Insurance carriers and banks are often called in one breath. Bill Gates once said "banking is necessary, banks are not". That promise has not yet been fully fulfilled. However, what we see is that banks are increasingly beginning to resemble technology companies, and more and more new technology companies are beginning to focus on bank products like payments, p2p loans, and auto-investment. Just think of Venmo, Funding Circle and Betterment.
At Gavin we think that the same will apply to insurers ... insurance is necessary, but insurers are not. Obviously, insurers will not disappear from one day to another. However, there is a number of developments that will cause insurance carriers to change radically from within.
The first development is the decline in transaction costs due to increasing competition and technological innovations. As a result, it will become less expensive to charge customers. This means that we can move in the direction of real-time collection of the actual costs of insurance, namely claim amounts that have been paid out and the ones still outstanding. The small tail risk can then be reinsured or simply be carried by the insureds themselves. Yet, this possible development has not yet been embraced by traditional insurers.
The second development, related to the first, is that the need for solvency capital decreases. If claim amounts can be collected in real-time, why would it be necessary to maintain solvency capital? In essence, it is not efficient to let a customer pay a monthly premium, which the insurer subsequently invests in a fund or fund-to fund, to then take out this amount and reimburse someone with a loss. This asset management approach to insurance involves unnecessary costs.
If claim amounts can be collected in real-time and there is almost no solvency capital, can we still speak of an insurer? Or has technology replaced the insurer? In any case people continue to want protection against risks. This will not change. So: insurance is necessary, but an insurer is probably not.
The beginning of this development can already be seen. At Gavin we apply this model to telephone insurance, bicycle insurance and travel insurance. Small, non-life insurance lends itself the best. But why could this model not be applied to, for example, car insurance? A sufficient number of customers allows to cover such risks as well. The same goes for life insurance.
It is still to be seen how fast things will go. In any event, it is a development that will benefit customers, as there will be a wider range of products available and costs will go down. The first example of this movement being Gavin and its new model for insurance.
Insurance is necessary, insurers are not.