Why insurance is not ready for blockchain or AI

Insurance companies need to focus on digitalisation and utilising data’s full potential, before worrying about AI and blockchain technology, according to Insly founder and CEO Risto Rossar.

The insurance sector has always been relatively slow to adapt to technology, even falling behind banks, which are also notoriously held back by their legacy infrastructure. However, things are slowly changing, and InsurTech is quickly becoming a strong place for innovation and hotbed of funding. Last year, total investment into InsurTech companies increased by around 92 per cent going from €1.6bn in 2017 up to $3.1bn, according to data by FinTech Global. Furthering on this, the spread of InsurTechs receiving funding is moving away from North America. While previously 58 per cent of the deals in 2014 were US-based, this fell to only 49.2 per cent last year – Europe had the second largest share in 2018, with 31 per cent of deals.

When talking about how to evolve the industry, the same buzzwords always pop up, blockchain, AI, and machine learning, to name a few. But, Rossar believes insurance companies have challenges ahead of them before they can look towards these solutions, and they revolve around data. Until insurance companies are able to fully utilise their data, blockchain and AI are not important.

Risto Rossar said, “Blockchain and AI are not doing anything real in the short term. I think the insurance industry, as a whole, is big on talking about blockchain and AI, but in reality, it’s more about getting the business to be more digital. It’s moving from paper to creating the solid foundation, not even to use AI, but just ensuring the data is used in a way it should be within the current information environment.  Additionally, it also needs to enrich the data that is collected from other data sources.  A lot to be done in the insurance industry but most of the data is in a shape or form that is not machine readable and that’s the first thing that needs to be solved.”

This isn’t to say that AI technology is not useful to the insurance landscape, in fact, Rossar believes the opposite and in the future, it will play a very important role. Unlike other industries which are using AI in more technical and challenging ways, such as self-driving vehicles, insurance is more about automation and most of the processes faced by insurers can be completed by machines. With it not being too onerous on technology, one would expect things to be adopted at a much quicker rate, but Rossar believes the space is so protected by large firms, it’s hard for digital companies to make a mark.

He added, “It is easy to create insurance brokers, agents, and intermediaries, but it’s very hard to establish new insurance companies, and in order to really change or innovate the insurance industry from deep within, you need to take control of the entire value chain. It’s not enough to only create prettier user interface. For example, if Uber was just an app to order regular taxis, it really would not change the industry as much. The same with insurance, if you are just a broker or agent selling the products of existing insurance companies, then it is quite difficult for you to create the new value propositions and outcomes in everything.”

The digitalisation of the industry and improved access of data is not a quick and easy task and could potentially take years of developments and gradual improvements. When this does inevitably happen, Rossar believes it would only take months or a couple of years to utilise it to create strong AI algorithms which can improve insurance premiums or calculating personalised insurance prices. Once the data has become machine readable, insurance companies can start accessing information previously locked away across hundreds of different internal databases, but also access information from new data sources and improve customer experiences in new innovate ways.

One of these innovative ways could be adapting the international capabilities of insurance firms. Currently, pricing and general operations of insurers has been done at a local level, with administration or underwriting decisions being conducted within each country individually by a local expert making the calls. In 10 or 20 years, and in the event of data being digitalised, Rossar sees this completely changing, with an AI algorithm handling all local tasks.

Rossar said, “Bigger insurance companies that have more data globally can create that artificial intelligence that says that a policy in Estonia should be sold with €300 and the UK with £550. So, the local nature off the insurance business will disappear, the same way as like the tax industry used to be like really local business. Today, it’s not anymore.  The same with hotels.  So, you really haven’t seen that shift happening in insurance as of today, but that’s going to happen.”

Insly, which has offices in Estonia, the UK, Poland and Latvia, is aiming to help these insurance companies, brokers and agents with their digitalisation so they can offer these improved insurance products. The startup provides them with technology and cloud-based software which can help them to improve their infrastructure, so they can begin to look towards new solutions like blockchain and AI. Its technology helps insurers to keep track of their customer’s coverage, create and administer policies and configure insurance policies, as well as automate lifecycle processes such as payments, renewals and invoicing. The company is able to configure the product to meet the various needs of a client. Last year, Insly raised €2.2m in a funding round to support its expansion into Poland, as well as supporting the development and scaling of its product.

There is still a lot of work needed for the digitalisation of insurance and nurturing the innovation. It’s not as simple as replacing the complete back-office, as insurance companies which have been operating for a hundred years cannot just simply switch things from their existing systems with a click of the fingers. It’s a gradual step-by-step job which needs technology being gradually adopted.  Its just traditional insurance giants have not particularly helped the rate of digitalisation, with many not being eager to jump into innovation, he said.

Going even further, there are also high regulatory and financial barriers which are making it difficult for new insurance companies to take shape and move into the space. In order to successfully establish a new insurance company, Rossar believes you need at least €10m but this typically has to be raised before any traction, and this is often hard to do. Then moving past that, they then have to spend a significant amount of time, potentially over a year, to get regulated. This all hinders the rate in which insurance innovation can happen.

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