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Insurtech, New Trends and Regulatory Agenda in Japan

Rise of the Insurtech market in Japan

Insurtech, the insurance version of Fintech, has been drawing attention in Japan lately.

Just as Fintech focuses on either customer-friendly financial services by leveraging and analyzing large volumes of behavioral data through network-connected digital devices, thereby achieving financial inclusion, or highly efficient back-end services for incumbent companies by leveraging data generated from day-to-day operations, so does Insurtech. While the collection and analysis of large volumes of data is what risk management professionals in the insurance industry have been doing to date, the current data network infrastructure is insufficient for insurers to collect the data necessary to assess the risks they underwrite. However, as people now share a common image of the next era where everything is connected to the Internet and the status of each thing is collected as data, the insurance industry in Japan has started to become aware that it needs to adapt to the changes.

Similar to overseas markets, the main players leading Japan's Insurtech scene are startups. Fully understanding that their services are woefully incomplete and aim for tiny niche markets, and therefore the incumbents ignore their activities, Insurtech startups are actively conducting trials of their data-driven services to verify their hypotheses and discover new ways of delivering insurance services to customers, with the support of venture capital funds and human networks.

Startups are capable of conducting trials in a short period of time, cost-effectively, with their small company size and simple organizational structure. They know that discoveries are made after conducting a large number of unsuccessful trials, which is the key to dominating the next generation of insurance services. The incumbents are becoming aware of the games that are forced to play out, so they are starting to fear that their existing rivals could discover the "hidden truth" and thereby fall behind them. Threatened by "FoMO", or the fear of missing out, the incumbents are now racing to gain access to the innovations being practiced by startups in exchange for capital and other resources under the name of "open innovation". Such activity by the incumbents leads to the acceleration of discoveries of disruptive business models and the erosion of existing businesses.

2018 is the year that this typical innovation cycle has started to work in Japan's insurance industry, likely one of the most conservative business sectors in Japan.

Just as Japan's financial industry tends to be seen by overseas markets as being enthusiastic in collecting information and learning what's going on, but taking the time to act and conduct trials, so does the insurance industry. Among the industry players, incumbents like the SOMPO and Dai-ichi Life groups started to visibly act relatively early. The SOMPO group created a chief digital officer position in May 2016 and took out the rudder of digitization, top-down in a single stroke. The Dai-ichi Life group also announced in January of the same year its "Instech strategy" to promote open business development.

Fintech in the banking and securities sectors has become a major trend, and existing financial institutions such as megabanks are taking challenges by making new attempts one after the other, such that the insurance industry will be prompted to move just like them. While most of such strategies are not well-promoted to the public, a majority of insurers go for Insurtech and try to place it as a long-term strategy that the management team must bear in mind. As a result, existing insurers set up their bases in incubation offices such as FINOLAB (https://finolab.tokyo/) and Plug and Play Japan (http://japan.plugandplaytechcenter.com/), and collaborations with startups or other IT-based companies are born.

While startups that apply cutting-edge information technology and data-driven business models to the insurance business have been struggling with stringent insurance regulations, as well as fixed and closed industry and supervisory practices, they have started to come up with solutions to bring their proposed business hypotheses into practice. BrainCat (https://www.braincat.live/), which attempts to provide a mutual aid ecosystem to society in a manner different from insurance by leveraging smartphones and social networks, launched its open beta service called "Gojo" in June 2018. JustInCase (https://justincase.jp/eng/), the first smartphone-based digital insurance service provider in Japan, was registered as a small-amount, short-term insurer (SASTI) in July 2018. And on August 1, 2018, hokan (https://hkn.jp/) launched its insurance distribution SaaS system that assists insurance agents with increasing their productivity.

Back-end enabler model

So far, I have shed light onto the relatively flashy Insurtech movement, which people tend to call a "disruptive innovation", but it's not only about this kind of business approach.

As one of the leaders of Japan's startup community, I have been trying to market to the incumbents of the financial industry the idea of the "10x rule" devised by Mr. Peter Thiel, a well-known venture capitalist in the US. Essentially, if any element of a service is improved by 10 times or more than existing services, then it is not a mere improvement but deserves to be recognized as an innovation. If we can do something 10 times faster, 10 times cheaper, or 10 times more efficiently than what we have been doing until now, it will create an overwhelming advantage over competitors and become a driving force to innovate the existing business model. According to this rule, Insurtech does not only sit on the front-end, such as in the form of greatly improved insurance products that use customer data, other sexy services for consumers or SMEs that leverage technologies and data, but there are also huge markets on the back-end of the insurance business that potentially achieve 10 times greater results than before.

As with other types of financial services, the core value of insurance services lies in their precise operation while complying with regulations. In the course of processing the day-to-day operations, an enormous amount of data is potentially being generated. If the incumbents can successfully create a system that converts the day-to-day analog activities of each of their divisions into real-time digital data, collect it throughout the divisions, and analyze it to extract intelligence that would not be possible through an analog operation, then they are able to create within the firm an environment similar to one that front-end Insurtech attempts to create outside of itself. Thus, Insurtech on the back-end will be looking at exactly the same approach as Insurtech on the front-end. In other words, by generating large amounts of internal business data across divisions in a digital format and combining the analyzed knowledge, it is possible to improve the speed, efficiency and accuracy of business processes by 10 times more than before.

Incumbents in Japan tend to see the new technologies just as a means of cost reduction by cutting human resources. By having such a notion in mind, they tend to delegate the introduction of technology to each division, without any strategic thought of collecting data cross-divisionally and utilizing it to achieve a "10x goal". This is the wrong approach, at least within the context of innovation. If incumbents are able to utilize data cross-divisionally and improve their business 10 times better than before, in any aspect, they may be able to positively disrupt the existing way of doing business and gain a great advantage over their competitors. Moreover, the incumbents who can successfully create 10 times better services may deploy them to third parties to keep their services competitive by laying their services open to those outside the firm. Actually, this is how Amazon.com revolutionized the field of server resources and fulfillment services, and now keeps their services competitive over everyone else.

Applying what Fintech has achieved to insurance services

As far as the Japanese insurance industry goes, it would be taken more seriously if the Fintech outcome is incorporated into insurance services. What seems to be worth considering from this point of view for the Japanese insurance sector is the creation of an ecosystem where suppliers of other business areas go through open APIs and insurers attempt to provide better customer experiences in the area of payments, such as the payment of premiums, benefits, and insurance-collateralized loans.

The API strategy will become more important for insurers to provide better insurance experiences in the digital era, given the current small number of touchpoints with customers where only insurance is provided. As a result of the Banking Act reform in 2017, deposit-taking banks have already determined to provide open APIs to other service providers based on the idea that the bank account will become a payment platform in the IoT era. It is true that insurance accounts are not touchpoints that customers access on a daily basis like their bank accounts. However, for example, in the medical and healthcare ecosystem of medical insurance, networks of medical systems such as hospitals and pharmacies and networks of health care systems such as fitness gyms and health service providers are latent fields that are yet to have their full potential tapped. If the insurance sector can increase the number and frequency of touchpoints with customers through an interconnected digital infrastructure built by other service providers and collect meaningful data for providing better insurance services, it will lead to greater innovation in the insurance service industry. The Ping An Insurance group in China is a good example of the feasibility of this type of business model in the digital era.

Improving the customer experience by applying innovative payment solutions to insurance services is another idea that the incumbents should make a reality. Currently, payments of insurance premiums are made only via bank transfer or credit card. Nothing prevents insurers from utilizing other payment methods, except for the need to change their charter documents filed with the regulator, which is a relatively simple, one-time procedure. Another way to enhance the customer experience is to utilize bank APIs in the premium payment process.

What seems to be taken more seriously when considering new ways to deliver insurance services to consumers is the business model under the Banking Act reform of 2017 where account information service providers provide insurance protection to consumers. So-called "account aggregators" have various amounts of financial data of consumers, so they are potentially in a position to understand which types of insurance their customers purchase and when. Since it is technically easy to switch account aggregators with other service providers, they tend to behave under the "customer first" policy. Assuming that they can maintain such a policy, avoid an "over-sell" strategy, and convince each consumer when they really need insurance coverage, then account aggregators can create a new insurance market. Considering the biased decision-making process of humans, it's not easy for people to rationally determine which type of insurance to buy, or switch to, and when. Therefore, a data-driven, personal insurance advisory model in combination with data aggregation services could better assist people with making better decisions when selecting and purchasing insurance, which in turn would help promote a more efficient, free-rider-less society and ultimately have a positive impact on government finances by reducing public spending that would otherwise be needed to assist people who are not covered by their private insurance.

Regulatory agenda

As most of us are aware, the open insurance business model that utilizes external data in cooperation with other industries was not foreseen when the existing insurance regulations were written. Thus, by attempting to realize just such a model, the industry will have to confront a number of regulatory barriers that inhibit the players from deploying new models. Even if the regulations themselves do not prohibit this, it is easy to assume that closed industrial practices, which have excessively adapted to the current business model, will hinder the realization of new models. However, it is not right to simply stick to the existing rules and practices developed in an era when the current technologies did not exist and have the entire society miss the opportunity to provide better customer experiences and make the community more efficient. From a customer-centric perspective in the IoT era, the regulatory, industry and supervisory practices must change. This is a common value that must be pursued by the industry, even if the changes may impact the existing insurance business, and even if monitoring activities by the supervising authority become more complex and difficult.