Padraig Walsh, partner at international law firm Bird & Bird, looks at the rise of regulation in the InsurTech sector.
The convergence of technology and regulation in the insurance sector is a topic of vital concern. In fact, the ingredients for disruption in the space, and the current economic drivers for change, have been particularly compelling in recent years.
In the future, we will see transformation at each stage of the insurance product cycle; across products, distribution, underwriting, administration and claims.
This innovation will rely on technology such as:
1. Internet of Things (IoT)
Sensors in cars, property and personal devices will provide information that will directly feed into the insurance products and insured purchases.
Insurance will become tailored to the individual’s track record, risk profile and behaviour – all tracked in real-time. Insurance products will become available on a pay-as-you go or just-in-time basis, to fit a modern lifestyle in which insurance may be required for a limited period, or based on renting rather than owning assets.
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2. Artificial Intelligence
Artificial intelligence works best in areas where there are defined processes, procedures and actions. Automating these processes can allow insureds to interact with chat bots to gather the information needed to offer a product and obtain the information needed to issue a policy.
3. Big data
This is the aggregation of large amounts of data from a variety of sources and its analysis (both actual and predictive) to assess risk, price, and reserves more accurately.
Blockchain is a distributed ledger of transactions with a high degree of transparency as each participant in the blockchain has a complete and transparent record of each transaction recorded on it. It has specific applications in due diligence and KYC protocols, and has the potential to significantly reduce the risk of fraudulent claims.
5. Smart contracts
This is a technology in which a software programme includes performance conditions and outcomes. Its main outcome is that certain processes required under a contract can be automated and enabled by technology, without any human or a third party participant. It is built on blockchain technologies. Its main applications will be in automating claims payment processes, particularly for risks where the actual payment trigger and contract flow requirements are simple without too much scope for human variation.
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These technologies carry complex and varied regulatory risks, including:
• Data: The provision of real-time data to insurers allows them to construct an individual’s profile and risks, and offer better pricing on the basis of that tailored information or as a reward for behavioural change. However, there are real risks that may lie ahead. Will consumers be penalised if they refuse to provide requested data? Will there be an increase in risk segmentation that leads to higher risk consumers becoming uninsurable? Will there be data leakage so that data received and reviewed to assess a risk profile, is also used to assess other issues such as ability to pay?
• Disclosure: An insured has a duty of utmost good faith to disclose information to an insurer in relation to the risk being underwritten. Given the multiple data points that may be open to an insurer in the future, what if the insurer already has the insured’s information? What if the insurer has more information on the insured than the insured could directly provide? Can an insured comply with his duty to disclose by simply being passive in the engagement process, given that the insurer possesses the knowledge already? What are the chances that an insured may lose cover because it did not disclose, even though the insured fully provided responses to an online automated application process run by a chat bot?
The solutions to these regulatory risks are far from known at this stage. What is clear is that whatever got the insurance industry to where it is now, is not going to get the insurance industry to where it will be in the future.
We are in a new world where technology is transforming the delivery of financial services but regulation often has its eyes in the rear-view mirror.
Now is the time for regulators to look ahead and continue to proactively participate in the creation and growth of the environment to ensure InsurTech is an integral part of London’s FinTech hub.