To what extent is the market being challenged by digital innovation?
Insurance & Reinsurance (3rd edition)
This is a very new and controversial subject in Brazil. Regarding internet sales, in addition to the legal issues surrounding the security and validity of insurance contracts, there is a natural aversion by brokers to direct sales, precisely because it excludes them. However, most insurers are studying ways and means of taking advantage of digital innovations, whether in terms of providing information about their products, the possibility of direct interaction with their policyholders or offering and selling products. Internet sales are likely to grow in the coming years.
In the past few years, the insurance industry is also facing a digital innovation.
Artificial intelligence technology powers the further development of Chinese insurance industry and provide solutions to the pain points in the segments of customer service, underwriting, insurance product sales and claim settlement.
The Internet giants are speeding up in participation of insurance industry. By 2019, Alibaba, Tencent and JD have all obtain their insurance license. Other Internet companies have also made deployments in the insurance industry by combining user data traffic with distinct sales scenarios.
The digital innovation also challenging the current regulatory system. CBIRC published the Regulatory Measures on Internet Insurance (Draft) in October 2018, the Regulatory Measures starts to release the regional restrictions on cyber insurance, permits banking insurance agency to sell insurance on its own website, and issues detailed regulations on information disclosure and publication of cyber insurance, etc.
The Danish market is certainly being challenged by digital innovation. The market is by many in the industry most likely expected to be transformed by digital innovation such as telematics devices, distributed ledgers and connected devices. As a consequence, insurers on the Danish market must be prepared to adapt to new distribution channels (mainly cloud-based). Insurance companies that cannot invest on developing in this di-rection may lose substantial business opportunities.
Several InsurTech start-ups have been established within the last years and we believe that further start-ups will follow. FINMA tries to make Switzerland a FinTech/InsurTech hub and gradually provides for a proper regulatory environment. The Federal Council supports this approach by proposing to exempt InsurTechs from supervision if certain prerequisites are are met (see also Question 2 above).We also observe that traditional insurance companies have recently started to take digital innovation seriously and that they have invested a considerable amount of time and money in connected projects. Most notably, Swiss insurers and reinsurers play an eminent role in the Blockchain Insurance Industry Initiative (B3i).
Digital innovation in South Korea has progressed and the South Korean Government has implemented certain changes to existing laws/regulations in response to the rapidly changing business environment for the insurance industry.
Previously, financial institutions including insurers were not permitted to save, store and process certain types of information on cloud servers pursuant to the Rules on the Supervision of Electronic Financial Transactions (“E-Finance Rules”). Effective 1 January 2019, the regulatory authorities have repealed all such prohibitions on the use of cloud servers, as long as the cloud servers are physically located in South Korea.
The South Korean National Assembly passed the Financial Innovation Support Act (“FinISA”) on 7 December 2018 to spark the financial services industry in conjunction with FinTech products and services which took effect in March 2019. The FinISA is intended to lay the legal foundation to introduce a Regulatory Sandbox for innovative financial services, where FinTech firms test their new products and services without certain regulatory oversight pursuant to exemptions for a limited period of time. In-line with the Regulatory Sandbox and evolving Smart Cities in South Korea for FinTech businesses and other innovative start-up enterprises, the FSC also modified its rules to now allow the establishment and operation of FinTech and InsurTech subsidiaries by insurers.
However, there still remain certain hurdles to overcome as the FSC and FSS find challenges in balancing consumer protection against plans for de-regulation including those related to data protection and privacy measures. A 2018 Innovation Task Force at the FSS led by Governor Suk Heon Yoon was empowered to simplify regulatory compliance for financial services companies while strengthening consumer protection; however, the Task Force was unable to find ways to de-regulate while compromising consumer interests which included initiatives for streamlined sales of insurance through telemarketing as well as home shopping distribution channels without requiring face-to-face interactions/transactions. The Innovation Task Force will continue to deliberate and debate on how a balance can be struck to accommodate the insurance industry while ensuring protection to consumers.
One of the main challenges for the insurance market in the face of digital innovation is exposure of privacy and confidentiality arising from cyber piracy or attacks.
To address this challenge, insurance companies must manage risks linked to information technology relating to failures in the security and operational continuity of computer systems, failures in development and implementation of the said systems and with their compatibility and integration, and inadequate investment in technology, among other aspects.
The digitalization of the French insurance industry is already underway and will bring about interesting changes in the near future. Connected objects and smartphone apps, to name the most obvious, represent promising new ways of having a better and quicker access to both consumers and data, which can be relied upon to better target potential clients and assess / price risks with greater accuracy.
As is often the case with technological innovation, this technology has great potential for both strengthening the position of certain major and long-established market participants (who are developing insurtech products and funding or acquiring startups) and causing market disruption, due to the arrival of innovative outsiders, who may try to significantly alter consumer experience and replicate, to an extent, what Uber and Airbnb have respectively accomplished in the urban transport and hotel industries. As an illustration of these broader trends, online arbitration platforms have recently emerged, in France, as have websites that either aim to put potential claimants and lawyers in contact (especially in the context of group actions) or, indeed, to provide some forms of legal or paralegal services (services that can rapidly fall foul of French legislation, which provides that only lawyers are authorized to provide legal advice and argue before French courts).
These opportunities, however, come hand in hand with new challenges.
EU Regulation 2016/679 – also known as The General Data Protection Regulation (GDPR) – came into force on 25 May 2018. The French Data Protection Act and its implementing Decree were also amended on 14 May 2018, so as to align national law with the European legal framework.
Cyber risks (ransomware, identity theft, tech-enabled financial fraud etc.) is also becoming more important and more sophisticated.
Digital innovation has been one of the major challenges for the insurance market in recent years. The insurance sector in Germany is traditionally more conservative than other sectors and traditional business models have to be changed without disrupting day-to-day services. While many insurers are already now offering digital vehicles such as mobile phone apps, studies have shown that a large number of insurers do not have the necessary technological capabilities by just using their internal resources.
Furthermore, traditional insurers have recently received increasing competition from insurtech entities. Whilst insurtech previously took on a supporting role for the most part, various insurtech entities are now starting to carry on insurance business themselves. Unlike traditional insurers, insurtech entities are and will be working predominantly or exclusively digitally; both in terms of selling their products and claims handling. As many insurtech entities are still in the planning phase and only few have started to underwrite risks, it remains to be seen whether they will catch on.
A new trend to cope with the digitalisation challenge for established players seems to be cooperation with competitors or other entities in the respective market branches. We expect an increase in transactional developments and new business strategies allowing the traditional and established players to keep up with the challenge.
The Insurance Commissioner announced that he will support any new company which will be fully digitalized. This support means, substantial lowering of the initial requirement for Insurers’ licensing.
In 2018 two new Digital Insurance Companies were established, handling private lines only. Their financial result for December 2018, shows loss, however it is too early to predict whether they will survive, or whether others will join.
Other than Digital Companies there are several High Tech Companies which are working on various products that will be implemented in the future in existing Insurance Companies.
Currently, there are a number of digital platforms looking for opportunities to expand their service offering, including into the Australian insurance market. At the moment, this is largely a positive for the insurance industry as it is creating new opportunities for distribution. However, if these players seek authorisation as insurers and issue their own products, this is likely to create even more competition in an already very competitive market.
One significant issue that has emerged with consolidation in the industry is the challenge of integrating legacy systems. The cost of replacing or integrating existing systems and technology is substantial. Those insurers that are able to adapt their systems, and make use of technology and insurtech to deliver insurance services in a more cost effective and consumer-friendly manner, will gain market share and potentially be attractive targets for acquisition.
Like every aspect of the modern life digital innovation is playing a major innovative role in the insurance market, and an even greater role will be played in future.
Digital innovation wil assume a key role not only in the corporate and financial governance of the (re)insurance companies but will be pivotal in meeting the GDPR’s requirements and certainly will simplify and render cheaper the loss adjustment thanks to software platform, commonly shared between claim handlers, loss adjuster, broker and eventually the lawyer.
Moreover, digital innovation has permitted the birth of a new generation of Motor insurances based on the “Black Box” installed on the car; this render more difficult the theft and has positively impacted also upon the costs of the Motor accident claims.
In Japan, the emergence of digital innovation in the financial sector, so-called FinTech, was most pronounced in the banking sector at first. Indeed, the Japanese government first responded to FinTech by amending the Banking Act so that banks could own technology companies as their subsidiaries – something which was previously restricted to some extent (the “Amended Banking Act”).
Japanese insurance companies are gradually adopting new technologies to their services, such as IoT (Internet of Things), Big Data and Artificial Intelligence. For example, Sony Assurance’s automobile insurance, where an insured has a “driving counter” installed into their cars, which would monitor their driving; if it shows safe driving on the part of the insured, the insurer will give the insured cash back towards insurance fees. This technology was developed in collaboration with OPTEX Co, a Japanese sensor producing company. As seen in this example, insurance companies alone cannot create new insurtech products because they do not have any resources/knowledge to develop new technology, so an alliance with tech companies or telecom companies is therefore necessary.
The remaining question is whether insurance companies are allowed to own tech companies or telecom companies as their subsidiaries in order to take full control of the new technologies. Technology development and telecoms are not included in the list contained in the Insurance Business Act regarding the scope of business in which a subsidiary of insurance companies may engage. As stated above, the Amended Banking Act allows banks to own subsidiaries that provide IT and other technology to enhance banking activities and benefit the banks’ customers. However, the Insurance Business Act was not amended to introduce similar modification of allowable activities. Therefore, it is questionable whether insurance companies may own tech companies or telecom companies under the current regulatory system.
Digital innovation is becoming more and more important on the Polish insurance market. Distribution of insurance is also becoming more multichannel. Internet and mobile applications have gained increasing market share, especially in the segment of standard products. Innovative tools are helping insurers and insurance intermediaries to analyse their customers' needs and are being used to assess the probability of insurance events (insurance mathematics).
Nevertheless, when compared to other European jurisdictions, the Polish insurance market is still quite undeveloped in terms of the use of digitalisation and digitisation. Some regulatory barriers still prevent Polish insurance companies from offering insurance protection or providing ongoing services to insured persons by means of electronic communication only. This is opposite to the banking market which is highly digitalised.
The main obstacle to the development of the digitisation of insurance services stems from the law. For example, there is the need to obtain written consents from customers at key moments related to insurance coverage. This also applies to written declarations and written consents to access medical data for the payment of benefits.
However, Polish insurers as well as the regulator are becoming more and more aware of this weakness. Many new initiatives and discussion forums have been developed recently with a view to adapt the insurance market to current trends and expectations of policyholders, who want to be able to acquire insurance services using electronic communication.
Therefore, the digitalisation of the insurance market in Poland is one of the key opportunities for the next few years.
In addition to the cyber-risk phenomenon, the digital transformation has had an impact on insurance, both in product creation and marketing. This phenomenon in Chile is still in a very preliminary stage. Although there are insurance companies that are taking care of incorporating the tools that digital transformation provides to their processes, greater transversality is required.
Digital innovation is currently being used in preliminary stages within the insurance industry, mostly by facilitating comparing different insurance products and placement of insurance within the population; use of technology to facilitate sales and adjustment of claims is starting to grow; the regulator is taking a cautious approach to the use of technology and we have not seen aggressive approaches by the industry to try and test the market.
The secondary regulation applicable to development of Innovative Models, which regulates the sandbox scheme set forth in the Fintech Law (Ley para Regular las Instituciones de Tecnología Financiera) was issued on 11 March 2019. We expect this to be an incentive for innovative insurtech products to be developed. We certainly hope the use of technology helps improve penetration within an underdeveloped market.
The London Market is expected to be transformed by digital innovation such as distributed ledger technology (“DLT). From the sharing of identical information across networks, to the cryptography-based protections built into the technology, DLT represents an exciting development in the fight against cybercrime for insurance industry stakeholders.
Similarly, the harnessing and use of Big Data (a term referring to the increasing amount of digital information being generated and the analytical technologies which are being developed to make sense of this data) will change underwriting as insurers will have far greater access to personal (or at least risk-specific) information than ever before. With more personalised information and with automated processes, for example automated claims handling, insurers are seeing an opportunity to offer customers new product lines with potential cost savings.
Adapting to new business models will require significant investment (whether in research and development or acquisitions) by existing market players and start-ups are attracting funding. New market entrants that design their business models around new technology and the use of digital information may be able to steal a march on their competitors. In an overcrowded market, many existing product lines are likely to struggle without adaptation to the new digitally-reliant environment.
With the significant increase in e-commerce transactions over recent years, the IRDAI has recognised the sale of insurance products online. The IRDAI has also recognized web aggregators (entities engaged exclusively in solicitation and procurement of insurance products online) as insurance intermediaries and has issued specific regulations for the licensing of these entities.
In addition, the IRDAI has also recognised the issuance of e-insurance policies.
The IRDAI has also issued the “Guidelines on Insurance e-commerce” of 9th March 2017 (E-commerce Guidelines) which laid down provisions for setting up Insurance Self-Network Platforms (ISNP) by insurers and insurance intermediaries for undertaking insurance e-commerce activities in India.
Recently, IRDAI issued the Brokers Regulations which states that a broker can solicit insurance products online and by telemarketing and distance marketing in line with the provisions specified for web aggregators under the applicable laws.
Further, keeping in mind the fast evolving financial technology landscape where such technologies are becoming more common and sophisticated, in September 2018, the IRDAI set up a committee for ‘Regulatory Sandbox Approach’ in order to carve out a safe and conducive space to experiment with financial technology solutions in the insurance sector. In this regard, based on the comments and inputs received from insurance, reinsurance companies and foreign reinsurance branches in India, the IRDAI has issued the “Report of Committee on regulatory Sandbox in insurance sector in India” on 5th February 2019 (Report). One of the key recommendations of this Report was to create a core Sandbox Committee having dedicated personnel to monitor and supervise the digital innovation activities, and provide support and advisory to the applicants.
Digital innovation will impact the insurance market in many ways from policy wording to the electronic sale of policies. However, the main effects of digital innovation on the UAE insurance market are twofold.
Firstly, it will heavily influence the types of insurance products that are sold. Developments in FinTech, digital innovation and cybercrime may cause the insurance market to experience an increase in the need for cyber insurance policies in order to meet these risks. Digital innovation is therefore key to winning new business streams.
Secondly, not only will digital innovation influence the types of insurance products that are sold, but also the way in which policies are sold. As digital innovation increases, it is expected that contracts between parties can be executed electronically; for example, contracting by ‘click-to-accept’ (where an insurer indicates their consent to the insurance contract by ticking a box online), will overtake the sale of policies by physical channels.
Belgian insurance undertakings are innovating in their internal processes (use of big data, automation of business processes, agile working processes, data security, APIs, alternative distribution processes etc.) and products (cyber risk policies, customer service, etc.).
Although interest in cyber insurance is growing, including under pressure from the government and other sources, especially for SMEs, Belgian insurance undertakings face difficulties in understanding the risk. The lack of historical data, the systemic nature of potential events, insufficient information on risks and the lack of specialised underwriters remain challenges for the sector.
The FSMA and NBB consider FinTech as an important focus of their supervisory activities. The supervisors have set up a “FinTech contact point” to encourage new or existing market participants to consult the authorities.
Digital innovation is having an increasing, although not rapid, impact on the insurance market in the U.S. Although there are a growing number of insurers with digital capabilities and InsurTech entities, most insurance today is still distributed offline. Perhaps one of the greatest challenges for insurers is to meet the growing demands of the millennial generation, whose members notoriously favor online, personalized products and services that suit their individual needs and requirements.
In recent years, however, concern for data security has notably increased following several major data breaches involving large insurers that compromised the sensitive personal information of millions of policyholders. Recognizing the importance of cybersecurity for the insurance industry, the NAIC recently adopted an Insurance Data Security Model Law establishing data security standards for regulators and insurers aimed at mitigating the potential damage of a data breach. The NAIC’s model requires insurers and other entities licensed by a state department of insurance to develop, implement, and maintain an information security program based on their individual assessment of the risk of internal and external threats. Each licensed entity would designate an employee in charge of that program. The model also requires licensees to investigate and report cybersecurity events, grants insurance commissioners the power to examine and investigate licensees to determine compliance with the law, and provides state insurance regulators the authority to remedy data security deficiencies they find during an examination.
The states are not required to adopt the NAIC’s model law, and to date, only four have done so: South Carolina, Michigan, Missouri, and Ohio. New York implemented its own cybersecurity regulations for insurance-related entities in March of 2017, becoming the first state to do so, and the NAIC model is substantially consistent with New York’s regulations. The NAIC and federal government have urged states to adopt the NAIC model law, and several states are currently considering the model.
Like many other countries, the rapid growth of technology has influenced the Indonesian financial industry. Significant developments in digital communications technology in recent years have resulted in a rapidly increasing number of financial technology (fintech) companies to support the financial services sector.
Digital innovation has given rise to a strong trend in online shopping in Indonesia. Media reports indicate that by the end of 2018 the number of online shoppers reached 11.9% of the total Indonesian population and is likely to continue growing as smartphone penetration increases.
For insurance and reinsurance companies, the development of digital innovation, the increase in the number of smartphone users and online shopping can result in new growth areas. Digital innovation has enabled insurers to tap into a broader range of prospects in the Indonesian market, with the potential to expand much further into rural areas. Digital innovation has also opened up new markets, such as online shoppers who wish to insure purchased products in case of damage during shipment or delivery.
Unfortunately, for insurance brokers and agents, the existence and development of digital innovation could potentially reduce their roles in the digital insurance market.
Given the significant pool of potential new customers using smartphones and internet, insurance companies are now in a race to take advantage of fintech companies’ extraordinary reach. This is achieved by way of collaboration between insurers and fintech companies, with insurers leveraging off of the technological advances made by fintech companies and the ability of fintech companies to find new prospects and obtain feedback on products (and potential products).
Although insurance product marketing and promotion can currently be carried out through digital marketing, new regulations concerning insurance product digital marketing are still in the pipeline, which may have a positive or negative impact on the insurance market. Regulation on digital insurance marketing is currently limited to micro-insurance products.
The offer for sale and the writing of insurance contracts via electronic means are permitted under the OIC’s notifications issued in 2017. Any insurance company wishing to use electronic and digital mechanisms in its business operations must register itself with the OIC (separately and in addition to obtaining an insurance licence). In addition, the insurance company must comply with specific procedures and conditions under the said notifications, as well as general requirements under the laws governing electronic transactions. There is a likelihood that an increasing number of insurance products will be marketed and distributed through digital means in the near future. However, to date, most insurance products are not distributed through online means.
As with almost every industry, digitalisation has also reached the insurance sector. It is, however, still lagging behind other service industries in terms of implementing digital innovation. This is partly due to the dense regulatory environment, which makes it more difficult for insurance undertakings to adopt new technologies while complying with regulatory requirements.
Established market players are thus challenged by innovative start-ups that are willing to disrupt the sector. Startups such as Amodo, which has received funding by Austrian-based venture capital fund Speedinvest, analyse data gathered from digital devices to allow better assessment of a customers’ risk exposure and product requirements. While this approach allows further individualization of insurance products, concerns as to the use of sensitive data will have to be addressed.
Recently, key players in the Austrian insurance market have declared digital innovation as their main development target. In 2016, one of the leading insurance companies in Austria and the CEE region announced an investment program in the amount of EUR 500 million aimed at adapting procedures and products to the change in customers’ expectations and needs owed to digital innovation.
Digital innovation is one of the biggest challenges facing the insurance industry in Ireland. As technology advances further, companies are faced with a higher risk of cyber-security breaches. As companies become more concerned with the threat of these breaches, whilst they tend to look more to preventative measures and there is also an increased use of cyber security insurance.
Insurers must implement innovative measures to keep up with the rapid advancement of technology demands of the market that come with that. In addition to the issue of cyber security, the emergence of automation in the workplace will create further challenges and insurers must be creative and innovative with the products they produce to overcome these challenges. Insurers may seek to improve the technology components of their operations.
Our general impression is that the insurers are focused on digitalisation and improvement of the customer journey. Norway has been in the forefront of digitalisation and almost all Norwegians have access to secure digital identification online through BankID, which provides the basis for digital service offering. At the same time we do not see a lot of genuine innovation in the insurance sector in Norway. There is a few examples of new concepts and players, but overall it is still early days when it comes to insurtech in Norway.