In my post last month, I discussed why the insurtech revolution should be focusing more on addressing the protection gap, thereby growing the pool of insurable risks, rather than figuring out how best to eat the insurance incumbents' lunch. A
t a conference in February, Tom Bolt of Lloyd's noted that an increase of 1% in insurance penetration can lead to a 13% drop in uninsured losses and a 22% drop in taxpayers' share of the loss. The key to increasing penetration is lowering distribution costs to make products more affordable. That is where insurtech can come in.
Many recent startups have business models looking to tackle the excessive intermediation costs that exist in the current insurance value chain. Sadly, when a catastrophe strikes areas of low insurance penetration, those communities not only suffer from the difficulties of having to seek aid—which can take three-plus months to reach affected zones—but also face the prospect of a significant drag to economic growth.
It is unsurprising, therefore, that governments in vulnerable countries are keen to improve their “resilience” and seek solutions to better prepare themselves for catastrophes by working with the likes of the World Bank, the UN and the recently established Insurance Development Forum (IDF). Interestingly, AIR Worldwide announced recently the Global Resilience Practice, which will be led by former U.S. presidential adviser Dr. Daniel Kaniewski.
See also: InsurTech Need Not Be a Zero-Sum Game
As well as providing low-cost distribution models in new markets, a related opportunity I see for insurtech is working together with the insurance industry in the growing field of resilience analytics. As Robert Muir-Wood recently pointed out on RMS' blog, the claims data gathered by insurers — which historically has been used for the pricing and managing of risk — have the potential to also be used to reduce the potential for damage before the event.
Insurtech companies could work with government authorities to pool this claims data, leveraging it with other key data from external sources and then using the results to influence urban resilience strategies. There are inevitable doubts over the willingness of insurers to share their data, but agile and thoughtful startups are likely better placed to be able to find insights in a world of abundant unstructured data than the more technologically challenged incumbents.
The current size of the protection gap is a failure of the insurance industry, and any companies that can help address it will not only be first movers in new markets but will also be adding social value and much-needed resilience to vulnerable communities all over the world.