Insurtech: are we ready?
“Digitise or die” is a phrase we are hearing with increasing frequency in Bermuda. The re/insurance industry has experienced years of sustained pressure on profit margins, partly driven by readily available capital that has been attracted to the sector at the same time that incumbents are challenged with addressing the cost impacts of manually intense operational processes.
More recently, new threats have emerged from the GAFAs—Google, Apple, Facebook and Amazon—and other large technology-driven players who have efficient delivery channels and understand the customer experience in a way the re/insurance industry can only aspire to.
These challenges have resulted in a wave of insurtech initiatives to remove friction in operational processes and enhance the customer experience. Spending on insurtech nearly doubled between 2017 and 2018 to more than $4 billion, with the majority of this provided by insurance companies. There is also a growing trend of insurance companies working in partnership with technology companies, indicating a spirit of collaboration not previously present.
Bermuda has been at the forefront of providing innovative solutions in the re/insurance, insurance-linked securities (ILS) and captive insurance markets. From a jurisdictional perspective, the Bermuda market has the largest ILS and captives sectors in the world, and contains one of the world’s largest reinsurance sectors.
Recent surveys by Deloitte have identified that regulatory issues are one of the biggest hurdles to insurtech and innovation. We have seen the Bermuda Monetary Authority (BMA) respond to this by clearly recognising the growing importance of disruptive innovation in the insurance and wider financial industry and the pivotal role that innovation plays in promoting efficiency and enhancing competitiveness in the market. The BMA is committed to the viability of the Bermuda insurance market and is committed to providing a regulatory environment that appropriately protects policyholders while, at the same time, remaining conducive to technological innovations.
Initiatives
It is to this end that the BMA has launched its sandbox and innovation hub, both initially targeted at insurtech companies. The innovation hub is designed to act as a platform for exchanging ideas and information where companies are not yet prepared for proof of concept.
The sandbox is designed for companies that are ultimately looking to become licensed insurance entities in Bermuda. It will allow them to test new technologies and offer innovative products, services, and delivery mechanisms to a limited number of policyholders (or other clients) in a controlled environment and for a limited period of time.
This regulatory support is fundamental to successful insurtech initiatives and is even more important when we start to consider the impact that blockchain—distributed ledger technology—may have. While many steps that the insurance industry has taken on its digital journeys may seem significant, these have been essential to innovation. Blockchain has the potential to be truly disruptive and has some key characteristics that make it ideally suited to transform the insurance industry.
Blockchain is a shared (distributed) and decentralised ledger, which means you don’t have to rely on intermediaries to record and track transactions or to maintain the integrity of the transaction data, resulting in ‘one version of the truth’. It enables smart contracts which self-execute predefined actions when specific conditions associated with a given transaction are met. This creates the potential to take leaps and not just incremental steps.
The decentralised nature of the technology gives the industry an opportunity to truly transform the marketplace and create exchanges bringing together risk and capital. This could facilitate efficient placing, automate technical accounting, simplify the settlement process and reduce friction in the claims process.
We have seen a number of initiatives in this space including the Blockchain Insurance Industry Initiative (B3i) and ChainThat. B3i was started in 2016 with a number of participants with a Bermuda presence involved and they plan to launch their first product in 2020 which will be targeted at the reinsurance market in the form of a catastrophe excess of loss product.
ChainThat has developed a re/insurance risk and capital exchange that aims to provide the benefits of an electronic exchange. It has decided to take advantage of the Bermuda culture of innovation and the BMA innovation hub to launch this initiative in Bermuda.
Previous initiatives to drive marketplace efficiencies haven’t been successful and technology hasn’t been the root cause of this. The appetite for collaboration has simply not been there. Through industry consolidation we have seen various groups getting closer to the customer with their acquisition strategies, and maybe now is the time for technology to drive this—are we ready?
Brett Henshilwood is a risk advisory partner at Deloitte Bermuda. He can be contacted at: brett.henshilwood@deloitte.com
