The changing face of insurance

As we hurtle further into the 21st century, it seems that no service industry is safe from "disruption". That's as true for finance as for anything else. Challenger banks are nibbling away at high-street banks. Peer-to-peer (P2P) lenders are bypassing traditional sources of financing. Robots are giving financial advice. But one bastion of old-school practices in the financial industry remains: insurance. High capital requirements and regulatory hurdles make it tough for newcomers to disrupt incumbents, while the dominant players, saddled as they are with cumbersome legacy IT systems, have been slow to innovate.

But this is beginning to change. Start-ups are cropping up all over, offering innovative products such as micro-insurance, P2P car insurance (see below) and "insurance on demand". In the UK alone, says consultancy Accenture, investment in "insurtech", as it's inelegantly called, trebled in the 12 months to August 2016. This investment could "prove more fruitful and more disruptive" than fintech while overall investment in fintech fell from $46.7bn in 2015 to $24.7bn in 2016, says KPMG, interest in insurtech grew "exponentially". Global venture capital investment in insurtech hit $1.1bn last year, up from $590bn.

"There seems to be significant pent-up demand for solutions to the problems challenging the insurance industry," says Murray Raisbeck, insurance partner at KPMG. "There's little doubt investment in insurtech is going to keep booming." Those aforementioned stuffy traditional insurers are investing in start-ups too, says Oliver Ralph in the Financial Times. In doing so, "insurers hope to have an early look at technology that could change the industry, while getting the opportunity to experiment". Aviva has set up a "digital garage" in Hoxton, just around the corner from London's "Silicon Roundabout" area. Meanwhile, rival Axa is putting "more than £3bn into IT and digital developments".

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Big Brother lowers premiums

"Big data", the science of conducting deep analysis of huge quantities of data to find useful patterns, coupled with the "internet of things", the proliferation of sensors capable of collecting said data, will be one of the main driving forces for change. You can already get "black box" car insurance policies, which offer lower premiums for customers who agree to have their driving electronically monitored via "telematics". With more "connected" cars hitting the roads, it's only a matter of time before our driving habits are routinely monitored in this way.

More sinisterly, perhaps, Admiralrecently tried to base car-insurance premiums partly on customers' Facebook postings until the social network barred it. But it's hard to see this trend reversing Google, Amazon and even supermarkets' loyalty cards have shown we're happy to part with personal data if it means we get a lower price.

"Smart homes" can monitor everything from smoke-detector activity to energy usage. Tech research outfit Gartner estimates there will be 500 "smart" devices in the average house by 2022. Accenture reported recently that 44% of insurers believe connected devices will drive revenue growth, and 39% have launched or are piloting "connected building" initiatives using the internet of things. The use of smart devices will also enable a shift away from compensating customers for loss, to preventing or minimising losses, driving up profits across the industry.

Another sector that can make good use of big data is health insurance. Using wearable health monitors to log your activity could cut your premium the more exercise you get, the lower the bill. In the US, UnitedHealth Group has teamed up with chipmaker Qualcomm to give consumers the chance to do just that. In short, insurance is changing fast. If the big players keep up, they will prosper. Those that don't will disappear.

Communist car insurance

"Insurtech" start-up Guevara wants to revolutionise motor insurance. On joining Guevara you join a "protection pool", which can have as few as five members. You can form your own pool with friends, or join an existing one. When you buy a policy you pay a premium, which is split into two.

One part goes to a single collective pot, as with normal insurance, while the other goes into the protection pool. Claims are paid from this pool first, then from the collective pot. Any money left in the pool at the end of the year is used to reduce next year's premium. The idea is that the sense of collective responsibility to your fellow protection pool members will mean that people only claim when they really have to, saving money overall.