It is broadly about technology-driven insurance, but more specifically about the new technologies disrupting insurance. The vast range of these technologies, and the extent to which they make insurance more targeted, efficient, cheaper and – paradoxically – more profitable, means that insurance providers will soon not be able to survive without embracing disruptive technology.
In South Africa, the fintech landscape is largely driven by banks or attempts to compete with banks. But the insurance industry is arriving fast, partly thanks to tech-savvy entrepreneurs who have stepped out from under the shadows cast by the monolithic presence of giant insurance companies.
Typical of these are Sumarie Greybe, Alex Thomson and Ernest North, three tech-savvy actuaries who worked for major insurers for many years. Two years ago, they broke away and formed one of South Africa’s first insurtech-focused companies, called Naked. With R20 million in funding and backing from Yellowwoods and the Hollard insurance group, they offered car insurance based on artificial intelligence. Significantly, the trio wanted to build a business on a foundation of social good.
“We saw first hand how insurers’ focus on underwriting profits overshadows claims handling, premium fairness and customer service,” says Thomson. “We realised that to fix these problems we needed to change how we make money, to remove the inherent conflicts of interest.”
The solution was GiveBack, a system that uses a fixed portion of premiums to run the business, with the balance going into a pool to cover claims. Money left over in the claims pool at the end of the year goes to charities nominated by customers.
“Naked GiveBack means that paying less in claims cannot grow our bottom line, so customers can be confident that their claims will be paid fairly and efficiently,” says Thomson.
Pay for what you use
More importantly for customers, though, Naked brings a level of flexibility to insurance that was never possible with legacy, paper-based systems. For example, the company’s app allows customers to change cover instantly at any time, or even pause accident cover if the car won’t be used for a day or more. In effect, pay-as-you-go insurance.
One of the keys to insurtech is system design, so that one is not locked into databases that don’t allow for quick changes. Such systems constrain not only the customer, but also call centre agents who are limited in how much assistance they can provide. Worse, it imposes onerous demands on the customer.
Says Greybe, “A lot of traditional systems have database diagrams that are insane, with tens of thousands of fields, so small changes become major projects.”
This just adds to the burden on the customer, says Thomson.
“People typically experience the insurance company going from being nice to becoming quite confrontational. You’re almost treated like a criminal when you’re looking to claim. Obviously, there are criminals out there trying to defraud insurance companies, but the companies start with that assumption. It’s not surprising people find the experience horrible.”
Claim via selfie
“We’re trying to get as smart as we can to process as many claims as possible without a human. So we moved from filling in forms to video selfies describing the incident. We run algorithms to detect fraud indicators with all kinds of techniques, including how often you changed your video submission, to data like how long you’ve been a customer, your payment and claims history, or adjustments you’ve made that are atypical.”
...paying less in claims cannot grow our bottom line...
The Naked app is the key to the cost-effectiveness of the business. It allows most processes, especially claims and cover changes, to be managed seamlessly, without involvement of a call centre. AI-based fraud algorithms allow many claims to be approved instantly.
“We’re trying to change the relationship people have with insurance fundamentally. We see two primary problems that we are trying to address. Firstly, if you ask people about insurance, you hear a lot of negativity: they don’t trust insurance, it’s a grudge purchase, they’re not confident the company will pay claims, they don’t understand how they determine premiums.
“The second issue is that the insurance industry globally and locally has lagged behind the shifts we’ve seen in the way service providers deal with clients. The direct insurers are almost exclusively dealing through call centres. To buy a policy from a major insurer, you’re spending 45 minutes on a phone call. Online direct sales that do exist for full service are typically tedious to the extreme, and almost always end up back in the call centre.
“A lot of the insurtechs are building sales engines but, when you want to change anything or claim, it goes back into the traditional call centre model.”
The irony is that many insurance companies already have an app. However, they do not allow end-to-end applications, approvals and claims, and apps often merely add to the time it takes to deal with the call centre. It is precisely this flaw in customer experience that insurtech promises to repair.
The app and the databases behind it are hosted in the cloud, on the Amazon Web Services platform, further reducing the cost of infrastructure, as Naked does not have to maintain or provision its own servers. It also allows Naked to take advantage of new functionality that is constantly introduced in the cloud. The data is housed in Northern Ireland, meaning that the hosts have to comply with the onerous data privacy requirements that the General Data Protection Regulation imposes in Europe.
Greybe says: “The technology is flexing its muscles at the moment.”
Rooting for you
This means that there is room for any number of new players, including those that want to facilitate the emergence of more players. If Naked is an example of the technology flexing its muscles, then a business called Root provides a kind of virtual gym.
...people find the experience horrible.
Root describes its offering as “programmable banking for software developers”, providing a “financial services toolkit” for others to build their “own banking experience with code”. It then allows almost anyone to integrate insurance into their products through an application program interface (API), which allows software to interact.
“We seek to make businesses like Naked easier to bring to market,” says Louw Hopley, CEO of Root. “At the moment, insurtech start-ups are very scarce, and the reason is barriers to entry are so high. We collapse barriers to entry so that businesses like this can become more ubiquitous.”
Despite the shortage of start-ups, there is frenetic activity in the sector, says Jonathan Stewart, head of Exponential Ventures at insurance giant MMI Holdings, which is working closely with Root.
“People are innovating around product, pricing, new ways of leveraging data, techniques to create personalised pricing, and marketplaces for different insurance products, while others are focusing on distribution or the front-end customer experience. There is no single dominant area or player. Incumbents are trying to transform themselves at the same time, for a host of different reasons, including those oft-quoted legacy systems that are not architected to be open or flexible or fast.”
Fintech on fire
Hopley built Root as a project of OfferZen, a technology jobs board created by seasoned innovators Philip and Malan Joubert, founders of the FireID high-tech incubator in Stellenbosch. The stable includes SnapScan, the groundbreaking mobile payments app acquired by Standard Bank, and Luno, South Africa’s leading cryptocurrency exchange.
In short, a hotbed of fintech. Hopley didn’t want to stop there.
“At some point we said, what are things not available to developers, who are creating the future, who are building what is to come? Given what we had learned, given that community, we started out trying to figure out how to bridge the gap between the developer community and financial services.
“We started with banking, being the core of financial services, and said, what would it take to make it programmable? We started Root Bank to lower barriers for developers, to enable them to prototype fintech products and take them to market without first having to get a bank partner on board and negotiate equity.”
Meanwhile Jonathan Stewart was appointed by MMI to head up Exponential Ventures for productive innovation, to bring innovators and entrepreneurs in from outside the business.
“The thought came to me to try to open MMI’s natural competitive advantages, at scale, using the benefits we have, the licenses and the intellectual property, and try to make those available to software innovators through an API. Justin Stanford of 4Di Capital introduced me to OfferZen and then to Louw. It was quite complementary, because Root has access to the developer community, while MMI has the licenses and so forth.
“One of the big challenges of insurtech is that they often have to build their own full insurance stack, and it’s quite a barrier to entry. Root ‘platformifies’ this, so innovators can employ their creativity and market insights at the front without having to build the heavy back end. It's cloud for insurance.”
MMI’s involvement with Root sheds light on the most common question in the sector: Will the insurtechs own the future, or will the incumbents?
“We feel it’s more a sensible combination of the two,” says Stewart. “We would rather collaborate with the wider range of skills available. To grant seamless access to innovators on a heavily scalable platform in the back end, you bring to market a richer range of innovation than an insurance company can do on its own.”
AlphaCode’s insurtech start-ups
Rand Merchant Banks’ fintech investment arm, AlphaCode, is one of the leaders in insurtech incubation. Its investments include:
· Click2Sure, a digital insurance platform that allows anyone, from retailers to brokers, to offer custom-developed insurance products at the point of sale or online.
· Hepstar, which offers travel insurance when one checks out after purchasing a ticket at online travel booking site Travelstart.
· Fo-Sho, which groups policyholders into risk profiles for short-term insurance, and then group insures them.
· StockBox, an inventory tool for consumers to photograph and list their possessions for insurance planning.
“Insurtech has gained momentum over the last two years in South Africa,” says Dominique Collett, head of AlphaCode. “It was initially seen as a major threat by insurance companies, but now insurers are taking a far more proactive approach to seize opportunities in this space and are starting to collaborate with start-ups. Exciting new models are transforming a staid industry characterised by opaqueness and outdated systems.”
Arthur Goldstuck is founder of World Wide Worx and editor-in-chief of Gadget.co.za. Follow him on Twitter on @art2gee.