Banco Bilbao Vizcaya Argentaria S A : Here’s how ‘insurtech’ is changing the insurance business

Shared economy, wearables, autonomous cars, big data… with the help of startups, the insurance business has begun to adapt its business model to a new society. The investments in insurtech already exceed $1.7 billion annually.

The insurance business depends, as few others do, on information. What's the real condition of an insured house? Does that man who´s coming in to sign a health insurance policy lead a healthy life? Does that twentysomething necessarily drive in a rather unsafe fashion, given his age? Up to now, insurance companies had relatively little data with which to answer these questions, which are key in their business. However, phenomena such as big data and the Internet of Things, together with more general technological advances, have completely changed their outlook.

The result of all these changes is insurtech, or insurance technology. It can be defined as the branch of fintech dedicated to the world of insurance. And it´s a very powerful branch. Investments in insurtech startups have multiplied fivefold in the last three years, so much so that, according to data from the consulting firm PwC in its report, 'Opportunities await: How InsurTech is reshaping insurance ', accumulated investment in the sector since 2010 now exceeds $3.4 billion. Another specialist firm, CB Insights, estimates that last year alone, investments in insurtech surpassed $1.7 billion.

How the business model is changing

The capacity to access more and better data, obtained in large part thanks to sensors and objects connected to the Internet, is one of the basic drivers of the insurtech phenomenon. That avalanche of data, if well managed, allows insurance companies to be more efficient in their internal procedures. Above all, they can offer better products, with better risk measurement, for more demanding customers with new social customs. In the sharing economy, the one-size-fits-all insurance policy is no longer valid.

Let´s take the example of automobile insurance, which in Spain accounted for 16% of all insurance as of September 2016, according to the industry association ICEA. Up to now, factors such as gender, age and even the vehicle's color determined the price of the policy. Today, with sensors inside the vehicle, insurers can really know when and how each person drives. The risk associated with someone who never exceeds speed limits and uses the car only to take their children to school is not the same as that of a person with a higher average speed, who drives at night on the weekends.

Salvador Nacenta, a partner in the financial sector at PwC, predicted in a recent article that 'car insurance prices will go inexorably lower because of increased safety and the reduction of accidents, as a result of the new technologies.' The tipping point will be the widespread use of autonomous cars.

The figures don´t lie: the first accident of Google´s autonomous car took place after it had traveled 1.45 million miles (2.3 million kilometers). This is an accident rate of 0.68 per million miles driven, far below the average of 2.0 per cent in the United States, where 94% of crashes are produced by human error. Machines are not infallible, but they don´t fall asleep at the wheel, nor do they look at their mobile phones while driving, or argue with their passengers.

New business model, new protagonists

The business model is changing. 'From reaction to prevention' has become something of a mantra in the sector. New niches are also appearing, such as those that link insurance policies to the data provided by wearables; or the crowdsourcing insurer, which operates through peer-to-peer (P2P) networks.

Companies like Guevara and Lemonade, whose marketing is far removed from the traditional messages and aesthetics of insurance companies, show that insurance via collections is not a utopic notion. Meanwhile, for the long term, the insurance sector awaits the impact of blockchain technology on its business model.

Startups have taken the lead in these transformations. According to the PwC report, only 14% of traditional insurers participate in alliances or insurtech incubators. Axa and Allianz, for example, have created their own brands, Kamet and Allianz X; but the small companies are setting the pace of innovation. Among them, the standouts include Switzerland´s Wefox (formerly called Finance Fox), which last September obtained $28 million in a financing round in the United States. Others are Metromile, which offers car insurance in seven U.S. states, paid by the numbers of kilometer driven; and Simplesurance, which sells different types of insurance through online stores, integrating its operations with theirs.

The insurance sector still has no Uber, Netflix or Apple, a company that really changes the rules of the game. However, there is enormous investor interest. Could the next technological giant be hidden among a stack of insurance policies?