Financial Technology (FinTech) has shaken up the financial services industry in recent years, with innovation seen across the market in a variety of spaces. However, one area that is yet to fully embrace the opportunities created through digital technology is insurance. Insurance Technology (InsTech) is increasingly a hot topic, with many predicting its inevitable emergence into the mainstream. The London market, the leader in global insurance, must embrace this change or risk losing market share to the increasing global competition. London may also have the most to gain from the technological innovation that InsTech will provide, as it has thus far been slow to bring its infrastructure up to 21st century standard. InsTech offers a great deal to those willing to take on the challenge of modernising the London market; however, early adoption is key to reaping the benefits and preserving London’s place in the global insurance hierarchy.
The FinTech 100, a report released at the end of 2015, listed the top 100 FinTech companies across the globe. Whilst commendable for those listed, only 7 companies on the list were categorised under insurance. So, why is it that insurance is under-represented on this list in comparison to companies dealing in payments, lending, and wealth management? The answer lies in the difficulties facing the insurance industry, especially the leader in global insurance: the London market.
These challenges include:
- Increased regulatory capital requirements;
- Attaining better data to more accurately evaluate risk; and
- High operational expenses.
When considering smaller, innovative companies that bring new products and services to the insurance market, raising enough capital is a major issue. Solvency II came into effect on 1 January 2016, a major provision of which requires insurers to hold more capital (based on a robust ratio) to prevent insolvency, thus protecting policyholders. While this will promote confidence and security in insurance, the capital requirements create a high barrier of entry for those looking to enter the market. London’s unique insurance environment adds to this market wide challenge, as higher taxes and stricter regulations have the knock on effect that companies will look to do business elsewhere: innovation and market share moving away from the UK, around the globe.
In 2013, the London Market Group, a market wide body dedicated to maintaining London’s lead in global insurance, published the report London Matters – The Competitive Position of the London Insurance Market. The report highlighted the then-current state of London’s insurance market, including some major issues London faced. Among the issues outlined in the report were:
- London-specific market requirements, causing a barrier to entry;
- High expense ratios, creating a disadvantage in pricing;
- Lack of presence in emerging markets; and
- Declining market share in reinsurance.
The report pointed out that not only regulations, but also the infrastructure and existing processes were creating higher costs. The London insurance market as a whole was still using manual processes and paper documentation in back-end operations between brokers and insurers. The cost of dealing in paper, slow distribution of information and lack of organisation all contribute to high inefficiency and high costs.
If no change is made, London risks losing its dominant position in global insurance to rising competitors such as Bermuda and Singapore, which offer alternative insurance centres with notable advantages in their respective regulatory and tax environments. Additionally, competitors in these locales have early-on embraced the introduction of new technology into insurance, explaining why London has already seen decline in market share.
Solutions and Opportunities
New products and solutions that some InsTech start-up companies have implemented include:
- Tech products underwritten by larger insurers;
- Crowd funding insurance;
- Peer-to-peer insurance; and
- Broker, insurer, underwriter central platforms.
These solutions mirror the type of products and services FinTech companies implemented at the beginning of the technology wave in finance. On a broader scope, the London Market Group has drawn up the Target Operating Model (TOM) which intends to modernise the market as a whole to benefit policyholders, brokers, and carriers. A consultation on the TOM has begun (findings are due to be published at the end of March) but it is clear that the emergence of technology in insurance is not only an opportunity, but absolutely necessary. Among the themes identified in the TOM, are the implementation of an electronic notification platform between brokers and carriers, a central platform for information storage and distribution, and the ongoing development of electronic claims filing. These are but a few of the initiatives laid out under the TOM, all meant to move the archaic infrastructure and processes of the London insurance market into the technological age.
Insurance is the next logical place for a technological upheaval to occur, and those first to jump on the opportunity will see the results. The market is beginning to see some new companies that offer products and services that change the way people use insurance, for both providers and customers. The London market has already responded to the need to re-evaluate current practices in order to cut costs and to remain the leader amongst growing competition, but it is the execution of this market renovation that is crucial to future success. The challenge lies within the task of overhauling a market weighed-down by old processes and stubborn inefficiencies, while simultaneously competing with challengers that face fewer obstacles. The landscape in which InsTech currently resides is reminiscent of that of FinTech in 2012 and similarly, the winners will be those willing to embrace and implement innovative, pragmatic ideas. London cannot afford to remain left behind.
 FinTech Innovators. Fintech 100: Leading Global Fintech Innovators Report 2015.; 2016. Available at: http://www.kpmg.com/AU/en/IssuesAndInsights/ArticlesPublications/Documents/fintech-100-leading-innovators-2015.pdf. Accessed February 11, 2016.
 London Market Group. London Matters - The Competitive Position Of The London Insurance Market.; 2013. Available at: http://www.londonmarketgroup.co.uk/index.php/market-reform/latest-news/713-london-matters-the-competitive-position-of-the-london-insurance-market-. Accessed February 11, 2016.
 London Market Group. TOM.; 2015. Available at: http://www.londonmarketgroup.co.uk/index.php/current-resources/tom. Accessed February 11, 2016.