Topic Fintechs InsurTech: Innovative new companies create a stir in the insurance industry
The insurance industry's core processes have been changing steadily over the past few decades. From consulting, sales and distribution, and underwriting to portfolio management or claims settlement, little by little digitalisation has come to affect every major part of the industry. Today, the speed and intensity with which data can be analysed allows for a more risk-based setting of tariffs and the possibility to address target groups more precisely than was possible a few years ago; meanwhile, online tools and software applications have become part of the service strategy.
Although the digitalisation of the insurance industry has been progressing steadily, for some time now a new wave of innovative start-ups have been making a name for themselves, stirring up fear of a disruptive change in the industry and generating a great deal of media interest: "InsurTech" companies, a type of the so-called FinTech companies specific to the insurance industry. By using digitalised processes and exploiting the competitive advantage that these entail, these companies are trying to establish themselves on the market at various different value-added steps, and are thereby increasing the momentum of digitalisation. As they are able to do this without being tied to existing products, systems, structures and staff, they promise to be more efficient than established providers.
Risk-taking culture versus long-term claims
Start-ups are generally known for their high entrepreneurial risk, innovation and agility. Some of these companies manage to hold their ground in their market, while others fail, and then sometimes learn from their mistakes and try again. This culture of risk, trying out, failing, and starting again is difficult to reconcile with the insurance business, where the focus is the policyholders and their insurance policy claims, which are sometimes set out for very long periods of time. These claims must be fulfilled – at all times.
For this reason, the legislator has set high requirements for the authorisation of insurance undertakings. InsurTech start-ups are therefore usually founded along the value chain, where they are not under BaFin's supervision. For example, insurance intermediaries must be recorded in a register held by the German Chamber of Industry and Commerce. InsurTech companies can cooperate with established insurance undertakings as comparison portals, digital intermediaries and contract administrators. This reduces the barriers to entry, but also the degree of innovation.
InsurTech companies and supervision
As is the case with "FinTech", there is no legal definition of the word "InsurTech", which means that this term is given different interpretations and there are no consistent data on the number of these companies. InsurTech companies come under insurance supervision when they act as risk carriers and thus require authorisation. So far, only two InsurTech companies have applied to BaFin for such an authorisation.
In ongoing supervision, BaFin does not make a distinction between established insurance undertakings and InsurTech companies. The principle of proportionality applies to both.
In response to the new market participants, established insurers need to make fast business decisions, such as investing in systems infrastructure, for example. However, they need to ensure that they first analyse the risks of each decision and manage such risks taking into account the risk-bearing capacity of the company.
Advantages for the market and for the consumer
In principle, InsurTech companies can help to encourage transparency and competition for the consumer. This is because new market participants increase the pressure on the industry to optimise processes, systems and products. BaFin welcomes this development, not only because of the benefits it brings for the consumer, but also because it will strengthen the competition and stability of the German insurance market in the long term.
BaFin does not consider the core insurance business to be affected by the new providers on the market. In the long term, insurance is more than just the ability to react quickly and innovatively to the market. If an InsurTech company wishes to conduct insurance business, it needs to have a strong desire to be seen as an established and stable insurance undertaking in the long term. Even in the Digital Age, insurance still relies purely on a very traditional value: trust.