Most of us know that taking out insurance is a sure sign of “having your life together” and have some form of insurance for our cars, home, life or funeral. If you don’t, you know you should.
By Sizwe Mase, business development lead at Root Platform
Like a growing number of South Africans, your primary contact with your insurance product is probably through a smartphone app – whether it is an insurer’s app, your banking app or your favourite retailer’s app. With these apps, you can insure items in seconds, get discounts for engaging in behaviour that reduces your risk profile, and process claims immediately.
But what does it take for that app to get onto your smartphone? The answer to that lies in Ancient Babylon.
A long history of shared risk
Insurance is, in essence, a form of shared (or distributed) risk. Everyone who has a policy, contributes to a pool that pays for mishaps covered by the policy. Insurers can take this approach because the chances of everyone crashing their car or having their house burn down at the same time are so small as to effectively be zero (although major events such as the Covid-19 pandemic can push insurers to the brink).
It’s a model that has a long history of working effectively too. The oldest evidence we have of insurance dates back to ancient Babylon. The ancient Egyptians had burial societies (which effectively included funeral policies as part of their services). Even ocean voyagers enjoyed marine insurance as far back as the 13th century.
Insurance has evolved considerably over the millennia, but the broad principle of shared risk remains at its heart.
A complex infrastructure
Contemporary insurance requires a large and complex network of people and technologies to work together effectively.
You need underwriters to evaluate the risk and approve consumers’ applications for insurance cover; actuarial scientists to determine the risk profiles of individual and group customers (and what premium they should pay); claims adjusters to determine what should be paid out; and insurance agents to sell and manage policies.
That’s without getting into other functions such as reinsurers (who insure insurance companies), customer service, and marketing.
Plus, all of this infrastructure has to speak to banking systems to gather premiums and pay out claims.
These roles are all more complex than has been outlined here, but it should be clear that it takes a lot for an insurer just to come into existence, nevermind build the app that you use to insure your new fridge or claim when someone dings your car.
Importantly, insurers also have to guarantee that every person and technology in that chain complies with the laws and regulations governing the industry.
Technology reduces complexity
Fortunately, technology is reducing a lot of that complexity. If you’ve used an insurance app, you’ve probably seen part of that improved simplicity first-hand. Whether it’s insuring a new cellphone, getting emergency help, or registering a claim, the fact that you can do so with a few taps of your screen is remarkable. But that app is just a window for a much broader set of technologies.
For instance, an actuarial scientist is far more likely to program the algorithm that determines your risk profile than to do the calculation themselves. Artificial intelligence (AI) and machine learning, meanwhile, easily filter out fraudulent claims. Your insurer is also likely to have an old mainframe server that houses massive databases, with the basic business rules of insurance hardcoded into the system.
The best insurtech platforms combine those functions and technologies seamlessly, so your favourite retailer can design an insurance product that suits their customers, even though they sell mobile phones, not insurance. That’s what makes it possible for your cellphone shop to offer you insurance against accidental damage from their app (and in the process start a new line of income themselves).
All of this means that insurers can now provide you with a much simpler, easier experience while keeping costs in check.
So, next time you open your favourite shopping app – or insurance app – take a moment to think about how much work goes into keeping it all so simple.