Danielle Cripps, an analyst in the general insurance team at Verdict Financial, explains why a new concept by Insure A Thing, a new InsurTech start-up that only charges customers after claims have been notified, has the potential to disrupt the traditional operational model of insurance.
Insure A Thing is a new UK-based start-up that is challenging the traditional operating model of insurance. Instead of charging customers a fixed premium at the start of the month, Insure A Thing proposes to instead bill customers at the end of the month, with the premium only reflecting the claims notified over the period.
The start-up is using a peer-to-peer model. To get covered, customers sign up to an insurance pool. This is when their policy begins, despite no payment being made. Insure A Thing then waits to see how many claims have occurred in the pool over the month, and then splits the cost by the number of people.
This model should be effective as it means that premiums are reflective of the true cost of claims, rather than a predicted valuation. This has benefits for customers as it ensures that they are treated fairly and are only charged what is necessary. The reversal of when payments are made may additionally create a more streamlined claims service, with the insurer making sure they are settled quickly if calculating monthly premiums is dependent upon it. The model also has the capacity to benefit insurance providers, as it removes the uncertainty in their profitability by ensuring that premiums cover the cost of claims and they are not left out of pocket.
The model, however, could generate uncertainty if customers are unsure how much their insurance payment will add up to at the end of each month.
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If there are a notable number of high-cost claims, this could mean customers may not be able to afford to pay. Insure A Thing addresses this by capping what customers pay in, with the rest covered by the insurance company – which also puts in the initial capital injection. This means that customers can rest assured that they will be able to budget for their policy.
The insurance start-up has begun its proposition offering bicycle insurance. But while starting small, it will be interesting to see whether the concept will grow over time within the industry.
This model has the potential to attract policy holders who are seen as low risk and unlikely to make a claim. The long-term effect of this is that the main insurance providers would land up just covering the high-risk policy holders and be unable to spread this risk across the whole market. The different pricing methodology also means customized rather than fixed premiums, which would impact competition.
If successful, this could totally change the dynamic of the insurance market.