Trends and Opportunities for Innovation: Insurance

Commonwealth is always looking for changes in the landscape that could lead to either new financial challenges or opportunities for new innovative solutions. Over the last year we have engaged in an extensive research project and have identified four areas (payments, insurance, decision making, and new actors) that we will be pursuing in the coming months. This is the third of four posts that highlights this work.  

Insurance is an important tool for managing uncertainty and risk.  One of the biggest financial challenges faced by the financially vulnerable is managing uncertainty and risk, yet they tend to have the least access and the fewest options in the insurance market.  Insurance coverage is generally correlated with income, with those earning more having higher rates of coverage.  The paradox is that the potential impact of uncovered events has the greatest impact on those who have the least access. 

Commonwealth has been exploring changes that are creating opportunities to build innovative new solutions to the financial challenges faced by the financially vulnerable.  We think insurance is under-explored as a financial tool to address these challenges.  New data and technology are bringing major disruptions to the insurance market. These disruptions are creating openings for new actors to enter the field and new opportunities for innovative products for under-served populations and overlooked types of risk. 

We have identified several areas of risks for which insurance products either do not currently exist or are inadequate to meet the needs of all consumers: 

  • Wage Loss – unemployment compensation covers some but not all workers and is limited to jobs that cease to exist, providing no protection for disruption of income from reduced hours or other pay cut. 
  • Shelter – financially vulnerable households are at risk of losing utility services and of losing housing altogether through foreclosure or eviction. 
  • Debt Service – volatile income and expenses can make it impossible to stay current on debt payments, even when a household has sufficient assets to be solvent. 
  • Legal – fees and fines fall heavily on low-income and minority communities, and inability to make timely payment can have snowballing effects, including even incarceration. 

Enabling financially vulnerable consumers to hedge against these and other risks would give them a more stable foundation on which to build financial security. 

The explosion of available data and the ability to process it quickly could facilitate underwriting novel products.  It could make offering insurance an option for many actors beyond traditional insurers, including state and local governments, the courts, lenders, utilities, and others. 

But there are several challenges to reshaping the insurance market.  The need to guarantee the integrity of insurance products has created complex regulatory structures, and compliance requirements can make innovation difficult.  Data must be available to make new risk assessments and products possible however the data on the financially vulnerable is often missing from data sets because of their historical exclusion from the financial mainstream.  Insurance will need to be available at smaller dollar amounts than are traditionally offered and so new business models will need to be constructed. 

In the coming months, Commonwealth will continue to explore how risks faced by financially vulnerable households could be feasibly addressed with new insurance products.

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