What is insurtech? The future of insurance, technology and finance explained

How insurtech works

Insurance is a contract between an insurer and the insured (a policyholder). The insurer will guarantee payment for an uncertain future event, such as a flood, car accident or death. In return, the insured pays a smaller premium – usually in monthly or annual installments – in exchange for that possible future protection.

That’s where insurtech comes into play. The term is inspired by fintech, which is a technological innovation in finance.

In most cases, evolution in technology leads to lower costs and higher efficiencies. For example, the various bank alternatives that have emerged in the fintech space make life easier for mass consumers, whether through personal finance, investment opportunities, cybersecurity or methods of exchange like blockchain. Insurtech aims to do the same thing, making the insurance industry more accessible and smoother for customers and businesses alike. 

Consumers are more and more comfortable sharing financial information and doing transactions online. They are also savvier about their insurance options and expect to be able to compare alternatives in a simple and trustworthy way (we encourage policyholders to do thorough research and review their policies every six months).

There are obvious benefits for insurance companies as well in creating partnerships with insurtech startups. One report estimates that digitizing existing business could double business for large incumbents in five years^[2].

Just as in fintech, smart insurance companies will look to collaborate with insurtech on their insurance products. So, how is insurtech reshaping the insurance industry? A few major insurance solutions include the IoT, machine learning and generative AI.

Internet of things (IoT)

IoT is a network of internet-connected devices that transmit, collect and share data. This can include wearables, smart home devices and telematics devices that people put in their cars. This can improve their insurance pricing by providing real-time data on how they drive.

IoT-connected insurance uses the data from IoT devices to improve understanding of risks. For instance, drones can access remote areas and easily run advanced aerial image analysis, giving insurers a clearer picture of affected areas without needing to physically send someone to the area.

This enhanced data means insurance companies can provide a better overall experience for their customers, such as tailored premiums, personalized service and faster claims management.

Machine learning

Of course, having all of this data is only useful if companies are able to analyze it properly. That’s where machine learning comes in – algorithms can quickly identify patterns and trends and provide insights on customers and potential risks. For example, machine learning can help with:

• Claims processing. Vehicle data can identify something like an aggressive brake or harsh turn, which helps provide a clearer picture for crash scenes. Telematics, for example, have been a revolution in big-data for more accurate insurance policies. As a result of better understanding driver behaviors, car insurance companies can process claims more quickly and efficiently. 

• Risk modeling. In the past, insurers had to craft policies based on very rudimentary data on the policyholder and their vehicle. But thanks to machine learning, algorithms can now create personalized risk profiles. If a driver regularly speeds, that gets factored into a company’s risk model. 

• Underwriting. Insurance companies can do things like outsource their underwriting to computers, allowing them to focus on improved customer service or offering special features for loyal policyholders. 

• Detecting fraud. A company like Shift Technology uses machine learning algorithms to highlight suspicious claims from large datasets, improving its own pool of data.

Artificial intelligence

AI, and particularly generative AI that goes far beyond predictive analytics, is having its heyday right now across many industries, but particularly insurance. It helps that AI is playing a larger role in cars themselves. With advancements like connected cars, autonomous vehicles and ride sharing apps, there’s plenty of room for insurtech to make its mark.

For example, the auto insurance company State Farm’s Drive Safe & Save feature uses AI to analyze in-car camera feeds, providing feedback on any unsafe behavior. Couldn’t wait to answer that text until you got home? Your car will know about it, and your insurance will be affected.

Insurtech companies offering AI can help with everything from:

• Fraud prevention: Flagging behavior that could be fraudulent to be given a closer look by licensed agents.

• Tailored products: Offering products to customers when they need them.

• Smarter claims processing: Streamlines the process of filing claims

• Risk reduction: Analyzes data to speed up underwriting

Why is insurtech important?

Plain and simple: Insurtech improves the customer experience. In the past, insured parties had to deal with salespeople driven by earning commission, not getting individuals what’s best for them. There was also a large volume of paperwork, and the entire process could take weeks, or even months. That’s all changing thanks to insurtech – insurance and other financial services are becoming more accessible.

Policyholders can now research options and even purchase insurance online. Through the internet and apps, individuals can compare and find what works best for them. No need for mountains of forms, insurance professionals or setting foot into a physical business.

Additionally, rating factors are becoming more about the person and less about the money. Thanks to things like the IoT, AI and machine learning, companies can better segment policyholders based on their actual driving habits, rather than more generally. That can also mean lower premiums, or at least ones that more accurately reflect you as an individual. This is true in home insurance and life insurance as well.

Finally, insurance is cheaper, both for insurers and policyholders. That’s typically true of traditional insurance, but we’ll expect to see more “short-term” insurance models, too. For example, coverage for a two-day weekend trip to a city three hours away should cost less than a monthlong excursion into an Australian volcano. Likewise, if you don’t have insurance and just need to borrow a friend’s car to pick something up, it wouldn’t make sense to invest in a six-month plan; you’d only need something like an hour or two of coverage. Insurtech is improving the flexibility of a traditionally monolithic industry.