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Why microinsurance will disrupt the insurance industry

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Originally posted in TechCrunch on December 29, 2015
By Raj Ramanand, CEO of Signifyd

Let’s be real.

The insurance industry has barely evolved since Benjamin Franklin first introduced the concept in the late 1700s.

You’d think after three hundred years and a market size of $1 trillion in the United States alone, insurance companies like MetLife and AIG would have nailed it, but they haven’t. Instead, they’ve left millions of Americans paying toward deductibles they will never use.

Once known for consistency and stability, insurance companies have quickly found themselves at a crossroads — either stay the course or adapt to change, as seen by banking, transportation, and the food services industries.

Ideally, it’s the latter.

With millennials on track to spend more than $200B by the beginning of 2017, bold and scalable moves need to be made if insurance companies want to avoid becoming the next print publisher.

So, how can insurance companies act fast and smart?

The answer is simple — microinsurance — and here’s why.

Follow the lead of key investors

Since 2010, investors have funneled more than $2 billion in venture capital into the insurance-tech industry and they are betting on startups’ new approaches to a landscape that has remained virtually stagnant.

Take for instance, Sequoia Capital who just recently took a step forward in microinsurance — small, rapidly underwritten financial protection against a specific risk over a relatively short period of time. The firm recently invested in Lemonade, a startup focusing on bringing peer-to-peer insurance to the masses.

Felicis Ventures-backed MetroMile, lets drivers only pay for the coverage they need rather than commit to a lengthy policy that often times goes unused.

Rather than blanketing an entire entity like a car or health with a lengthy, lifetime policy, investors are looking for companies that are trying to focus on events like a car ride or doctor’s appointment to insure instead — e.g. microinsurance.

Explore new kinds of insurance

Customers and businesses are desperately seeking workable solutions to their problems and with microinsurance they have the ability to handpick features that offer the right amount of financial protection for the shortest period of time.

Take for instance, OpenDoor, the startup radically changing the way we buy and sell homes. Not only does the company buy your home over the web instantly and let you close in three days, they also guarantee handling every aspect of the tedious escrow process for you, saving you time, money and headaches.

We’ve also seen companies like Oscar that connect users with quality and easily accessible health care insurance in under five minutes via mobile.

In ecommerce, Signifyd insures sellers from fraudulent buyers guaranteeing businesses against the loss of any revenue due to fraudulent chargebacks.

Affirm and Klarna offer a new form of consumer financing during checkout, insuring the seller against any defaults in payment.

Adapt to changing behaviour

Technology innovation has exploded in the last 100 years and in the last two decades alone millennials have especially grown up in an era of rapid change. They’ve gone from tech ground zero to a thriving tech ecosystem — addressing any and every problem one can imagine.

There has also been a shift in thinking. Millennials want access to cars and houses but don’t want the responsibility of owning them. In fact, a Goldman Sachs’ report states that 60 percent of millennials would prefer to rent things like homes and cars rather than own them.

Insurance companies now need to insure the sharing economy from Airbnb renters to ZipCar users. And anything that is shared needs to be protected. This is where insurance-technology comes in. It is the the next frontier for companies to tackle.

Put data & technology to use, right now

Given that more than 90 percent of the world’s data has been generated in the last two years, the insurance industry is sitting on an unprecedented amount of data. Accenture found that 78 percent of customers would be willing to share personal information with insurance companies in return for benefits like lower premiums or faster claims settlements.

IoT sensors are helping insurance companies go from watching historical data trends to creating actionable insights that will allow microinsurance policies to be deployed quickly.

Expensive data sets such as car history or public records that used to previously be locked behind corporate firewalls, are now available via APIs.

Access to real-time data from IoTs and APIs combined with advancements in machine learning will allow fintech startups to tailor protection on an on-going basis, taking into account the unique factors and circumstances, and giving a more personalized microinsurance policy.

Disrupt existing regulations

The insurance industry is deeply rooted in regulations. Insurance companies are legally required to maintain statutory reserves, liabilities with respect to their unmatured obligations (i.e., expected future claims). The longer the exposure period, the larger these reserves must be. With microinsurance, the exposure periods are focused on short-term events, reducing exposure and therefore limiting the need for reserves.

Other industries have recently seen similar disruption. Companies like Airbnb and Uber have sidestepped onerous municipal rules that govern short-term lodging and taxicab services by describing themselves as communications platforms for people who want to rent out their spare bedrooms or the passenger seats in their cars.

Leveraging microinsurance, fintech startups will take the lead not just in rethinking this antiquated insurance system but also creating completely new kinds of insurance that will meet the dynamic needs of millennials. And perhaps the leading voices for insurance companies won’t be a gecko or a pig anymore, but a unicorn.




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