Fintech: An insurtech risk-sharing model

This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on June 19, 2017 - June 25, 2017.
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Around the world, insurance premiums are determined by several factors. They include the types of coverage, the likelihood of claims being made and consumer behaviour. 

However, not many realise that there are hidden fees behind those premiums that could make the cost higher than the value of the coverage itself, says Julie Kim, founder and CEO of 

South Korea-based Smallticket. 

“The premium may include the operation fee, fraud detection fee, commission and marketing cost. With all these fees, the value of the coverage is actually less than half the premium. Consumers are not getting the value that they are supposed to get,” she says. 

This issue has become more apparent in South Korea. According to Kim, the commissions paid to insurance agents are typically very high. It has got to the point that if an agent manages to sell a long-term product, such as child insurance, he does not need to worry about selling other products for the rest of the month. 

“Giving high commissions used to make sense because the assets under management of these insurance companies were sky high. They could definitely afford to pay the agents hefty commissions,” says Kim. 

“However, they also realise that they are not making as much as they used to. The take-up rate is getting poorer by the day and millennials are not buying insurance products. 

“It is getting harder and harder for insurance companies to maintain the commissions, but the agents are still vital to the companies’ marketing purposes. So, they have no choice but to increase the premiums.” 

To tackle this problem, insurance companies have started selling their products online through their cybermarket channels, where policies are directly distributed to consumers via their website. As this eliminates the cost of commissions, the products sold online are a lot cheaper than those sold by agents. However, the number of products sold is not helping to reduce the companies’ 

operational cost. 

Kim launched Smallticket, an online social broker of peer-to-peer (P2P) insurance, in February to help insurers sell more policies. It does this by selling their products online to groups rather than individuals. 

The platform basically acts as a risk-sharing network, allowing each group to pool their premiums so as to mitigate individual losses. At present, only travel insurance products are available, but the company plans to offer pet, child and pregnancy products in the future.

Smallticket also allows individuals to create their own groups — comprising family members, friends and even other people with the same insurance needs to collectively assume responsibility of the group’s risk profile. “By bringing in consumers in a group, we are able to decrease marketing cost and create smaller insurance tickets,” says Kim. 

Rewards, bonuses and discounts

Kim started insurtech career in 2015. She participated in a digital marketing project for an insurance company in South Korea and found that the insurance market was taking off in the country. 

“I was in charge of a benchmarking study and I noticed the insurtech trend, which was very popular in Europe, gradually taking place in South Korea. Upon seeing gaps in this market, I decided to come out with Smallticket. We are the first to introduce an insurtech risk management model in the country,” she says. 

In the traditional insurance model, people who have similar coverage are placed into a pool and they pay premiums based on their individual risk profile. When one of them makes a claim, the funds from the pool are used to pay the claim. Any funds left over at the end of the coverage period are retained by the insurance company as part of its revenue.

However, in Smallticket’s P2P model, any funds left in the pool when the coverage ends are given back to the group in the form of bonuses or cashback. “With this, you can get a bonus or cashback if there are no claims — the bigger the group, the bigger the bonuses can be,” says Kim.

“And since this is a group reward, people will be pressured into making sure they do not get into situations that require them to make a claim. For example, if we are in the same motor insurance group and I keep getting into accidents, you can warn me to be extra careful to make sure we can still get some good rewards.” 

Anyone can open an account on Smallticket and create their own groups. While the members are free to determine whether the group is private or public, it must not exceed 200 members. The platform currently has seven groups of more than 280 users.

“It is like a Facebook page — you can join a group or create your own with people who have similar lifestyles. And we curate the insurance products for you to choose from,” says Kim.

“For example, if you want to buy pet insurance for your French bulldog, you can create a group with your friends who also own French bulldogs and buy a policy from one of our partners.” 

Although the risk profile of each member of the group is not taken into account in the P2P model, the loss ratio still plays a prominent role in determining the rewards the group may get at the end of the coverage period. “Thus, members will have to try their best to keep the loss ratio low. In the case of pet insurance, members will have to keep their pets healthy by giving them regular vaccinations, better food and sufficient exercise,” says Kim. 

“To help mitigate risks, Smallticket offers discounts for services related to the insurance coverage that are provided by certified third-party partners. For pets, we provide discounts for veterinary clinics, pet food stores and even pet villas, where members of the group can play with their pets on weekends to keep them happy. This will really help lower the probability of group members making a claim for their dog’s medical needs.” 

Another example is long-term travel insurance. To ensure their safety and reduce the likelihood of claims, members are given discounts for an English video education company so that they can learn the language before travelling. 

Smallticket has partnered 17 parties in South Korea and is looking to get more partners on board. “Insurance coverage is not perfect. There are gaps here and there. We try to fill those gaps with our partners. We give discounts for many services, including maternity classes, children’s football classes and medical examinations,” says Kim.

With these additional offerings, Smallticket 

users will get the most out of their policies despite paying the same premium as the ones sold on the insurance companies’ websites. The platform currently provides insurance policies from Samsung Fire & Marine Insurance, Hanwha General Insurance, Kyobo Lifeplanet Life Insurance Company, Shinhan Life Insurance, Meritz Fire & Marine 

Insurance and Axa General Insurance Korea.

Going beyond South Korea

Smallticket is targeted at South Korean youths — the age group that is buying the least amount of insurance products. Kim says this happens because millennials do not like the persistence of insurance agents and do not want insurance to be part of their monthly commitments. 

“Millennials do not want insurance because the companies are pushy. They send advertisements via text message and call them endlessly. They also do not know how to present the products in a way that appeals to the generation. This is too huge of a market segment for them not to tap, especially with the opportunity to cross-sell with other parties,” she adds.

“Meanwhile, Smallticket is simple, transparent and allows millennials to buy products with their friends. As this is the generation that wants to give back, we also enable charity functions where people can form groups that will pass any rewards they get to our non-profit organisation partners.”

Although it may seem like Smallticket is impacting the commissions of insurance agents, Kim says it wishes to cooperate with agents in marketing the products, especially the bigger, long-term ones. “When people buy more expensive products, they are still reluctant to do so with a single click. They still want to meet insurance agents to get opinions and talk about their needs. In the future, I would like to come up with a model that allows us to work with agents to sell more products.”

Despite the business being based in South Korea, the programming and development team is based in Singapore. Kim plans to expand her business to Singapore before establishing a presence in Hong Kong and Malaysia. 

“I did not think that Malaysian insurance companies would give my idea positive feedback, but they did. That is why I feel Malaysia is definitely one of the first countries in Southeast Asia that I will expand to,” she says.