This article first appeared in Personal Wealth, The Edge Malaysia Weekly on December 25, 2017 - December 31, 2017

When Bank Negara Malaysia governor Tan Sri Muhammad Ibrahim said the existing Malaysian insurance business models were broken from the perspective of the underserved, I was not surprised.

The statistics are glaring: the overall life insurance and takaful penetration rate has hovered around 55% for years — a long way off the 2020 target of 75%. General insurance premiums paid, as a share of GDP, stood at 2% in 2016 compared with 4% in developed markets.

Any strategy to penetrate the insurance market should be predicated on closing the gap between those who are insured and those who are either uninsured or underinsured. Regulators have played a big role on that front this year. Indeed, at the time of writing, Bank Negara had allowed three insurtech companies — Jirnexu,

GoBear and GetCover — into its regulatory sandbox. The goal of the three start-ups is to reduce the number of Malaysia’s uninsured.

Also, 2017 is notable for the appointment of Jessica Chew, previously the central bank’s lead person for the insurance sector, as deputy governor. The move underscores Bank Negara’s priority to tackle the problem of under-insurance.

With Malaysia’s significant mobile phone penetration granting underserved demographics and the more urban population access to a range of online financial services, there are entirely new consumer markets for the taking. What’s more, many of them are moving away from the traditional insurance distribution model.

With all this happening in 2017 alone, I am excited to see what the new year has in store for the insurance sector.

Simply moving online is not a guaranteed silver bullet

People following the fintech scene often think it is the only way forward. But the word “insurtech” and “online” have been so overused and exaggerated that entire companies have risen and fallen on the hype alone.

We believe enough time has passed since the mass-market acceptance of fintech and insurtech companies here. There is no longer any excuse — start-ups must master the basics of the insurance industry. They need to perfect their business models and consider if they have achieved optimal product-market fit, notwithstanding any of the oft-quoted advantages that technology provides.

In 2018, distribution-based insurtech companies must come to terms with a latent problem in the insurance sector — rarely anyone wakes up in the morning thinking of nothing but buying the perfect insurance plan in anticipation of some ruinous event. Thus, simply putting products online and splurging on Google AdWords will not change the natural buying behaviour of customers.

A report by Oliver Wyman and Policen Direkt highlights 19 distinct insurtech business models, each seeking to improve different parts of the insurance value chain. Most insurtech companies in Malaysia claim to have tackled distribution simply by providing an online alternative. Is it really that simple?

Buying insurance is a complicated experience and to most people, it is either an afterthought or born out of regret (perhaps as a reaction to financial ruin). If insurtech companies are able to understand this, they would know that while e-commerce presents great business opportunities to a great many industries, the same logic is not readily transplanted to the insurance sector.

What this means is that while consumers want the most coverage for the least amount of money, they are not going to be poring over the terms, conditions and riders in quite the same way as they would obsess over choosing the perfect pair of shoes to buy online. They want the insurance process to be over and done with as quickly as possible but the complexity of insurance contracts means that consumers might not yet be ready to do it themselves.

Further complicating matters is that at present, 50% of general insurance gross written premiums (GWP) are distributed by agents — the number rises to 70% for life insurance. Whether or not insurtech players like it, the human and emotional element is still an integral part of the insurance experience and will not change overnight.

So while insurtech companies are clamouring to replace the human element altogether, we think a well-oiled and polished integrated service — something that combines the ease of online browsing and purchasing and the ability to consult with a real person on demand — will be a good starting point, at least while consumers continue to remain relatively uninformed and, as a result, intimidated by the prospect of purchasing insurance.

More collaboration, less ‘disruption’

Given the highly regulated nature of the insurance sector, insurtech companies would fare better by forming strategic collaborations with insurers rather than attempting to supplant them. Insurtech companies need to convince traditional players that they are able to bring new and untapped markets (read: the uninsured and underinsured demographics I spoke of earlier) to the doorstep of these large insurers.

In 2016, 67% of insurers were reluctant to collaborate with insurtech companies. Only 28% explored partnership opportunities. And why should they? If anything, insurtech companies, like many other tech-heavy start-ups, give the impression that they are out to steal market share for themselves.

Simply put, insurtech companies that see the value in collaboration and then convince potential insurance partners of the same will be the big winners in 2018. I should know. A year ago, PolicyStreet had the painful experience of insurers declining our proposals for collaboration for the same reasons outlined above. But they have since returned to knock on our door in these last few months because they now see the benefits of finally being able to tap a previously underserved demographic in a cost-effective manner.

Leverage data to win

We also anticipate a second wave of emerging insurtech companies targeting other less visible pain points in the insurance sector. There should be increased attention on backend office-based operations rather than just the customer-facing distribution networks. Insurtech companies that are able to help insurers greatly reduce paperwork as well as processing and turnaround times would be tapping into a goldmine.

Over the last few years, in preparation for motor and fire insurance detariffication, general insurers have invested millions in revamping their internal infrastructure and replacing legacy systems. They are now able to capture more useful data to make better business decisions, cut costs and make profits.

For 2018, we anticipate insurers fine-tuning their presence and strengths in the market by relying on more data-driven innovations like telematics and the Internet of Things to develop differentiated products and tailored solutions such as usage-based insurance.

Winnie Chua We-Ning is co-founder of PolicyStreet while Shaun Liew Yong Jian is on the company’s product team

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