Insurance technology companies can be innovative, efficient, agile. They can delight their customers with modern user-experiences, impress them with low costs from reduced overhead and surprise them with swift service. But there is one area where they face an uphill battle to take market share from large, established insurance institutions. Trust. Why would a customer risk choosing an insurtech company with a young record in the industry over a traditional player with a long-held reputation for being well-capitalized? When the hurricane hits, can the insurer be trusted to honor the payout?
See also: The Insurer of the Future – Part 9
The answer for insurtechs is not to focus on battling the behemoths to create equally huge capital backup. Insurtechs have to win the battle for hearts and minds. Insurance is about customers achieving peace of mind. But the industry is plagued by major misalignments of interest. Customers may well understand that the major players have enough money to pay their claims but they don’t necessarily believe they will pay out. There is a trust deficit. Large companies with capital have high costs and, unfortunately, making payouts can directly impact their profits. Regulators aim to protect customers and ensure fair payments. But, in the end, the cost of the additional compliance bureaucracy is passed on to a distrustful end-customer anyway.
Insurtechs need to rely on their competitive advantage — technology. That technology, and specifically blockchain, can be deployed to ensure customers receive their payouts automatically. As a customer, you can have no better peace of mind than knowing you will receive payment immediately with no questions asked. Insurtechs can provide “parametric” insurance policies where events trigger automatic payments, eliminating the burden of customers’ claims processes. Parametric policies can work, for example, for flight-delay insurance. If a customer buys a policy against a late arrival of an hour or more and a plane is indeed officially logged as behind the clock, then payment is made automatically. Blockchain technology has the power to create an unalterable database that can be trusted immediately by the insurer and customer alike, meaning the transaction is transparent and automatic. In this way, blockchain enables provable fairness to allay consumers fears over the industry’s misalignment of incentives. The same parametric insurance mechanism can be used for weather. A six-week drought can prompt payout to farmers who fear their crops will shrivel. The farmers do not have to prove their loss. The data executes the policy automatically.
It is possible to imagine a world of insurance with vastly reduced overhead – a world where payments are automatic and there is no need for cumbersome claims processes. This clearly means insurance policies can be cheaper – and cheaper policies opens the possibility of more granular policies targeted at the real lives of customers. This is another way the insurtechs can win the trust of customers – by being perceived as helping solve their actual, specific problems. A sports club can organize a tournament and insure its players against injury. That kind of specific policy is currently likely to be seen as low value for the big insurance companies. But with their lower costs, insurtech companies can use blockchain to design a bespoke policy that serves customers and creates profits.The insurtechs can use their cost efficiencies to provide bespoke policies that create an intimacy with a customer and that, in turn, builds trust.