalism
Capitalism hasn’t been getting such a good rap lately, has it?
Or let’s be more specific, capitalism hasn’t been as popular as it used to be since before the global financial crisis of 2008-09.
Hardly a day goes by without someone knocking the unfairness of a financial system that has amplified inequality, nationalised the private debts of the wealthy and generally rewarded unproductive rentiers at the expense of employees and entrepreneurs.
I must admit, it’s sometimes hard to argue with them.
But let’s just hang on a minute – we are capitalists and insurance is absolutely embedded in the capitalist system. Indeed, Joe Plumeri, the charismatic and flamboyant former CEO of Willis, once described insurance as “the DNA of capitalism”.
If we can’t defend it, who will?
The best form of defence is attack.
The only way to help get capitalism’s good name back is to let it go back to doing what it does best and that means to make it work for those who most need it.
If we can get global finance focused again it will solve more problems and lift more people out of poverty than the most generous aid programme imaginable. When capitalism works well there is no better wealth-creating engine yet invented.
But how is this going to work?
At any big insurance conference we will hear very senior leaders talking about how we must close the protection gap. The protection gap is what keeps rich countries rich and the poor ones poor.
The protection gap stops poorer countries from recovering from catastrophes. A lack of protection lowers their ability to recover to the extent that the potential GDP growth path of their economy is permanently impaired after a big loss event.
In rich countries insurers rebuild, in poor countries there is no insurance and the country just gets poorer. Important things that get broken do not get fixed for years because there are less funds than there were before.
In this way even a relatively small disaster can knock an unprotected country back by a whole generation.
The trouble with the insurance leaders speaking at the conferences I mentioned earlier has been that while they have no shortage of warm words, very few of them have a specific vision of how exactly to go about fixing this massive problem.
Until now, that is.
First of all, let’s frame this in a more positive light – it’s not a massive problem, instead it is a fantastic opportunity, perhaps the greatest business opportunity of the century.
Technology has a lot of the answers to many of the world’s problems and so does insurance.
Yet we have previously been going about things the wrong way. Instead of solving real problems for real people we in insurance have tended to try and find new ways of selling them insurance products.
This is where the technologists have been so insightful. They have learned to build everything from the customer’s point of view and then slot their products and services in behind, not the other way around.
That is why the tech part of insurtech is so revolutionary. It is the change in focus to customer-centricity that is more revolutionary than any of the technology itself.
Ordinary people in developing economies who probably don’t currently have any insurance don’t wake up every day thinking “I must buy some insurance today” but they do worry that if there is a major storm, drought or flood they will go bust.
The average new insurance customer wants protection from floods, drought and storms, so let’s give them that first.
Insurance is only part of that solution, but it is an important part. We are going to use technology to teach these budding new consumers a sophisticated understanding of their own risk and then we are going to take on some of that risk in return for a premium.
Insurtech is filling the gap by solving these client problems increasingly cheaply and efficiently. For instance, the cost of sophisticated satellite imagery has come down exponentially whilst connectivity has sky-rocketed, even in the most remote places.
Insurtechs can build platforms that link what they can see from the sky with what insureds can show from their view on the ground, blended and overlayed with inexpensive models and real-time hazard data.
Those same insureds can also receive instant cash payments to their mobile devices
The result will be fraud-and-friction-free claims handling almost anywhere.
Suddenly minimum premiums can shrink to almost nothing and insurance becomes a viable product, in even the poorest countries.
Whereas in the past the expense ratio on a microinsurance venture could become uneconomic very quickly, now it can tend down to levels where insurance can start to be genuine value for money and provide really useful funds for resilience in the poorest nations.
Because of technology risk management and mitigation will also become more effective. Real-time weather data will give meaningful advance warnings and much cheaper models will guide insureds and help them avoid siting assets in the wrong places.
And here is the most important part. Not only will insureds benefit from really efficient risk transfer for the first time, their insurers will also be able to make proper profits.
Not obscene amounts of money, but enough to provide attractive returns on capital. Because the new insureds get made whole after losses, their economies can recover and grow at very high rates.
Demand for insurance increases because of economic growth. Capital is rewarded and comes back to fulfil that extra demand. More new capital comes in and pricing becomes keener, to the benefit of insureds. The poor become richer and better able to become richer still.
Everybody wins in this virtuous circle – better insurance means better growth, which in turn means more insurance.
And how big is the prize?
Dig out your annual Swiss Re almanac of global insurance premiums and you will see that the insurance industry had around $6 trillion of income in 2019.
Now let’s be conservative and target a doubling of that over the next 20 years. Who fancies creating a new $6 trillion market?
15 years ago, when the idea of microinsurance was first gaining currency, there was a sense that it wasn’t really supposed to make money for insurers – that it was an extension of Corporate Social Responsibility or international aid budgets.
These days that is nonsense.
Today this is simply a fantastic new business opportunity. Even better than that – it is also a business opportunity for good, that will make the world a better and fairer place than it was before.
The good name of capitalism can and will be saved!
And the marriage of insurance and technology is going play a starring role.