The case for smart regulation in insurance

Insurance is an old industry, that goes back hundreds of years and pursues the goal of protecting what is important to all of us. With the burden of such history and antiquity, is something really changing in the insurance sector? In short, the answer is yes.

“There is nothing permanent except change”[1]. A phrase as valid today as back then, in time of Heraclitus.

Something is changing. Something has always changed in insurance, from its origins to the present day. A digital innovation in the light of new technologies that allow you to do things faster, better and at a lower cost. Accelerated by the impact of the pandemic.

On March 11, 2020, the WHO declared the pandemic for Covid-19. A pandemic that has profound effects, that forces us to rethink how to use technology, but that mainly produces an acceleration of digital adoption in multiple industries and in the lives of all of us. It pushes organizations to rethink their work models and highlights the problem of cybersecurity.

Opening networks and applications for the use of more people remotely increases the risk of cyberattacks, with public and visible cases that ultimately affect the operation of insurers but also puts at risk the data of customers that they store. In a recent survey of insurers, 1 in 2 companies had experienced at least one cyberattack attempt in the last 3 years. It is not surprising then that it is an area of increasing focus because of the risk it represents, and I also believe a point where the regulator could contribute by ensuring that the appropriate plans and controls are in place, among other things.

The pandemic forced insurers immediately to accelerate initiatives that supported digital and virtual capabilities, as a mere survival reaction to ensure business continuity. Accelerating an agenda of digital transformation that was already a priority for insurers and that in the long term they recognize that it must continue to accelerate, along with an expectation of having more activities carried out remotely. The regulator consequently will face, if not facing already, an acceleration in the need to give a framework of supervision and regulation so that this digital agenda can have a solid development with transparent and effective control schemes.

Even before -and regardless of - the pandemic, the digital revolution that is transforming the insurance industry worldwide also results in innovative solutions and propositions enabled by new technologies along the entire value chain. Already visible in some key trends that demonstrate the need for a process of adoption of international standards in terms of regulation of the insurance industry and modernization of the insurance sector, as demonstrated by leading regulators around the world.

• With interaction models based on mobile and digital, especially in the area of inclusive insurance such as microinsurance, embedded and just-in-time insurance.
• Supported by virtual advisors and representatives and the use of AI, to make sense of the data and achieve higher levels of efficiency.
• Supported by a series of key technologies that democratize access to services such as the cloud and the use of programmed interfaces (APIs) that facilitate in a standardized way the exchange of data and integration between stakeholders in the value chain.

These trends are visible in digital platform business models, where 3^rd parties can increase their revenue line incorporating an Insurance product. The distribution of Insurance under a digital affinity model, but that in a massive way surely requires ensuring that it can be carried out in the appropriate framework. As also happens with invisible insurance, where insurance becomes part of a product or service without the need to opt-in. Or with In-App Insurance, where insurance is closely coupled to the experience of a product/service, but the customer chooses to participate. A super app that offers multiple services and that has customer data that allows them to exploit at the point of interaction an insurance need (without being an insurer). Some questions that immediately arise from models like this: who is the owner of that data? Can/how/under what circumstances share the data of the app with 3^rd parties?

These are some of the innovative models that are already a reality and that come as a response to a series of factors that accelerate the need to innovate in insurance. The challenge is that regulation, along with the effort of most of the industry today, is mostly focused on the digital enablement of today's business. To the extent that innovation is extremely digital, we face business models based on sensors, virtual advisors, one-click sales, with integrated ecosystems in different areas of the insurance value chain, which requires thinking about how this integration will occur, if it is possible to adopt industry standards, the need to have technologies ready for that integration; with a focus on data and its use, as well as clear guidelines in terms of use of AI and the decisions it makes, instead of humans.

Integrated, intelligent and algorithmic organizations require regulation and supervision of the same characteristics.

From here, where are we headed?

Clients expect services that help them be healthy and protected in their different key areas such as car, property; life and health. They take for granted that an indemnification will be paid to them in the event of loss, but they hope that insurers would go further; taking advantage of the multiple technologies that allow them to offer a value proposition based on the prevention and mitigation of risks. Propositions that consider the unique motivations of customers and enable faster, easier experiences, and at an accessible cost. This requires innovation; but disruptive innovation in a regulated industry requires working as a whole, and reaching out to other industries and sectors, ensuring this innovation can be channeled within the appropriate regulatory frameworks.

Faced with this scenario, leading regulators are acting to provide a framework in which this innovation can occur. Regulators in Asia (i.e. Singapore), in Europe (i.e. Spain) and Latin America (i.e. Brazil) have introduced legal environments to ensure that innovation in the financial sector is developed in an effective and safe way for users. Through a Regulatory Sandbox, which is identified as a test bed in which the supervisory authority will allow to test innovative technology-based projects in the financial field, with real users, under the control and supervision of the competent authority. These regulators are also considering regulations around Open Insurance.

APIs are in the heart of Open Insurance. They allow you to share originally proprietary data with externals (i.e. partners or the marketplace) through standardized and pre-programmed integrations.

The innovation we are witnessing, strongly supported by technology, allows us to rethink the insurance value chain, with all the potential and challenges that this entails. The possibility of assembling digital ecosystems that generate greater value for customers. That provide transparency to the different processes. This is an opportunity but also a wake-up call for everyone. Because Innovation is happening, because the speed of change is greater than ever, because there is no inclusive insurance without a massification of the value proposition and this requires making use of the multiple innovations that are possible today. All which requires a framework of adequate regulation and supervision, and all the interested stakeholders working in coordination so that these innovations can be a reality.

Note: the text of this blog post is a summary of the keynote I delivered to the Argentinean insurance regulator, government officials, and key directives of the main chambers and associations participating in the Argentinean insurance industry, in the context of the kickoff of the Argentinean Insurance Innovation Hub on September 17^th 2021. The complete video can be found here (in Spanish). My intervention starts at minute 37’.

[1] Heraclitus of Ephesus was an Ancient Greek, pre-Socratic, Ionian philosopher born in c. 535 BC and a native of the city of Ephesus, which was then part of the Persian Empire.