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Insuring What You Want, When You Want

DIAmond Award winner Trōv is one of the most widely referred to cases when speaking about disruption in the insurance sector. But what is Trōv exactly about? What is the business model? How successful is it? Trōv’s founder and CEO Scott Walchek will share his vision in a keynote presentation at DIA Amsterdam, this May. To warm up, I interviewed Scott last week.

Trōv is the world’s first on-demand insurance platform for single items. It is a mobile app that allows users to insure whatever, whenever. It empowers customers to insure “just the things you care about” for whatever period you prefer. Trōv users simply snap a picture of a receipt or the product code of a product. This creates a personal digital repository for all things tangible. For selected items, Trōv offers a quote to insure each individual item. Customers can then simply “swipe to protect” to purchase the insurance. It is equally simple to “swipe to unprotect.” With Trōv, long contracts are not necessary. Even the claims process is automated with the use of chatbots and available on-demand on a smart phone.

Trōv is founded by Scott Walchek. Scott is a successful technology entrepreneur. Over the past 25 years, he built companies such as Macromedia, Sanctuary Woods, C2B Technologies and DebtMarket. He was also a co-lead investor and founding director of Baidu, China’s largest search engine.

Scott is also one of the 75 thought leaders who contributed to our new book “Reinventing Customer Engagement. The next level of digital transformation for banks and insurers.”

What inspired you to create Trōv?

Scott: “At some point I realized there is an enormous latent value in the information related to the things people own. From obvious things such as receipts and warranties to actually having an overview of what you own and what the current replacement value of each item is. We want to curate ways to turn this into value for consumers. From keeping information on items up to date to, for instance, arranging insurance for these items.

We’re a technology company, not an insurance company. We’re new in this space. So I started with testing our first ideas about a proposition and the assumptions behind it with several senior executives of large P&C insurers such as AIG and ACE. What I assumed is that at the end of the day the core metric of success is the ratio of insurance to actual value. The better this ratio, the better the balance sheet.

Of course, this is an oversimplification, but everyone agreed that in essence this is how over the past 200 years value in insurance is created. Now, what is remarkable is that insurers do not really know what consumers own, and what the exact value of these goods is … What if they did know? This would disrupt markets. It would lead to much better risk assessment driven by real knowledge of the true value of what people really own.”

See also: Insurtech: The Approaching Storm  

Trōv’s main target users are millennials, a target segment that most incumbents find very difficult to reach and engage with. Why does Trōv strike the right chord among this generation?

Scott: “We’re in the Australian market for a year now and entered the U.K. market a few months ago. Around 75% of our users are aged between 18 and 24. It appears that we are successful in tapping into the specific needs of this group. We do this by explicitly tapping into four key millennial trends. The first is “on-demand.” We can see that from how millennials consume entertainment, shopping etc. Services need to be now, 24 hours a day, on my device. The second trend is, “Don’t lock me into a lengthy contract.” We enable micro-duration. Customers can turn their insurance on and off as they see fit. In practice, they hardly do. But it is about the psychological benefit of being able to do so. The third is what we call “unbundled convenience”: “Let me choose what to protect, the things I really care about.” The fourth is: “people/agent optional.” Millennials want to engage with their smartphone without having to talk to an actual person.”

Trōv is based in the San Francisco Bay Area. But you decided to launch first in Australia and the U.K. Why there?

Scott: “Ha ha – there’s a linear story and a non-linear story to that! The linear story is that microduration is still new to the industry, so our hypothesis requires testing. The regulatory environment is important if you want to get to market fast. Australia and the U.K. have a single regulatory authority versus the 56 bodies in the U.S. But we’re also in the process of filing in the U.S. The non-linear story is that I just happened to meet Kirsten Dunlop, head of strategic innovation at Suncorp Personal Insurance, at a conference in Meribel in France. She immediately understood the strategic impact of Trōv, and that is when it took off.”

Because the Trōv concept is so new to consumers, it must be extremely interesting to learn what exactly strikes the right chord …

Scott: “Customers just love the experience. Our NPS is +49. However, we’re learning every day. With a completely new concept such as Trōv, it is impossible to know exactly what to expect, honestly. It turns out that Trōv reveals new consumer insights. There is still a significant number of valuables that our audience wants to insure but that we cannot provide a quote for, for instance. Although more than 60% never turn off an insurance, the ability to switch an insurance on and off turns out to be an important psychological benefit. This appears to be category-dependent. Sporting goods are switched on and off more often than smartphones and laptops.

We’re constantly measuring and improving every step of the funnel. From leaving Facebook to downloading the app, to registration, to actual swipes. We will share concrete numbers on uptake and conversion rates at DIA Amsterdam. But to already share two big learnings: We designed Trōv for use on smartphones, but, much to our surprise funnel figures multiplied when we decided to add a web interface. And we are actually even attracting better-quality customers.”

In Australia, you decided to partner with Suncorp, in the U.K. with AXA and in the U.S. with Munich Re. What are the success factors of a partnership between an insurtech and an incumbent?

Scott: “At the end of the day, it is about relationships and people. We understand their internal challenges. Everyone agrees that real knowledge of individual insured goods and the actual value of those goods improves the loss ratio. But we need to figure out how this works exactly through experimentation. This requires internal dedication, throughout the whole organization, starting at the top. It is not about conducting small pilots, but the willingness to experiment while going all the way, invest for several years and learn as we go what insurance will look like in the future and how consumers want to engage.”

What are your future plans and ambitions with Trōv? We can imagine that Trōv could also be an interesting partner for retailers and producers of durables. With Trōv, they could seamlessly sell insurance …

Scott: “We have three lines of business. The first is what we call “solid.” This is about expanding the Trōv app geographically, covering more categories and continuously developing the technology. Trōv will be launched in Japan, Germany and Canada shortly. Then there is “liquid”; offering white-label solutions to financial institutions, for instance in relation to connected cars and homes. The third line of business is “gas”; basically Trōv technology embedded in other applications; insurance as a service. This could be attractive for all sorts of merchants, telco operators etc.”

See also: Understanding Insurtech: the ABCs  

This would make Trōv even more part of the context in which consumers makes decisions about the risk they are willing and not willing to incur. And it also taps into the exponential growth of connected devices, similar to how machine-to-machine payments are increasingly taking place …

Scott: “Yes. What we’re now doing with Trōv is really the beginning. Trōv is about providing our customers with exactly the protection they want, exactly when they want it. With more and more connected devices and sensors and new data streams everywhere we can make the whole experience so seamless they don’t have to do anything at all.”

Insurtech Ecosystem Emerging in Asia

Building on T.J. Geelen’s blog post about the thriving fintech ecosystems in Asia, I’d like to share with you some insights relating to the emerging insurtech ecosystem in the region. Although insurtech in Asia is in its infancy, since 2015 we’ve seen a surge of interest. By the way, I’m a big believer that Asia has a real potential to power the next wave of global insurance innovation.

Four flavors of insurtech

First, let’s revisit the definition of insurtech to make sure we are all on the same page. Essentially, there will be three major camps of insurtech: one that enhances existing insurance structures, another one that aims to disrupt by providing alternative digital risk transfer mechanisms and the third type coming from existing insurance firms attempting to defend their existing market positions. The first and third types broadly can be broken into the following sub-types:

  • Product sales/distribution (aggregators, online portals, apps)
  • Risk management (IoT, healthtech, blockchain)
  • Fraud detection/prevention (big data, machine learning)
  • Claims management (big data, machine learning, vendor network management solutions)
  • Service management (chatbots)
  • Investment management (portfolio optimization, asset/liability matching)

The second type attempts to drive an end-to-end structural innovation, either removing part of the structure or fully digitizing it.

Why Asia for insurtech

Asia is attractive from both an insurer and an insurtech perspective due to the size of its significantly underinsured population. The region has traditionally seen a large part of the risks self-insured through family and community networks. As the region experiences rapid growth in the affluence of its population, together with an aging population, the risk exposure is becoming even more apparent, and the need for alternative risk transfer mechanisms, including insurance, increases. Insurtech, alongside traditional insurance, can help.

Further, there are near-perfect locations for the launch of a program. Singapore, for one, allows for sandboxed experimentation, regulatory support and advanced tech infrastructure. Limitations of traditional insurance distribution channels and the rapid increase of 4G mobile penetration mean that insurers are also highly interested in exploring innovative partnerships that help them connect with potential customers.

See also: Matching Game for InsurTech, Insurers

Insurtech in Asia

Asia is a very diverse region and has a mix of developed and emerging countries. So far, the major push for insurtech has come from China, India, and Singapore, while Japan, Korea and emerging Vietnam, Cambodia, Taiwan, Philippines, Thailand, Indonesia, Malaysia and Burma have lagged. (While Australia and New Zealand are geographically close and are very well integrated in the Asian region, the markets are much more ”Westernized” and hence are less applicable to this blog post.)

There’s China, and then there’s everyone else when it comes to insurtech. The first full stack (end-to-end) innovator, Zhong An, is valued at a massive $8 billion and raised $931 million. It accounts for more than a third of the global insurtech funding in 2015. It is also worth mentioning TongJuBao (peer-to-peer) insurer and FWD (Asia’s second-richest family’s insurance venture, which is re-positioning itself from traditional insurer to an agile digital insurance competitor).

India, another vibrant insurance market, has seen its insurtech innovation focus mostly on distribution. Not surprisingly, two of the major aggregators come from India: Policy Bazaar and CoverFox have seen healthy level of customer take-up as well as sources of funding. CoverFox has recently expanded its service proposition, now assisting customers with their insurance claims.

Being based in Singapore, I have a particularly detailed view of the insurtech landscape in Southeast Asia. So far, I have gathered the following mapping of Asia insurtech startups as they fit within the insurance value stack. There’s a mix of very-early-stage as well as more mature Series A and listed ventures. The list keeps growing.

Please feel free to comment and reach out if you come across any additional startups that I’ve missed out in the list below, and I’ll update it.

Area:

Distribution

Actual Losses

Operating Insurance Co.

Value:

20%

55% Losses + 5% Fraud

20%

Role:

Aggregators

Leads Generation

Customer Transactions

Improving risks

Fraud detection

Rewarding healthy

Risk assessment

Loss adjustment

Operational/Service Efficiency

Start-ups: Policy Bazaar (Aggregator)

CoverFox (Aggregator)

Health/House-front

Latize (Fraud) JustMove (Health)

Uhoo (Health IoT)

Harti (Health)

WaveCell (Comms platform)

Fixir (Finding repair garage)

MyDoc (Health claims)

Stash.ph (Health claims)

GoBear.sg (Aggregator)

Cxa (Employee benefits)

PolicyPal (Policy mgm.)

UEX (Group policies)

Zhong An (General Insurance) CH

TongJuBao (Peer to Peer Insurance) CH

DirectAsia (Direct General Insurance) SG

FWD (General / Life Insurance) HK

Singapore Life (Upcoming Life Insurance Startup) SG

 

Corporate insurtech

Singapore, with its advanced infrastructure and innovation-supportive financial services regulator (MAS), has secured a leadership position for Asia’s corporate insurance innovation as reflected by the high concentration of insurance innovation centers. Eight of 10 Asian insurance innovation centers are based in Singapore. The innovation centers are powerful corporate change catalysts and typically include elements of awareness building and cultural transformation.

Firm Innovation Center Country Focus Status
Aviva Digital Garage Singapore Digital Transformation Active
Manulife Loft Singapore Digital Transformation Active
MetLife LumenLab Singapore New business models Active
Allianz Digital Labs Singapore Digital Transformation Active
AXA Data Innovation Lab Singapore Big data Active
AIA Edge Singapore HealthTech Active
Munich Re Innovation Lab China General Insurance Launched Q1 2016
Swiss Re

India IoT, AI, Big data Planned July 2016
IAG

Singapore

Rumored 2016
NTUC

Singapore

Rumored 2016

 

In summary, Asia is a region to watch when it comes to insurtech. Whether it be the home-grown insurance innovation from China and India, corporate innovation from Singapore or innovation concepts imported from elsewhere and deployed in Asia, the region is likely to deliver a vibrant insurtech ecosystem during the course of the next two to three years. And when the dust and excitement settles down five years down the road, we’ll have a fundamentally stronger set of competitors.

Wanting to accelerate insurance innovation, we’ve created InsurtechAsia, an action-oriented community of insurance practitioners, entrepreneurs and industry stakeholders across Asia. We are aiming to attract the best minds to tackle the challenges and opportunities in insurance, connect entrepreneurs with the best enablers, validate concepts and help business scale rapidly.

See also: New Insurance Models: The View From Asia  

A dedicated and company-agnostic insurtech accelerator, such as Startupbootcamp InsurTech, which was launched in London in late 2015, would go a long way to spur further insurance innovation here in Asia. We eagerly await the day when Startupbootcamp InsurTech will come to Singapore.

Are you passionate about making a change to the insurance industry? If so, join us at www.insurtechasia.com and follow this great team of like-minded people on Twitter: @insurtechasia.

Matching Game for InsurTech, Insurers

What is it with InsurTech startups and insurance companies?

To any outsider, it’s very clear that InsurTechs and insurers make for very odd bedfellows. InsurTechs are quite ephemeral. They sprout up with the sweet rains of venture capital funding and die as their funding dries up. They are nimble and innovative. They aspire to be the next Google — ready to disrupt the establishment in the best “moon shot” tradition.

Insurers, on the other hand, tend to be corporate immortals, often measuring their tenure in centuries. Their processes appear fixed and hidebound, handed down from ages gone by. Their speed of innovation is positively glacial, and their customer proposition has “rock of Gibraltar” stability. Insurers are the very establishment that InsurTechs are seeking to disrupt.

Opposites attract — or so they say.

The fear of disruption

The insurance industry has seen an ever-growing demand for “creativity,” “disruption” and new digital technology since 2013. AXA was one of the first to declare its intent to become a digital insurer. In April 2014, the company established a lab in Silicon Valley and announced its tie-up with Facebook. At the time, everyone in the industry was waiting in trepidation for the market entry of the tech giants such as Amazon, Google, Facebook, Samsung and Apple. The fear was that those companies would sweep away the traditional insurers in an Uber-like tech tsunami.

Well, the tide came in, but it was no tsunami. Google breathlessly launched into the motor insurance compare market in March 2015. Just a year later, it unceremoniously departed. The industry heaved a collective sigh of relief because there was little or no impact. Yet the tech giants linger and remain the insurance industry’s boogie man.

See also: An Eruption in Disruptive InsurTech?  

Follow the money

The presence of the tech giants has created a created a rush to fund new InsurTech startups. Many of the leading insurance firms have set up VC funds focused on InsurTech. AXA is, again, one of the more notable in this area, providing funding to the tune of €230 million over the last 18 months. VC funding for InsurTech startups has increased 250% year-on-year, from $750 million in 2014 to $2.65 billion in 2015. For insurers, they get financial rewards and get to be at the forefront of any industry disruption if the technology takes off.

But many insurers see the need not only to fund innovation but also to “do” innovation. Hence, we’ve seen a steady stream of insurers around the world establishing innovation labs, collaborative spaces, digital garages and centers for digital disruption. Time will tell if these are fundamental drivers of strategic change or are unmasked as simply “window dressing” for the market.

Widening the net

The InsurTech “boot camp” is another recent phenomenon that has opened up a wider range of innovative startups to the insurance industry. These camps are a cross between an accelerator program, a beauty pageant and a reality TV talent show. For the small price of some equity and the added incentive of some up-front “pocket money,” the InsurTechs get to rub shoulders and gain insights from industry mentors and leading insurers. These boot camps are quite grueling, as they extend over several months. Competition can be fierce, with the best of the best InsurTech teams pitted against each other. The participants get to hone their solution pitches, demos and financial plans for the gathered insurance brotherhood and their fellow InsurTechs. Yet some InsurTech teams are frustrated by the insurers’ lack of urgency and their naïve view of how much effort is really required to make an innovation alliance work.

See also: InsurTech Start-Ups: Friends or Foes? 

A new hope

All of this activity has not been lost on governments wanting to push a “clever economy” strategy, creating sovereign incubators for the development of new or exotic financial services products and business models. The Singapore and U.K. governments are leading exponents of this new way of thinking and have spawned a wave of innovation emulators from Australia to Germany. These innovation-friendly government policies generally encompass a mix of:

  • Seed funding for startups;
  • Provision of “collaborative” spaces;
  • Incentives for the establishment of innovation labs; and
  • Regulations fostering the flexibility/tolerance to try new things in public that may fail.

Breaking new ground, the Monetary Authority of Singapore (MAS) has launched its own innovative boot camp: the Singapore FinTech Festival. It’s a coordinated way to accelerate innovation for the whole financial services industry, drawing on FinTech and InsurTech talent from around the world. Singapore is putting its money where its mouth is, funding a “Hackcelerator” competition as part of the festival. This competition will run 10 weeks, starting in September 2016, and it has more than $500,000 of funding and prizes to be shared — no equity required! All the teams need to do is be in the top-20 at solving at least one of 100 problem statements set by the organizers.

In a similar vein, Singapore insurer NTUC Income has announced its own InsurTech accelerator program. It’s offering funding of S$28,000 apiece for 12 top InsurTech startups. Again, no equity required. The program runs from January to March 2017.

If this trend continues, boot camps will be out of business — at least in their current, equity-gobbling format.

But where are the traditional insurance tech vendors?

In all this activity, where are the insurance legacy tech suppliers (LegTechs)? Many of the traditional consulting firms are doing quite well, tying up with some of the boot camps. But those vendors that were selling mainframe systems, software development services and the like, where are they? The answer for the most part is nowhere — the land of digital transformation. Perhaps it’s indicative of the level of mistrust between insurers and their LegTechs that insurers “go direct” to the innovation source. Perhaps it’s the fear that the innovation will too quickly be commoditized by these vendors and spread to insurers’ competitors. Whatever the case, LegTechs are being cut out of the conversation.

This is a big mistake.

LegTechs are better at partnering. They typically understand the innovation process and have a product mentality, which would really help package what InsurTechs have to offer. There is also an alignment on maximizing profit on technology with a common view of pervasively selling into the market. As a consequence, the LegTechs have a large, well-established, tech-savvy salesforce ready to carry the InsurTechs’ message to the market. This is one of the most decisive reasons why InsurTechs should partner with LegTechs. The final reason is that LegTechs are a goldmine of useful resources. They have an army of developers, lab space, sandpit environments, technology centers of excellence and distinguished engineers/architects with decades of experience — all of which would rapidly bring robust InsurTech products to market.

See also: InsurTech Boom Is Reshaping Market  

For LegTechs, there are also many attractions. Systematic partnering in this way would inject innovation and an entrepreneurial spirit they badly need. InsurTechs would provide an outlet for some of the LegTechs’ brilliant engineers, giving them an opportunity to dabble with the heady challenges of a startup while maintaining their security. This would definitely boost retention and attraction of this scarce talent pool. Finally, the LegTechs could get into new growth areas rather than stagnate on a declining commodity technology business.

The bottom line

Change is the only constant in an industry fiercely trying to catch lightning in a bottle. The lyrics from the Pokémon song are really quite apt for this current stage: “You teach me, and I teach you,” as I doubt we can “catch ‘em all.” We have a vision but have yet to stumble on the magic formula for repeatable innovative disruption. We hope we’ll find it in InsurTech’s perfect match. Or, perhaps, it has already happened but we just don’t know it. In any case, with boot camps, hackcelerators, insurers, VCs, governments and LegTechs all at hand, our visionary InsurTechs will soon deliver further breakthroughs. Let’s hope their beauty and passion rub off on an old industry.

This article originally appeared in InsurTech News.

What Gig Economy Means for FinTech

Earlier, I discussed the implications of the gig economy on the insurance industry. We concluded that the existence of “crowdworkers” in the gig economy creates four main opportunities for insurers: a faster flow of information, claim process efficiencies, information customization and cost efficiencies.

We at WeGoLook believe all industries must take notice of the disruptive gig economy to remain smart and streamlined, adapting to consumer needs.

What I want to do today is focus on the traditional finance industry, which includes insurance, and the new disruptive trend in fintech. When you combine two major disruptive shifts (fintech and the gig economy) the results are game-changing.

The Fintech Disruption: The picture we can already see

Fintech is an umbrella term for an array of new financial sector services that were once monopolized by large financial institutions. This is a good thing. The change is forcing traditional banks to adapt and may even keep those pesky banking fees to a minimum!

Goldman Sachs predicts these fintech startups will capture as much as $4.7 trillion in annual revenue from traditional financial companies and $470 billion in profit.

These fintech companies include budgeting platforms such as Mint and Acorns, automated investing services such as Betterment or lending services such as Lending Club, OnDeck and Kabbage. What these companies are accomplishing is the decentralization and democratization of financial services like loans, banking and investing.

These fintech companies are making traditional services more accessible to consumers. Remember, the gig economy — or what some people term the “sharing economy” — is all about access.

See also: ‘Gig Economy’ Comes to Claims Handling  

In 2015, the Economist declared fintech to be a “revolution” of the finance industry, and Time Magazine stated banks should be “afraid” of fintech.

The Role of the Gig Economy in Fintech: Flexible workforces

In the gig economy, intermediaries disappear. But don’t ask me — ask your local taxi owner, hotelier or car rental agency if Uber, Airbnb or Turo have affected their way of doing business. This is a rhetorical question; of course there’s been an effect. This is a good thing, but how we react will define our businesses in the years to come.

When discussing what fintech means for the traditional finance industry, Barry Ritholtz, a Bloomberg columnist, aptly said: “What is much more interesting to me is how the traditional money-management industry will respond to and adopt the latest technologies for helping it operate more efficiently and with greater client satisfaction.”

This flexibility is something most industries, including the financial sector, have yet to fully embrace. There are a number of gig economy companies out there that have access to thousands of on-demand workers who can perform a number of tasks that were traditionally in the wheelhouse of full-time employees.

Why would an insurance company or other large financial institution have tens of thousands of employees across the country to verify assets when they can leverage a stable of trained, vetted and professional gig workers? This is the gig economy, where people with spare time are self-identified as willing to complete on-the-ground tasks in their location.

See also: The Gig Economy Is Alive and Growing  

Gig economy companies aren’t just a vendor service — they can be part of the process. Need we get into the amount of money this can save a company?

Let’s dive into a specific sector of fintech — online lending — as a case study of how the gig economy can enable and complement the lending process.

Gig Economy Case Study: A flexible workforce and online lending

Online lending, including peer-to-peer lending, is an old concept reinvented for a digital age. Entrepreneurs, business people and citizens have always borrowed and lent money, but only in recent history has that become much more sophisticated and accessible through online marketplaces and fintech services.

Foundation Capital predicts that more than $1 trillion in loans is expected to have originated through these new lending marketplaces by 2025. Let that number sink in for a second.

Indeed, fintech has enabled a safe lending environment between people and businesses through innovative screening and credit checking. Investors and businesses of all stripes can now lend and borrow through internet platforms without traditional bank applications or even the need to physically exchange documents.

In most of these cases, however, asset or document verification are still requirements.

Take, for instance, common financial loan transactions, such as vehicle financing or refinancing, property financing and business loans. All these transactions require some form of physical verification that an asset exists and is “as described.” Whether that is a car, property, business or some other assets, someone needs to fulfill lending requirements.

Gig economy companies such as mine, WeGoLook, have access to thousands of workers across the U.S. who are ready and trained to travel to a specific destination to complete asset verification tasks.

The Gig Worker Landscape: What that means for fintech

Technology allows us to direct our “lookers” to capture the correct on-site data and perform tasks in a consistent manner across the U.S. (and now in Canada, the U.K. and Australia). The benefits of this gig model are numerous, and a looker, or gig economy worker, can now:

  • Replace multiple vendors;
  • Augment or supplement employees in the field;
  • Augment, supplement or replace employees dispatched from a bank to verify assets or perform a task;
  • Provide faster task completion at a lower cost; and
  • Capture and store all data in the same place and format.

For an example of a real estate report we provide to many of our banking clients, click here.

Because of the flexibility inherent in gig work, there is a significant increase in flow of information to clients. For instance, companies like mine can provide an electronic “live” report, which allows clients to review photos and information prior to receiving a traditional report.

There is also the ability to support video, enabling a walk-through of a property, a demonstration of a piece of equipment in operation — and much more. This walk-through can also be done live with the client, if needed.

In the past, a customer would need to bring documents to a bank and work face-to-face with a branch employee for notarization and paperwork completion. This is no longer the case.

Gig employees can now immediately travel to the customer’s home or place of business. The gig worker can take photos of the asset, deliver documents, notarize originals, deliver them to a shipper and submit all relevant information via an electronic report.

This allows the bank to view all information and verify all documents are properly signed. The bank can then fund a customer before the FedEx or UPS package of original documents arrives.

See also: On-Demand Economy Is Just Starting

All this flexibility allows for faster turnaround times, the elimination of multiple vendors and a reduction in lag time waiting on a customer to try to get to the bank during business hours.

In the end, what we have is a smarter and faster process, which is important, particularly when a loan rate guarantee is in place.

Changing entire industries takes time, but the gig economy and fintech are rapidly altering the landscape of the traditional finance industry. As discussed, all three of these industries aren’t mutually exclusive. Traditional financial services can embrace the better use of technology through fintech and greater efficiency through the gig economy.

Major Regulatory Change in Asia-Pacific

The global insurance industry is undergoing significant regulatory change, with regulators in the more developed markets endeavoring to synchronize their efforts. Similar occurrences can be observed in the Asia-Pacific region, where a number of countries are reviewing and undergoing changes in their approach to insurance regulation and holistic risk management. Most notably, a number of regulators are either introducing risk-based capital (RBC) or revisiting their existing RBC frameworks. The maturing regulatory approaches in Asia-Pacific will be a significant factor in managing systematic risk and enhancing policyholder protection.

Asia-Pacific is different

While the proposed RBC framework in Asia-Pacific may have similarities with the European Solvency II standard, there is wide disparity in the level of sophistication and application. Many of the changes are being driven by local market nuances, such as characteristics of the insurance products being sold and maturity of the insurers who operate in the various jurisdictions.

For example, Australia has recently implemented its second-generation solvency regime. Singapore and Thailand are consulting with the industry on second- generation RBC frameworks, while others such as China and its Hong Kong SAR are considering moving in that direction. These moves are particularly encouraging in providing a regulatory framework that will allow for a degree of consistency, especially for those insurers that have multiple offices across the region.

In addition to the changes in reserving and solvency calculations, a number of regions are also strengthening their risk management efforts (e.g., China with C-ROSS). This exemplifies how regulators are paying more attention to embedding risk management activities in the business. They look to ensure that senior management has sufficient oversight to allow them to consider and discharge their fiduciary responsibilities. It is important that organizations have an operational infrastructure and that the risk profile is within business risk appetite levels.

What does this mean for insurers?

Advances in regulation in the Asia-Pacific region
are far-reaching. The implications are expected to improve the way businesses will operate to create long-term sustainability. These implications, in our view, will affect product offerings, investment strategy, capital utilization, risk transfer opportunities and infrastructure.

In particular, we foresee several implications:

• Robust regulatory framework will provide comfort to the overall financial soundness of the insurance industry. However, the cost of regulatory compliance is expected to increase significantly.

• Changing regulations will provide more room for innovation and incentives to enhance or change organizational metrics. Better-managed companies will potentially benefit from lower capital requirements, making their products more attractive.

• Companies traditionally focusing on new business value will have to rethink the continuing profitability of past years and will need to understand options available for in-force value management. This will be particularly crucial given that existing forms of new business may be capital-intensive.

• A better understanding of the business risk profile will be needed. This will necessitate implementing sophisticated techniques in modeling/optimizing risk- adjusted returns and outlining a more systematic process for risk appetite.

• Investment will be required to enhance the modeling and reporting systems to meet regulatory timelines.

• Convergence of regulations toward RBC will also mean that there is less disparity between local and foreign players. This will make Asia-Pacific insurance markets potentially more attractive for foreign investments. Moreover, customers may eventually benefit from new ideas and solutions from both foreign and domestic insurers. This will create a healthy competitive market place for policyholders.

Challenges and opportunities

Based on experience in more developed insurance markets, changes in regulations produce both challenges and opportunities for insurers. In the short term, it is anticipated that there will be more investment demands on insurance companies. Insurers have the prerogative to make the best use of these investments to define long-term opportunities.

In Europe, for example, some insurers have used Solvency II as a means to further enhance their risk management systems, capital allocation mechanisms and reporting infrastructure, and redefine their key performance Indicators. This, in turn, has convinced shareholders and analysts that investments because of regulatory changes should not be for mere compliance, but rather as a means of enhancing competitive advantage. We believe that insurers in Asia-Pacific should draw upon the experiences and challenges in more developed markets to establish an approach for Asia-Pacific markets that considers regulation, economic nuances and the purchasing behavior of policyholders.

Looking ahead

There will be many changes within the industry over the next few years, and companies will need to consider the operational implications for their businesses. Based on our conversations and experience in the region, we see an increasing number of insurers making adjustments to their future business plans and investment needs. Some of these modifications are tactical, such as enhancing their existing processes, while others have the potential to have a wholesale effect on entity rationalization and strategic initiatives, such as capital optimization.

We are very engaged with the regulators, industry bodies and insurance companies in the emerging discussions and are helping insurers to consider these regulatory changes with a strategic mindset.

China

The China Insurance Regulatory Commission (CIRC) has adopted a factor-based solvency system similar to Europe’s Solvency I regime. It is composed of internal risk management, solvency reporting, financial analysis and supervision, regulatory intervention and bankruptcy remediation. This solvency regulation system was built from 2003 to 2007.

Over the past 30 years, the Chinese insurance market has become one of the fastest-growing in the world, and its complexity and risk have increased accordingly. The existing static solvency system no longer properly reflects asset and liability risks facing insurance companies. Therefore, it has limitations in providing good guidance for insurers to improve risk management quality and capabilities.

Globally, there is a trend toward more risk-oriented regulation and governance, such as Europe’s Solvency II, the US NAIC’s solvency modernization initiative and Singapore’s RBC 2.

Developing a new solvency system for mainland China would not only meet local market needs but could also provide pragmatic and invaluable experience for other emerging markets, as well as the international insurance community.

Australia

Australia has two primary supervisory authorities, the Australian Prudential Regulation Authority (APRA) and the Australian Securities and Investments Commission (ASIC). Both bodies have authority over the entire retail financial sector, comprising deposit-taking institutions, life and non-life insurance companies, friendly societies and superannuation schemes. APRA is responsible for the licensing and prudential regulation of financial institutions, while ASIC deals with consumer protection issues.

The most significant recent enhancement to the regulatory regime is the capital adequacy framework and draft conglomerate supervision. This is supplemented by a corporate governance regime.

Hong Kong

The insurance industry in the Hong Kong SAR has witnessed considerable growth in the past decade. As of Oct. 14, 2014, there were 155 authorized insurers in Hong Kong, including
44 long-term insurers, 92 general business or non-life insurance companies and 19 composite insurers (i.e., life and non-life insurers).

In Hong Kong, the Office of the Commissioner of Insurance (OCI) is the Insurance Authority (IA) under the Insurance Companies Ordinance (ICO) and oversees the financial conditions and operations of authorized insurers. The OCI is part of the Financial Services and the Treasury Bureau of the Hong Kong Government.

India

The Indian life insurance industry has witnessed a phenomenal change in the last 14 years since it was opened to private players. It experienced strong growth (a CAGR of 30%) for almost a decade, until a wave of regulatory changes capped charges for unit-linked products. This compelled insurers to shift focus from unit-linked investments to traditional protection products, significantly slowing industry growth. With reduced shareholder margins on unit-linked plans, sales of traditional products have increased and now constitute at least half of new life insurance business, whereas unit-linked plans are facing negative growth.

General insurers have seen growth of 16% CAGR over the past decade. This is attributed to the evolving regulatory environment, new private companies entering the market, changing demographics, greater disposable income and business development in the corporate sector. In fact, growth was significantly higher in the financial year 2012–13 — up 24%, primarily as a result of policies sold and rate adjustments.

Against the backdrop of a relatively underpenetrated market, there is a significant potential for sustainable long-term growth. Currently, there are 24 life insurance and 28 general insurance companies in the market. A few mergers and acquisitions are in the pipeline.

The industry today is in a state of flux. Surrounded by political uncertainty, slower economic growth, regulatory changes and increased competition, insurance companies are looking to increase profitability, manage expenses and improve persistency.

Indonesia

Indonesia is one of Southeast Asia’s largest economies and presents a huge untapped market for the insurance industry. An expanding middle class and the young demographics of the population is creating a vast platform for savings and investment products, and as life insurance continues to show exponential growth, the microinsurance market is gaining traction with low- income consumers.

Against this backdrop, the Indonesian insurance industry is being shaped by changing regulations and stricter capital requirements that are aimed at introducing greater transparency and stability. In this transformed regulatory landscape, there are more new entrants to the market and greater opportunities for mergers, acquisitions and joint partnerships.

Malaysia 

Malaysia has a well-developed, stable economy that continues to attract insurers. The GDP is growing at nearly 6%, and unemployment and inflation are relatively low. Demographics and strong economic growth have helped to develop a strong market for takaful insurance and bancassurance. In recent years, the country has undertaken wide-ranging reforms aimed at improving regulatory efficiency and opening the door to greater competition in financial services.

The Malaysian insurance industry, like others in the Asia-Pacific region, is struggling with depressed investment returns, higher volatility in capital markets and increased pressure on the cost of capital. Against this business landscape, the industry appears to welcome regulatory changes. However, there are also concerns that some of these changes are diverting attention from key issues, such as improving portfolio returns and new business.

Singapore

The Monetary Authority of Singapore is finalizing the risk calibration and features of the RBC framework, with implementation expected from Jan. 1, 2017.

The RBC framework for insurers was first introduced in Singapore in 2004. It adopts a risk-focused approach to assessing capital adequacy and seeks to reflect most of the relevant risks that insurers face. The minimum capital prescribed under the framework serves as a buffer to absorb losses. The framework also facilitates an early intervention by the Monetary Authority of Singapore (MAS), if necessary.

While the RBC framework has served the Singapore insurance industry well, MAS has embarked on a review of the framework (coined “RBC 2 review”) in light of evolving market practices and global regulatory developments. The first industry consultation was conducted in June 2012, in which the MAS proposed a number of changes and an RBC 2 roadmap for implementation.

South Korea

The regulatory authority for the Korean financial services industry, the Financial Supervisory Service (FSS), introduced RBC in April 2009. In replacing the Solvency I requirement, the RBC scheme aims to strengthen the soundness and stability of the overall insurance industry.

In the rapidly changing insurance market, FSS has to review the RBC regime continuously to ensure that it serves the intended purpose. This effort included some changes in 2012, such as subdividing capital classes and categorizing risk factors in accordance to the types of risks transferred to insurance companies. Moreover, FSS enhanced the RBC calculation methodology by adding reverse margin risk as part of interest rate risk in 2013 and by raising the confidence level of risk factors for insurance risk early in 2014.

In light of the recent enhancements, some insurance companies’ solvency margin ratio has fallen below the FSS’s recommended ratio of 150%. As a result, these insurers have had to raise capital through alternative options such as issuing subordinated bonds.

Thailand

The Office of Insurance Commission (OIC) implemented a risk- based capital (RBC) framework and gross premium valuation (GPV) regime in Thailand in September 2011.

The OIC rolled out two phases of parallel tests before the actual implementation of the RBC framework to gauge the impact on insurers and to gather industry response. The solvency requirement was also increased from 125% at the initial implementation to 140%. This became effective Jan. 1, 2013, to give insurers more time to respond to the changes.

In 2011, the Thai regulator granted temporary RBC exemptions and relaxed some of the restrictions. This was an effort to help local general insurers overcome financial difficulty caused by flood losses that occurred that year, as the floods coincided with implementation of the RBC framework.

The OIC rolled out two phases of parallel tests before the actual implementation of the RBC framework to gauge the impact on insurers and to gather industry response.