After many years of crisis, scandals, low growth rates and declining customer satisfaction, there are compelling reasons for the radical transformation of insurance services to occur. There are also powerful arguments as to why these transformations will need to begin in the emerging economies of Asia.
The case for change
For industry, nations, and consumers the transformation of insurance is more critical today than ever before.
For industry
Limited growth in mature markets and pressures to reduce costs are taking a toll on the insurance industry.
Armed with outdated IT infrastructures, insurance providers have little capacity to reduce spiraling administrative costs or develop cost-effective services for low-income developing markets. Companies remain helpless to increase their customer base or meet internal growth targets.
Restrictive IT infrastructures have led to poor customer engagement and ineffective fraud detection methods and pricing structures as well.
“So far the industry has been perceived to be fairly reactive to technology, to have issues with IT prioritisation and implementation, and ultimately to be relatively slow to innovate and change.”[1]
The time has arrived to overhaul the legacy IT systems that continue to cause significant inefficiencies and increased risks.
Seeking out transformational technologies that reduce inefficiencies and enable the delivery of innovative products and services to untapped developing markets around the world is now critical to future competitiveness.
Forget “first the west, then the rest”, it’s about “the rest, then the west”…
It’s important for companies to understand that technology adoption is no longer the exclusive domain of consumers in the West. Technology adoption today often begins in emerging economies and then flows to the west.
Out of the world’s developing economies, the emerging economies of Asia represent an unprecedented opportunity to experiment with low-cost innovation and open regulatory frameworks.
They also represent a vast customer base hungry for new services. Companies that are able to deliver micro-insurance services have the opportunity to tap into these vast markets.
A “first the rest, then the west” approach is now an imperative for future innovation, growth, and success.
For nations
For the hundreds of millions of low-income residents in the emerging economies of Asia, from Indonesia and the Philippines to Cambodia and Vietnam, access to formal financial services, especially insurance, remains extremely low.
Without the ready availability of insurance products and services to all segments of society, the economic progress made by individuals in these and other nations will remain tenuous, and future economic development will be limited.
Insurance plays a key enabling role in wealth creation, and economic growth as coverage is a prerequisite for financial institutions to offer many other types of financial services.
Governments must, therefore, begin to lay the regulatory foundations for the future proliferation of micro insurance services if they are to realize their nation’s financial inclusion targets and overall potential in the new innovation-based economy.
For Consumers
In most of the emerging economies of Asia, insurance coverage remains rare.
In fact, according to the Asian Development Bank, insurance penetration in Indonesia, Cambodia, and Myanmar is almost non-existent.
In the Philippines, insurance penetration is estimated to be around 4%, relatively high when compared to Indonesia where 1% of insurance needs are currently met.[2]
There is now widespread recognition from those in the development sector that insurance is a vital financial service to help people climb out of poverty, manage various risks and protect valuable assets.[3]
The continued absence of viable products and services means that the livelihoods of millions of individuals continue to remain uncertain.
“Insurance can protect the poor against losing their livelihoods and assets due to natural disasters or sudden illness thus preventing them from falling back into cyclical poverty.” [4]
For the small minority of these populations lucky enough to have access to insurance services, low levels of transparency, fairness in charges and claims handling and a severe lack of consumer protection is a significant problem.
Individuals with limited education and familiarity with complex insurance products remain at risk of exploitation unless insurance providers can simplify their offerings and realign their incentives.
Several problems, one corrosive root cause
Over the last decade, a dramatic shift in trade power has taken place away from the advanced economies in North America and Europe to the emerging markets of Asia. [5]
From nations like China that have developed at a rapid pace to countries that are at the beginning of their economic development journey like Myanmar, the emerging economies of Asia are now a vital part of the world economy.
But offering services to these low-income markets in Asia has remained entirely out of reach for most insurance companies. This despite the massive growth opportunities and a general awareness of the importance of these markets among industry executives.
Why?
The answer is surprisingly simple and can be traced to a single, yet highly corrosive root cause.
Fragmented, old-world IT systems and siloed record keeping infrastructures that lack basic levels of interoperability.
It is the outdated systems utilized by most insurance providers that are creating the spiraling costs and crippling inefficiencies which have in turn prevented insurance companies from developing cost-effective micro-insurance services for low-income customers in the emerging economies of Asia.
Simply put, without the transformation of these systems, insurance companies will become increasingly inefficient and remain unable to access vital growth opportunities.
A devastating flow on effect
Sky high administrative costs & backend inefficiencies
Administrative expenses and backend inefficiencies are crippling the insurance industry. With complex contracts between multiple stakeholders that need a significant amount of human processing, the administration of insurance has not only become expensive but highly inefficient as well.
Underwriting and claims settlement, two critical processes conducted by all insurance companies today involves the time-consuming and often inaccurate evaluation of information.
After a claim is registered, an astonishing variety of tasks must be completed. These include but are not limited to, the retrieval of supporting documentation, performing fraud detection checks, determining which party is liable for the damage, determining the amount of the claim, and communicating back and forth with the customer and other parties involved.
Processes are slow, manual, paper-based, repetitive, expensive and also prone to errors and duplication.
Inefficient client onboarding and compliance processes
Insurance companies must complete several compliance related steps which create significant time and cost delays as part of the onboarding process for new clients.[6] These include the collection, validation, and verification of key documents such as proof of identity, proof of address and proof of birth.[7]
Compliance officers must also manually check and share enormous amounts of data with third parties and internal due diligence teams which can take a considerable amount of time to complete. [8]
Vast resources are spent by companies to fix needless errors during the compliance process and reconciling data sets across departments and external intermediaries is a massive headache.
Ineffective fraud detection
It is estimated that $45 billion is lost annually to insurance fraud with approximately 65% of fraudulent claims going undetected.[9]
Fragmented and siloed record keeping practices together with record systems that lack basic levels of interoperability have led to a severe lack of advanced data available for risk analysis for fraud detection.
Legacy systems prevent risk and compliance teams from gaining a systemic view of transactions and a complete historical record of a customer, limiting their ability to identify duplicate transactions or those involving suspicious parties.[10]
With a limited ability to detect fraudulent activities, insurance companies must deal with greater risks and expenses and charge higher premiums to their customers.
Blockchain replaces fragmented and siloed record keeping infrastructures with a unified platform
If you’re like many insurance executives, you may be wondering what all the blockchain fuss is about. The technology continues to garner endless attention yet there remains a lack of understanding among decision makers within the industry.
Putting the hype and bluster aside, the promise of blockchain lies in its capacity to eliminate the root cause of the inefficiencies that impact the delivery and management of insurance services.
“This technology has the potential to impact the entire insurance value chain end-to-end, including information collection, underwriting, rating, actuarial analysis, quoting, binding, billing, contract management, claims processing, distribution, policy administration and also regulation.”[11]
Blockchain technology offers to rid the insurance industry of the high administrative costs and backend efficiencies that have plagued the insurance value chain.
Labour-intensive, repetitive and error-prone underwriting and claims settlement processes are transformed through the use of a unified platform to store and share all documentation.
“Every personal insurer’s core computer system is, at heart, a big, centralised transaction ledger. At the very least, blockchains deserve to be evaluated technologically by insurers, as a potential replacement for today’s central database model.”[18]
There are significant benefits for compliance as well. Regulators can gain access to full sets of unchangeable data in real time without requiring companies to conduct reconciliation and the collection of detailed information for reports.[12]
With the same data available to all parties, insurance platforms powered by blockchain can experience unprecedented data sharing capabilities and back-end analytics for pricing and risk.[13]
“We believe that blockchain will play a major and disruptive role right across the insurance value chain. From customer onboarding and ‘Know Your Customer’ (KYC) requirements through to claims processing and adjudication, the potential use cases for blockchain in the insurance sector grow each day.”[14]
Detailed audit trails of all past insurance claims can be maintained for risk analysis and fraud detection. Risk teams gain a system-wide view of all their customer’s records to enable not only the identification of duplicate transactions but also those involving suspicious parties.
As a result, long and tedious onboarding and verification processes experienced by legitimate customers can be dramatically reduced.
Smart contracts could change the game
Equally as fundamental to the future of insurance are smart contracts. When run on a blockchain, smart contracts become self-executing contracts where contractual enforcement, rights, obligations, performance, and payment are automatically executed.
By enforcing the rules for insurance claims through code instead of human decision making, event-triggered smart contracts make it possible to automate some types of claims.[15]
“Alongside big data, mobile and digital technologies, blockchain is essential to establishing an efficient, transparent and customer-focused claims model based on higher degrees of trust. Within claims prevention, new data streams can enhance the risk selection process by combining location, external risk and analytics. A distributed ledger can enable the insurer and various third parties to easily and instantly access and update relevant information (e.g., claim forms, evidence, police reports and third-party review reports).”[16]
InsurETH, for example, a company developing blockchain solutions for the insurance industry, built a flight insurance product that runs smart contracts on the Ethereum platform to automate insurance claims and automatically refund users in case of flight delays or cancellations.
By eliminating the manual processes involved in claims management, smart contracts can reduce the costs and time associated with the handling of claims and also disintermediate the claims process.
The use of data from a mobile phone or sensors could streamline claims submission as well.
A report from EY explains,
“The use of data from a mobile phone or sensors can streamline claims submission, reduce loss adjuster costs and increase customer satisfaction, with blockchain systems facilitating communications and coordination among all parties. Consider how sensors can trigger alerts to insurers that a crash has occurred (thereby initiating a new claim), and then route secure and relevant data to preapproved and conveniently located medical teams, towing services and/or repair garages.”[17]
By making the processes associated with the delivery and management of insurance services more accurate, efficient and secure, companies can save money on their service offerings in mature markets and also gain the capacity to offer cost-effective micro-insurance services to low-income markets in the emerging economies of Asia.
The future of insurance starts today in the emerging economies of Asia
The insurance sector has traditionally been slower than most other industries to adapt to change. Decades of neglect driven by conservative and risk-averse cultures have brought the industry to a tipping point.
Outdated systems and IT infrastructures have left insurance companies with gross inefficiencies, high administrative costs and ineffective fraud detection methods.
Insurance companies are failing their current customers and continue to have a limited capacity to develop cost-effective products and services for underserved low-income markets.
With limited growth in mature markets there are now acute pressures to innovate and find new sources of growth.
Insurance executives must come to the realization that band-aid solutions cannot fix the root problems afflicting the industry or meet the challenges of tomorrow.
There is also a need to internalize new realities that have come with globalization and the new digitally based world economy. Economic power shifts in recent years away from the West to the emerging economies of Asia mean that significant growth is no longer found in New York, London or Paris.
Ho Chi Minh skyline – a symbol of economic growth and increasing prosperity in Vietnam.
Rather it is the economies of China, Vietnam, Indonesia, the Philippines and many others that hold unprecedented growth opportunities.
For hundreds of millions of low-income people living in these markets, access to formal financial services, especially insurance has will mean the continuation of real economic growth and formal inclusion into the global economy.
Nations and industry have important roles to play to ensure both financial inclusion and competitiveness.
Governments must lead by example and begin to lay the regulatory foundations for the future proliferation of insurance services. They must also initiate collaboration with the insurance industry to seek out and test new technologies for mutual benefit.
“Like the first generation of the internet, this second generation promises to disrupt business models and transform industries. Blockchain (also called distributed ledger), the technology enabling cryptocurrencies like bitcoin and Ethereum, is pulling us into a new era of openness, decentralization and global inclusion.”[19]
Industry will need overhaul legacy systems and embrace transformational technologies like blockchain that can enable the delivery of cost-efficient micro-insurance services to new developing markets to ensure competitiveness.
A supercharged insurance industry powered by blockchain technology in combination with a modernized regulatory framework will not only lead to critical growth opportunities for companies but also help trigger the proliferation of financial services and drive economic development in the emerging economies of Asia.
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Anthony is the head of content and research at Intrepid Ventures. He has spent the past several years researching and analyzing technologies and working with a diverse mix of blockchain companies to help them gain insight and develop authoritative content.
Realizing the revolutionary nature of blockchain technology and the existence of a significant knowledge gap among entrepreneurs, industry, and government, Anthony now concentrates his time on creating educational content, researching potential use cases and analyzing the impact of the technology on global industries.
Also published on Medium.