In March 2017, the expression “financial inclusion” hit its peak popularity on Google.
This is excellent news. There are over two billion unbanked individuals in the world today – people with no access to banking services. This is a global problem. In India, 19 per cent of the population – 1.2bn people – is unbanked, according to a joint Assocham-EY study, while 22 per cent of adults in Poland do not have a bank account.
Financial services providers reward those who are already part of the system, and fail everyone else. The issue is exacerbated in the developed world by a behavioural shift among the millennial generation, which does not see the need for traditional banking at all. Some 63 per cent of adult millennials don’t have a credit card, according to research firm First Data.
It is imperative, therefore, that incumbent providers start to rethink their models
Take loans and mortgages. Historically, providers look at credit histories to determine whether to lend. Yet the young graduate with great potential but no credit history will not fit this mould. Firms like German startup Kreditech are recognising this and lending based on online data rather than a traditional credit history.
But there is a huge piece of the puzzle missing in current discussion: insurance. Many insurance products are simply too expensive for swathes of the population. Here in the UK, research from Aviva shows that, out of people living in rented accommodation, three in five have no household insurance. That is 5.5m households without cover.
And there is another reason why now is the time to think about insurance.
Although the traditional cost base has, unlike in certain areas of banking, not yet gone through a complete digital transformation and become low-cost, the industry is about to be hit by a tsunami: blockchain technology.
Blockchain and smart contracts could improve sector efficiency by up to 30 per cent, according to blockchain insurance industry initiative B3i.
Blockchain will make the cost of reinsurance processes and claims cheaper.
The currently expensive offline process of selling to the high-net-worths and family offices that fund reinsurance and allocating a portion of a portfolio to investors will be replaced. Secure, automated distribution and payments will be held via blockchain and triggered by smart contracts. The premium is paid, and the reinsurer gets their share immediately.
Now imagine if people were paying premiums in cryptocurrencies. Theoretically, you could have seamless payments from policyholder all the way to reinsurer. The conventional relationships between insurer, reinsurer, managing general agents and brokers could collapse.
Lower operating costs mean cheaper solutions for customers – which means greater financial inclusion.
Blockchain is still nascent across the insurance arm of the financial inclusion landscape, although startups like Black Insurance and iXledger are utilising it for things like transferring risk away from clients, and trading insurance products. But other technologies are already enhancing access to products and services by invoking models that actually take into account people’s lifestyles and circumstances.
A big step forward is the rise of pay-as-you-go models. My own firm, PremFina, enables brokers to offer finance to their clients, removing the need to make a lump sum payment on an insurance policy – in the same way that a mortgage allows people to purchase a house. Rather than having to pay out in one go for one policy, this means you can afford multiple policies, allowing you wider coverage, at a given moment in time.
This is a crucial moment for the insurance industry. We can choose to innovate around the products and services we offer, ensuring that they are customised to suit the lifestyles of consumers. And finally, we can choose to pass on the savings technology will bring to the end customer.
We ignore the challenge at our peril: if incumbents don’t step up, new entrants will.