AI combats fraud and enables scale for wider insurance access  

“The culture we set out to build is one of embracing the exploration of new things, and exploring whether there is a better way of doing something – this can only be achieved by using technology,” says Ernest North, Co-founder of Naked Insurance of South Africa, which is among a growing cohort of insurtech startups that consider themselves technology players first, and then insurance providers.

The company’s employees are immersed in this innovation culture, always experimenting with beta versions of new software and technology, and adopting those that add value.

This tech-first insurance business started with a clean slate, so there were no legacy systems blocking the rapid adoption and deployment of new, tech-backed innovation.

“We put technology first, and built everything we needed to deliver our value chain from scratch.”

It is common practice for insurtech startups to partner with and receive capital from larger, established insurance businesses. The relationships of trust that develop between an insurtech and its funders can make the difference between flourishing and simply getting by.

According to North, Naked’s insurance partner allowed them to innovate substantially around the fundamentals of the insurance cover being developed. “Our partner has always been on board with our vision and played an integral role as both shareholder and underwriter, giving us the space to do things radically differently,” he says.

Insurance providers have to understand customers’ desires to balance convenience, simplicity and speed with access to information, assurance and safety, he argues: “Our biggest successes stem from our application of innovative technology, and our ability to get into the mindset of our customers and make the insurance process easy for them.” 

The benefit from deploying AI, automation and machine learning is mainly in the cost savings that accrue to the insurer and its customers through process refinements at scale. At the base level, Naked relies on automation to deliver a sustainably differentiated digital experience covering policy sales, cancellation or variation; claims submission; premium collection; and even product innovations, such as ‘CoverPause’, which allows customers to downgrade their comprehensive motor cover to ‘stationary’ on days when they are not driving. “We have reached scale, where savings from automation translate into lower premiums,” North says.

AI has multiple uses in the business, from traditional image and voice recognition to its perhaps more important application in identifying potentially fraudulent claims. Naked uses AI to accurately flag claims for human investigation, mitigating the cost and risk associated with combating this type of insurance crime.

AI and automation are increasingly seen as indispensable in the sustainable underwriting paradigm, too. “In using technology to reduce the cost of delivering cover, and reducing the cost of claims by stamping out fraud, we are making the underwriting pool more sustainable,” North says. 

Maintaining a small team and deploying tech across the value chain makes it possible to run an insurtech at a fraction of the traditional insurer cost. North identifies scale on the back of tech innovation as the factor that enables the business to expand the pool of insurance customers. “The beauty of our solution is that our marginal cost of operating is basically zero; we can offer low premiums because we only have to charge for the true cost of our risk exposure,” he states.

This model has huge potential in a country like South Africa, where there is significant appetite for third party motor insurance and low-value household assets cover. Anecdotally, around two-thirds of the country’s motor pool remains uninsured and ‘ripe for the picking’ for insurers that solve the access and affordability challenge.

“We are changing the insurance business model by restricting our access to underwriting profit and capping it to a fixed percentage of premium, and then distributing surplus underwriting profit to charitable institutions selected by our customers,” North concludes. The only caveat here is that since the primary focus remains on paying for insured losses, the donations to charity will fluctuate in line with the underwriting environment.