Insurtech has been all the buzz in the insurance industry recently, and for good reasons. For the insurance companies, it brings the promise of better anti-fraud protection, cutting operational costs, and converting new clients with attractive packages. For policyholders, tech disruption is likely to mean lower prices and better insurance plans. Overall, things are looking great for all stakeholders.
Or are they?
For a highly regulated industry like insurance, tech disruption simply doesn’t happen overnight, and it’s probably going to look a lot more like a gradual transition than a revolution. Let’s discuss some of the factors that are likely to hold insurtech back for a while.
Privacy concerns on the rise
One of the most promising recent tech developments in the industry has been the incorporation of Internet of Things (IoT) for health and life insurance underwriting. Or more precisely, of IoT-generated data. Information from fitness wearables is so useful to insurers that some companies have entirely switched from traditional plans to ‘interactive policies’, where the Fitbit or Apple Watch is the basis for underwriting. This approach has also been proving to be successful in other global markets as well.
But with the public becoming more and more aware of data security and privacy, not all coverage of the news has been positive. Critics are worried that trusting insurers with access to a constant stream of information about their clients is a dangerous move. In all honesty, they can’t be blamed — IoT devices have a pretty bad reputation for product security.
Insurers certainly don’t want to find themselves on the wrong side of the data privacy discussion. Using IoT for policy underwriting might be a great financial move, but it could also backfire on the PR front.
The complicated case of compliance
IoT devices provide huge volumes of data that can no longer be processed by a human in a timely manner. Artificial intelligence offers a solution for fast information processing: it can be used in the underwriting process and claim management.
But there is a huge obstacle to insurers working with this technology. AI is a so-called ‘black box’ technology — we feed it data and get back results but we don’t know what happens in between. The decision-making process of the algorithm is so sophisticated that humans can no longer follow it.
This lack of transparency translates directly into lack of trust. If no one can explain what goes on between input and output, how to do you prove that you comply with relevant laws, policies, and regulations? And how do you answer to clients when they question their quote or claim settlement?
Explainable AI is a growing field of data science but, for now, the only way to account for AI’s calculations is to make it less complex. And that also means lower accuracy of computing.
Tech disruption in insurance is happening behind closed doors, so it’s hard to assess what stage we’re at right now. As is the case with AI, insurers may be using cutting-edge technologies but they’re nowhere near reaching their full potential yet.
We’ve seen the power of buzzwords in recent years, with stock increases for companies that put the words ‘blockchain’ or ‘bitcoin’ in their name, for example — so insurers’ claims that they’re working with blockchain or replacing their employees with AI should be taken with a pinch of salt. Time will show which of the new technologies will become an integral part of the business and which turn out to be pure hype.