New regulatory oversight and advances in insurance technology are rapidly changing the way Hong Kong-based insurers sell insurance, assess risk and detect fraud. Liana Cafolla reports
Illustrations by Roberto Cigna
For centuries, the insurance industry was a heaving, slow-moving behemoth best known for its archaic processes heavy on paperwork and small print and light on innovation and ease of use. Now, insurance is experiencing a foundation-shaking overhaul of the like seldom seen in established industries.
New technology and regulation are changing the ways insurance companies sell insurance, assess risk and detect fraud, and in the process are transforming the industry into a more user-friendly, efficient, responsive and altogether sleeker version of its former lumbersome self.
Insurance technology, also known as InsurTech, is a branch of FinTech. InsurTech uses big data and analytics to find and build efficiencies and savings for insurers and their customers. The bank UBS in a recent report, Shifting Asia: InsurTech, said that “customers will be the biggest winners of InsurTech, benefitting from better services, greater convenience, cheaper premiums and more personalized solutions. Insurers will gain not only greater cost savings but also enhanced perception and reputation.”
The industry is ripe for reinvention and the impetus for change is clear. According to the PwC Global FinTech Survey 2017, insurers have suddenly woken up to the potential of technology such as blockchain, which can be used to automate claims processes, streamline data collection and payments to improve underwriting, and allow for better monitoring and transparency of exposures and claims processes. In 2016, just 17 percent of respondents said blockchain was a very important innovation trend, now 68 percent of insurance participants expect to adopt blockchain as part of an in-production system or process by 2018.
In Hong Kong, added impetus for change came in late 2016, when insurers lost a lucrative customer base in Mainland China following crackdowns by the China Insurance Regulatory Commission on direct or proxy sales of Hong Kong insurance products to Mainland customers. Sales of life insurance policies in Hong Kong to Mainland buyers totalled HK$49 billion in the first nine months of 2016, almost 40 percent of all life policies sold in the city, according to government data reported in the South China Morning Post [16 June].
In addition, along with other parts of the financial services sector, insurance suffered a loss of customer trust following the financial crisis, and consumers began to look for more transparency. At the same time, technology was moving choice increasingly into consumers’ hands through innovations such as the smartphone, the sharing economy (e.g. Uber, Airbnb) and comparison shopping websites.
“A gap was created between what consumers came to expect and what banks and insurers would provide. And that gap is what the FinTech industry is tackling right now,” says Henri Arslanian, PwC’s FinTech and RegTech Lead for China and Hong Kong. “There are different models – some insurance companies are building their own tech solutions, others are partnering with existing InsurTech players, and some are investing in start-ups.”
Reinventing the industry
Partnering with InsurTech start-ups can solve headaches for insurers looking for hard-to-find talent and technology. According to PwC’s survey, 87 percent of insurers have trouble finding the right tech talent. “Partnering can assist incumbents to meet changing customer needs and target new segments, for example, pay-as-you-use insurance,” states the report.
These partnerships can also lighten the burdens of legacy IT and company cultures faced by many insurers trying to integrate innovation into their existing operations.
“There are different models – some insurance companies are building their own tech solutions, others are partnering with existing InsurTech players, and some are investing in start-ups.”
In developing Asia, the insurance market is immature. In 2016, Asia accounted for 43 percent of the world’s population, but just 13 percent of total premiums, according to UBS’ report. Asia is also a highly tech-savvy region where consumers are keen on fast, digital solutions. As the size and wealth of the region’s middle class grows, InsurTech can attract business by empowering these customers to quickly compare and choose products on their phones and pay for them instantly. “If disintermediation occurs and people buy direct from insurers or can choose from and compare a variety of insurers, it becomes more of a demand-led business where the insured is driving the market,” says Padraig Walsh, Partner at law firm Bird & Bird, who focuses on FinTech.
In Hong Kong, there is a new regulator, the independent Insurance Authority, which says InsurTech is one of its main priorities, and is encouraging insurers to make changes.
Data collection and analytics
Wearable devices and smartphone apps are increasingly popular with consumers and insurers, especially in the healthcare and wellness space. Devices include bracelets that count the calories burned during a workout, patches that monitor heart rate and blood pressure, and apps such as Inithealth, a Spanish start-up, which allow customers to monitor and manage their health through mobile, online or wearables. Customers can use the data to improve their health and fitness levels. Insurers use the data to find out customers’ needs, habits and preferences before offering them personalized insurance options.
“When you see health insurers investing in wellness or health apps, they’re not doing it out of the kindness of their hearts,” says Walsh. “There is a business reason. It gives them access to data that allows them to price risk better.”
Another example of how InsurTech is changing the industry is the launch of the first blockchain platform for marine insurance, which will start operating in 2018. The platform was developed by EY and software security company Guardtime in collaboration with A.P. Moller-Maersk, the world’s largest container shipping line, and other partners. It will allow information and data about identities, risk and exposure to be shared between Maersk, brokers, insurers and third parties, which can then be integrated into insurance contracts.
The platform will be able to “create and maintain asset data from multiple parties, link data to policy contracts, receive and act upon information that results in a pricing or a business process change, connect client’s assets, transactions and payments, and capture and validate up-to-date first notification or loss data,” according to EY.
The technology will bring practical benefits to shipping companies, which often have limited information on the exact whereabouts of their ships and the content of containers.
“With advance technologies and various tracking devices on the ships and cargos, insurers participating in the blockchain platform could have access to real-time data, which will help to streamline the claims process and make it more transparent,” says Jonathan Zhao, EY Asia-Pacific Insurance Leader.
Individual parties in the blockchain will only have access to the information that’s relevant to them to ensure that data privacy is protected, adds Zhao.
“Overall, we’re always questioning what exactly all this new technology can do for us,” he says. “Blockchain has been talked about a lot in the insurance industry. In this case, and in this context, there are specific reasons that this will add value to the industry.”
Elsewhere, blockchains have uses in specific areas such as smart contracts, says PwC’s Arslanian. While traditional contracts set out terms and conditions of cover, smart contracts go further by, for example, verifying whether conditions have been met and then executing pay-outs. “A very basic example could be say if someone dies or there is a covered event that takes place, then the smart contract policy could automatically trigger payment of the coverage using cryptocurrencies to the specified beneficiary.”
But the technology is not yet ready for widespread use, he cautions. “We can see its potential, but we’re still at the early days of a very long transformative cycle.” Immutability is the core characteristic of a blockchain, but an inability to modify conditions could become problematic if external events change. Nor does the use of a blockchain safeguard against non-data related fraud, noted KPMG in a recent blogpost “Five blockchain myths that just won’t die”. The immutability of data on a blockchain “provides little protection against someone putting something on the blockchain that should not go on there – for example a land transfer that a seller is not entitled to sell,” KPMG wrote.
New technology can streamline work in compliance departments, where paper-heavy and labour-intensive practices are still typically the order of the day, and also cut what are typically some of the heaviest costs in any financial services firm, says Walsh of Bird & Bird.
“Some of the things coming through in regulatory technology (RegTech) will be blockchain platforms and applications that will ease know your customer (KYC) processes in terms of making it easier for financial institutions, including insurers, to know and verify the identity of people and all sorts of other information and data about them,” he says. “That could eliminate a lot of the costs of that department.”
InsurTech in Hong Kong
Insurance company FWD and insurance platform GenLife are well advanced in using InsurTech to differentiate their services in Hong Kong.
FWD, the insurance arm of investment group Pacific Century Group, plans to invest about US$500 million in InsurTech in the next five years in three main areas: Internet of things, mobile and big data analytics.
“We are a pioneer in developing digital commerce for insurance and ‘gamifying’ our interaction with consumers,” says Paul Tse, Chief Marketing Officer, FWD Hong Kong and Macau.
In its effort to be more consumer-friendly, FWD’s innovations highlight the ways technology can be used to encourage better behaviour. Its Drivamatics mobile app, for example, launched in 2016, tracks drivers’ behaviour and allows the company to better assess risks, and rewards safe driving habits by offering premium cash rebates of up to 30 percent. The app has been effective in changing behaviours. So far, data on those using the app for six months shows speeding is down by 12 percent, brake-slamming down 27 percent, and phone-use while driving has dropped by one-third.
“These data are very useful for us to tailor-make flexible insurance options and incentives, and merchant offers for customers with different lifestyles and habits,” Tse says.
GenLife is an artificial intelligence (AI) company with operations in Palo Alto, California, and Hong Kong, that creates research and development (R&D) capabilities for insurers using AI and blockchain, with AIA as the lead investor. Chief Executive Officer, Chairman and Founder Steve Monaghan sees machine learning as the most transformational aspect of InsurTech. Machine learning has been defined as the development of computer programs that can access data and use it to learn for themselves without being specifically programmed to do so.
“With machine learning, you really need vast swathes of data, so we’re setting up as an R&D group and building a network of insurers and working with their primary data set to become the leaders in risk and distribution,” says Monaghan. His service enables insurers to plug into his system to take advantage of new technology such as AI without changing their existing technological infrastructure. “AI has enormous potential in insurance, but it is very hard to superimpose AI on legacy systems that weren’t designed for AI and high-velocity data,” he told UBS.
Faster change is already possible in the insurance industry through the use of existing technology that enables disintermediation, says Walsh, such as websites that allow consumers to compare similar products from different providers and robots that answer customer queries. “All of that technology is there, easy and can happen organically.”
But the technology could also lead to less desirable outcomes, notes Walsh.
“With many more sources of data available to them, in some cases, could it lead to a case where insurers say, this person is simply too risky to insure?”
The view from the regulator
The establishment of the new independent Insurance Authority (IA) complies with requirements of the International Association of Insurance Supervisors that insurance regulators be financially and operationally independent of the government and industry. The aims of the IA, which started work in June, are to modernize the industry’s regulatory infrastructure and improve protection for policyholders.
The IA will facilitate the use of new technology and ensure that policyholders’ interests are adequately protected, says John Leung, Chief Executive Officer of the IA.
“We are technology neutral as a regulator. We would let the market drive these changes.”
He says wearable devices and mobile apps can “encourage their customers to participate in a health and lifestyle management programme. That’s a value-added service for the clients, not just taking out insurance.”
Technology can increase efficiencies by streamlining claims processing, allowing for e-onboarding of customers and enabling them to buy products such as simple life insurance policies online. This can improve the customer experience and create cost-savings for insurers, he says, while blockchain technology can help insurers fight fraud.
“The Hong Kong Federation of Insurers is working on an insurance database for motor claims, employee compensation, medical insurance etcetera, that makes use of the latest technology including blockchain,” says Leung. “If all the insurance companies cooperate, they can build up a database which would help them to spot fraud. That’s one area that is a challenge and also an opportunity.”
The IA says only very few insurers are considering a move to online-only services, and concerns that this will lead to job losses for brokers and agents are overblown. “If insurers all go online, then there’s no use for intermediaries. But it is over-worrying – overseas, for example, complex life insurance products still require face to face advice.”
Insurance is an important business in Hong Kong. As of 30 June, there were 761 insurance brokers, employing 8,939 registered chief executives/technical representatives and 65,613 appointed insurance agents. The IA expects that the new licensing regime to be introduced in 2019 is unlikely to greatly impact the number of brokers.
“I would expect most if not all current practising intermediaries would continue to be qualified under the new regime,” says Leung. “We are not raising the bar that much. New licensees may have to meet some additional requirements.”
That is likely to mean that Form 6 education would be needed as a minimum requirement to join the industry, rather than Form 5 at the moment. This is a result of changes to the Hong Kong education system, he adds. ◆