A startup plots to trim the fat in the insurance industry
When 30-year-old Ou Zhiqi became an entrepreneur after a stable career at the Ministry of Education, his friends’ perceptions about him changed.
“People don’t see me as doing a startup, they just see me as an unemployed person,” he says.
Ironically, his Singapore-based startup, Bandboo, sells unemployment insurance. But here’s the twist: it promises to make insurance cheaper and more transparent than ever.
“The insurance industry has too much fat in it. The profits may be a bit excessive for the insurance companies, and they’re not as efficient as they can be,” he says.
Bandboo is unique in two ways. First, it’ll return unused premiums back to the insured within a year. That’s unlike traditional insurers, which keep the premiums you’ve paid and in many cases don’t return them, even if you didn’t claim the money.
The only money Bandboo keeps from its unemployment insurance plan is a membership fee, which costs S$9.99 (US$7.20) a month. Ou reckons this fee is enough to make Bandboo profitable, but not excessively so.
On top of that, customers pay a monthly premium of S$35 (US$25). Now, assuming you’ve kept your job, would you get all of it back?
That depends. Bandboo pools people into groups of a thousand each. Your insurance activates only when your pool reaches that number. When one person is retrenched, the cost of the claims is shared with the entire group. Whatever isn’t claimed goes back to your pocket. So when the economy is soaring, the insured pay less.
Traditional insurers, meanwhile, are forced to keep their premiums high because they can’t lower their rates during good times, claims Ou. That’s why unemployment insurance hasn’t been successful in Singapore.
The question though, is whether Bandboo’s business model can survive an economic catastrophe on the scale of what happened in 2008. Ou claims the sum of its monthly premiums can weather that.
And wouldn’t traditional insurers simply copy his idea? He thinks it won’t be easy.
Incumbents are incentivized to reduce payouts because it directly affects their bottom line. Bandboo’s model doesn’t have this conflict.
The insurer’s shareholders and top management will need a lot of convincing that a model like Bandboo’s “is necessary for preserving market share or even their survival,” he says.
Even if they do switch, they’d need to drastically overhaul their business model, from how insurance agents are remunerated, to how funds are invested, to transitioning legacy insurance policies sold years ago that still have many years to maturity.
So it looks like the most probable copycats would be startups themselves.
From Army buddies to co-founders
Ou met Ashley Kee, now the CEO of Bandboo, when they were in the Army. After a career in law and private equity, Kee took the plunge with Ou into the startup world.
Ou says of that moment: “If I don’t do it, when I look back in the future, I’ll probably regret not taking this leap of faith, especially when we’re still relatively young and our financial commitments are not so heavy.”
The tech whiz of the group is Ng Zhong Qin, a computer engineering scholar who spent five years building apps for UOB Bank.
AIA will never show you what’s in their books.
Ng was crucial in developing a customized version of Ethereum – a type of blockchain. “It took him many sleepless nights,” says Ou.
Bandboo now uses it as a ledger to log all transactions, including claims, happening between its users. The records will be viewable by the insured.
“If you look at other insurance companies like AIA, they’ll never show you what’s in their books, they’ll not show you what’s the breakdown of the premiums.”
Do customers really care about this level of transparency though? He concedes that’s something he’s still testing.
Regardless, the potential of blockchain in improving insurance is far from being realized.
Ou believes the blockchain can be used to develop “smart contracts” that can automate the verification, processing, and payment of claims.
Today, if a person dies, his family would need to jump many hoops to make a claim. With smart contracts, the money could be automatically deposited.
Making this happen would require easy access to government data via an API, something that tech-obsessed Singapore could foreseeably provide.
Long, nervous wait for government approval
It’s dawn for insurance tech – or insurtech – in Singapore and the world. Bandboo only launched a month ago, and hasn’t yet reached the thousand signups it needs to kickstart its first pool.
It’s still ramping up distribution, and plans to rely on insurance agents who Ou says are enthusiastic as unemployment insurance complements their portfolio of traditional products. Bandboo also sells its wares directly to companies who want to offer retrenchment benefits.
China’s first online-only insurer Zhong An just started in 2013 and is now valued at US$8 billion. It hit pay dirt by offering Taobao buyers insurance for deliveries.
Some upstarts are attempting to implement blockchains in insurance. US startup Dynamis is similar to Bandboo in that it uses Ethereum. In addition, it’s trying to use an insured’s LinkedIn data to speed up the approval of new policies and claims.
Governments are grappling with how to regulate insurtech. While MAS, Singapore’s central bank, is friendly towards fintech, Bandboo played it safe and sought MAS’ written approval to run its startup.
We’d rather ourselves be regulated.
Ou believes what they’re doing doesn’t fall under the Insurance Act as Bandboo is neither an insurance carrier in the traditional sense, nor are they an insurance intermediary selling products from insurance companies.
But they wanted the added insurance of a stamped approval from MAS. It’s an un-Uber-like approach.
The review took longer than they expected. MAS conducted a comprehensive review of Bandboo’s business model and tried identifying systemic risks.
Ou was concerned: What if the review turned out to be negative and they couldn’t proceed?
“When we were waiting for the eventual results to come out, it was a little challenging,” he says, noting that MAS has been “very helpful” throughout.
But after a three-month wait, they finally got the green light.
Ou thinks it’s crucial for startups in the financial sector to talk to regulators.
“We’d rather ourselves be regulated because we think that it’s part of a process of building trust with the public,” he says.
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