Fintech, insurtech and Asian institutions – a match made in heaven?

The following is an opinion piece written by Philipp Kristian Diekhoener. You can find out more about Philipp here.
 
A game designer, hipster and digital nomad meet in a boardroom. No – this is not a joke. Insurers are increasingly bringing customer experience focused talent from startups and major tech giants in to work in their newly established digital and innovation functions. In essence, they are building pockets of inspiration into a heritage structure. It’s a two way street – many insurtechs are founded by industry veterans that have left their safe, well-paying jobs and are looking to introduce a breath of fresh air into the industry.
 
This dynamic is rather new for finance. While mobility across industries is reasonably common, talent movement between startups and corporates is definitely a more recent phenomenon in Asia, especially for fintech. In the ideal case, it will help the innovation community and its change makers across organizations of varying shapes and sizes grow closer together. The same can be said of start-ups and corporates as entities. As per a recent report, 50% of VC funding volume in SEA can be traced to corporate VCs. While these are most likely involved in more late-stage deals, there is an evident trend of corporates getting more involved. Start-up accelerators (however critical we may want to be of them otherwise) have done much to foster this proximity.
 
In my view, fintech start-ups and financial institutions in Asia are increasingly coming to the realization that they benefit more from collaborating, rather than competing. The rationale in this region is particularly clear given the vast population of unbanked customers existing institutions hardly reach today. Apart from such untapped customer potential, strict and disparate regulation in the region also offers strong use case for mutual benefit partnership between licensed institutions and newcomers. Specifically, this calls for innovative operating approaches, such as e.g. institutional license-sharing with startups. In some Fintech verticals, the risk exposure that comes with running a financial services business serves as a perfect rationale for forming symbiotic relationships between disruptors and established players. Insurtech is a perfect example of this. For instance, take Slice[1] and Munich Re, or Lemonade and their liaison with Berkshire Hathaway and Lloyd’s of London[2].
 
The more startups explore creating actual financial (especially insurance) products, the more potent and widely prevalent these mutual beneficial partnerships will become. Also, more talent will circulate freely between incumbents and challengers. On a macro level, start-ups and corporates in fintech and insurtech in particular are becoming aware of their co-dependency and increasingly finding ways to make the best of it for the time being. Some companies go as far as making the partnership approach the core part of their business model, delivering their value proposition for a B2B2C context in which a startups’ customer-facing product is offered to the end user through financial institutions, such as to their existing customer base. This can be a very effective approach for managing regulation and also reaching scale quickly via large existing pools of customers that have already been through KYC.
 
Considering these developments, the reputation of financial services as a lethargic industry seems to be in need of an update. The extent of collaboration occurring at the moment is almost antithetical to what public perception has made of banks in post-GFC years. Good call – globally, FIs are estimated to loose close to $5 trillion in revenue to Fintech companies[3], so the enthusiasm to collaborate may in part have to do with a well-developed survival instinct. Overall, it is very encouraging to see a mix of entrepreneurs and intrapreneurs building better financial customer interfaces, products and systems –most importantly, seeking to better understand each other.
 
To sum up the most important dynamics between old and new financial players, we are nowadays seeing a dynamic movement of talent, mindset and ideas – probably like never before. Finance may be experiencing a digital equivalent of the enlightenment age with broad implications on how business is done and who is involved. Insurance, a vertical within finance that has been hesitant a little late to the innovation party, is possibly facing the most fundamental threats and opportunities. P2P insurance models have begun to demonstrate that risk pools without an intermediary like an insurance company are far from utopia. At the same time, insurance is blessed. Even though it sells an intangible product with no visible benefit until the moment a claim is made, people are actually willing to pay for it. Many industries that sell intangible products struggle a great deal with monetising. Think Netflix or Spotify – for the asking price of a few dollars a month, both really offer a great deal of value that is available to be enjoyed instantly. It’s the same story with apps, and the apparent reason is that people believe that certain things should be free due to a psychological factor referred to as anchoring.[4] Even banks tend to struggle with monetization, as most transaction banking services are either free or available at very low cost. Fortunately, insurance does not have this issue. Perhaps that is why the insurtech domain already attracting in excess of 1bn$ in venture funding in the first half of 2016.[5] Insurtech is on its way to be a major fintech domain, and the reason for it is obvious when we remind ourselves what the industry is all about. Insurance essentially secures financial value (e.g. a life, a holiday) by transferring risk to an intermediary that agrees to pay the buyer in case risk materializes and results in loss of value. In exchange for this promise, insurers receive a premium that people are usually very willing to pay. It exists to safeguard our financial present a future, basically.
 
When we look at the essence of fintech and why we find value in it, it is not much different. Fintech companies seek to provide better financial services, i.e. to maximize the financial value we retain and receive in our lives. Start-ups tend to achieve this by focusing single-mindedly on a specific customer need and offering an ideal solution to the market at a more reasonable price point than incumbents. The notion of fintech is largely based on startups individually doing the best possible job at providing a single service – such as automated investing, education loans, motor insurance or remittances – and this is a great approach for a startup to enter the market and change the rules of the game. On the other hand, it really only solves one small wedge of customers’ overall needs. The moment we see the big picture, we come to appreciate that even the average financial customer will need much more than one specialized fintech service to have their needs met. Most of us would need to use a variety of fintech services provided by many different startups to take care of all our financial needs. This is a great user inconvenience to solve and a tremendous market opportunity that has not been adequately met in this part of the world. We will basically be seeing new types of service aggregators consolidate fintechs that cover a range of functionality into one experience and customer proposition in the digital realm.
 
Life insurance companies, as you may be surprised to find, would be in an excellent position to focus on providing such a holistic value proposition. Traditionally, life insurance products play an important role in a person’s overall financial planning process. Insurance products that can be used for financial planning are also popular among wealth managers. Wealth management and life insurance both have a mandate to take into consideration a persons’ overall financial health. Life insurance companies tend to have both functions under one roof – thus, a financial planning one-stop-shop would be a very ‘ownable’ territory for them.
 
Make no mistake – in order to seize the opportunity, life insurers will need to think very differently about the business they are in. If we were to reframe their purpose from being a financially stable and dependable provider of long-term, big-ticket financial products to becoming a single place for people to take care of their present and future financial health, the industry would future-proof itself in a highly effective and relevant way. This would involve proactively seeking to form partnerships with a range of market-leading startups who each contribute a small piece and technology to the overall proposition – roboadvisors, digital investment advice platforms, equity crowd-funding sites, direct life insurers, P2P lenders, digital banks, AI powered risk underwriters (once they come to exist in Asia), and so forth.
 
Overall, we should be highly optimistic about the present and future interactions between startups and financial institutions in Asia, especially in the domain of insurtech. Both sides have a long way to go in terms of assimilating. Tremendous potential awaits progressive entrepreneurs and intrapreneurs who are resourceful and realistic about finding natural connection points that create mutual benefit. Wealth management and life insurance in particular should see an exciting wave of transformational startups and business propositions emerge in years to come.
 
The preceding article was an opinion piece written by Philipp Kristian Diekhoener, and does not necessarily reflect the views of Insurance Business. You can find out more about Philipp here.