Insurance companies need to improve their enterprise software or premiums will rise for consumers, according to Luther Systems co-founder & CEO Hossein Kakavand in a research interview with FinTech Global.
Enterprise software is crucial to the operations of businesses; however, a lot of traditional financial institutions and insurers are still using outdated and slow legacy systems. This has caused a lot of inefficiencies in platforms which leads to prices rising for consumers and their policies. The issue is that most of these institutions are using enterprise software which have not been designed to work with other areas in the business, which just causes waste, according to Kakavand.
He said, “Collectively this results in a large amount of waste and failure which ultimately is going to affect the end consumer. In our normal lives we don’t directly come across these processes; although, we are affected by them. We have insurance, pay utilities, buy a car, pay taxes go to hospital all of these are enterprise processes that are underpinning how we’re dealing with them it’s just we don’t see them. Effectively we are paying for all of this waste and failure through the price in the products we use, it’s just we never see them.”
The issues with the legacy software systems is it creates data silos, lowers communication and increases the propagation of error across the entire process. By not being able to connect with other areas, it means they work independently and if an error is made in one area, it is harder to identify when it is passed on to a new team or department.
“Ultimately what is going to happen is that instead of spending $2m on a process, an insurance company would spend $3m. That extra is going to be paid by you. So, say the premium you pay on your insurance is £100, but really it should only be £75,” he added. Companies need to be able to compensate for their losses and so unless they can lower the waste, prices will continue to be inflated.
There are only two options these companies have and its either improve what they have or be replaced by better solutions, he said. Not only will InsurTechs be able to provide an updated software back-office where everything is connected, they could also beat an institution using legacy solutions on scaling. These solutions are using old technology which was made to handle a select number of claims; however, if they want to grow and handle more, it becomes harder to adapt old solutions because of the way they were designed.
This has left a gap for new solutions to either provide the same service but with a different, or even just improved, business model in a more efficient way.
InsurTech has seen a lot of interest over the recent years, with the sector set to see a record year for capital raised, according to data by FinTech Global. During the first half of 2018, a total of $1.7bn was deployed to a total of 80 InsurTechs globally – this is over 80 per cent of 2017’s total funding level. Last year, there was $1.9bn invested across 192 deals and was more than $400m more capital than that which was deployed in 2016.
At the moment most of the attention to the InsurTech sector has been put towards the consumer-facing side. Of the top 10 deals in the InsurTech sector during H1 2018 only two were focused on the back-end. However, run-off solution developer for insurers Armour raised the largest deal of the period, bagging $500m.
“There are two parts to FinTech. One of them is the is the cool customer-facing user experience and one is what’s in the back-end, the connectivity or plumbing of the systems. They both need to be addressed.”
The way enterprise process where designed were in an exclusive way which didn’t foster cooperation between different areas. Instead processes were specifically designed for their specific function in the organisation. Kakavand described it as similar to building a ship out of Lego. The best way to create the ship is to use a selection of existing standard building blocks and create the ship you need, which can be adapted and changed. However, the way legacy systems built back-end solutions was by specifically building the various blocks they needed for the solution, so they only work for that design.
A lot of the functions at work in the enterprises overlap, which means software can be created to handle all of these tasks, rather than recreating the same solution for each area of the back-end. If many of the tasks are repeatable and over-lap, it becomes cost effective and optimised to have a singular function handling it enterprise-wide. It also improves communications between the whole business as they are interlinked, helping errors to be found from end-to-end.
Kakavand said, “Our focus is primarily on using blockchain as an infrastructure technology to improve operations across the insurance space. This is not sexy or glamorous, but it is very necessary because it underpins the rest of the process, it adds scale.”
Luther Systems is a blockchain technology developer which helps to streamline enterprise business processes across the insurance and healthcare industries. The company build core reusable codes which can be put together to create the functional requirements to complete a process. This enables clients to use the platform to easily recreate functions and processes wherever they are needed in their back office.
Blockchain technology is regularly paid up with cryptocurrency; however, the infrastructure is used across a wide of different industries and use cases. It can provide huge benefits to businesses with their data and real-time processes, and is generally regarded to be one of the big players in innovation for coming years.
One of the reasons Kakavand thinks blockchain is essential to the evolution of companies is its ability to improve data, processes and infrastructure across their entire backend. Solutions can streamline tasks, orchestrate various systems at once, monitor the entire end-to-end process in real-time and reconcile information and data across participants.
Its main draw is the fact it offers so many benefits through just a single piece of technology. Kakavand said that other areas blockchain can help enterprises with is their ability to create a single ledger and database which cannot be tampered with, and it is able to repeat processes across the enterprise.
One of the main areas Kakavand sees the market moving towards is their automation of repeatable tasks. Using blockchain and AI to be able to handle processes which take place in a number of different places across a business is much more cost-effective but also secure.
The InsurTech market is starting to mature, with there being a growing trend towards larger investments into the space, according to data by FinTech Global. Deals valued over $10m have increased from 19.4 per cent share of the total deal volume in 2014 to a 30.7 per cent shar last year. The trend is set to continue into 2018, with 51.4 per cent of the deals completed in H1 2018 being over $10m.
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