The development and use of technology in the insurance sector, “Insurtech”, is having a transformative effect on the insurance market. Not only is Insurtech providing new ways of selling, but it is increasingly forming the basis of thinking for the development, underwriting, monitoring and administration of insurance products.
Asia is a particularly exciting area for this development. Relative to developed Western markets there has in the past been low insurance penetration – factors such as a huge and dispersed populace make product distribution challenging. However, with rapidly increasing smartphone use, the majority of the world’s population of tech-savvy millennials and growing middle classes with distributable wealth and insurance requirements, the demand for rapid digital services is ever-increasing and creates conditions for a potential boom.
But whilst Insurtech will surely bring customers quicker access to and more bespoke insurance products, it remains important that those customers are protected, treated fairly and provided with quality products. To that end the regulators are seeking to fully understand the emerging technology and position themselves in a way that is relevant to the future of the industry.
In this article we look at how Insurtech is developing, consider some of the risks and comment on how the Hong Kong regulator is positioning itself to adjust to the new environment and keep the city at the forefront as an international insurance centre.
To date, the majority of Insurtech has been utilised by providers as a sales medium – a means of distribution for existing products to a wider audience. In addition, policyholders are now often provided with the online platforms to process claims more quickly. “Chatbots” are increasingly popular too, allowing customers (and agents) to open an online conversation window and raise queries and check useful information much more quickly and efficiently than in the past.
So far, so good. But there is lot more potential yet to be realised, particularly in interaction with the Internet of Things - the concept of connecting any device to the internet with the goal of allowing insurers access to the data from those devices so they are able to gather more data about their consumers. Supplied with this data, insurance products more relevant to (and better priced for) the specific customer can be offered.
Two lines of insurance that are likely to be early movers in implementing interaction with the Internet of Things are health and motor. For health, wearable monitoring devices are already popular across the demographic and that presents an opportunity for insurers to access live data on their insureds rather than needing to rely solely on health records and claims history. Sophisticated data analytics should lead to more accurate risk assessment and pricing and that may in turn lead to premium discounts or rewards for policyholders who stay active and healthy.
Similarly with motor insurance – a policyholder’s device could be plugged into the car and the insurer could receive data on how that policyholder drives. Depending on the results, there could be an adjustment of premium (either way).
Insurers can also benefit from the greater reach and lower cost of digital sales platforms. The potential for the use for blockchain technology is particularly relevant here - digital record keeping will also increase efficiency and reduce costs and fraud risk.
Privacy and security are clearly the first concerns. Statistically millennials are more likely to trade privacy for convenience, but even with the incentive of premium discounts, many customers are likely to be reluctant to allow insurance providers (and of course the device manufacturers) access to sensitive data in light of the security and hacking concerns that emerge ever more frequently in media headlines. Insurers will need to provide their customers with confidence that enhanced levels of security are built into the processes.
No less a concern surrounds what happens with the data collected, not only in terms of its storage and dissemination but, potentially more sinisterly, in its application. Data privacy laws will give protection to a certain degree, but a question arises as regards the extent to which an insurer could withdraw or simply refuse to provide, for example, medical cover, on the basis of data obtained from the Internet of Things. The use of the data in underwriting is something that regulators will need to have close regard to in ensuring that customers are treated fairly.
The risks arising in the use of blockchain technology are not yet fully understood. As the database is not stored in any single location but rather across multiple jurisdictions, the regulation of the environment is difficult. This remains a topic of keen and current debate amongst global financial regulators. In any event if blockchain is to be employed in the administration of insurance policies, the regulators will need to be satisfied that such cross-jurisdictional issues will not bite.
Finally, whilst a number of lines of business can be adapted quickly to the online marketplace, there are a number of long-term insurances that have more complex features that require a professional assessment of e.g. financial circumstances as well as the need for the intricacies of the product to be described to the customer in detail. This would raise challenges for customer and insurer alike over an online platform.
Hong Kong regulation
Last year, the Hong Kong Insurance Authority (“IA”) launched its Insurtech “Sandbox” to facilitate pilot trials, and start a licencing “Fast Track” to provide a dedicated queue for new authorisation applications from online-only insurers in order to accelerate the approval process. Similar schemes have been launched in other jurisdictions.
The Insurtech Sandbox allows authorised insurers to experiment with new Insurtech and other technology applications without the need to achieve full compliance with the IA’s usual regulatory requirements. Under the Sandbox initiative, pilot trials of Insurtech applications are conducted in a controlled environment with sufficient safeguards for policyholders. Insurers can gain real market data and collect user feedback before their formal launch in the market.
The IA’s stated aim is to provide a regulatory environment that is conducive to business development and one that embraces technology. The advantage of the Sandbox approach for insurers is that it allows experimentation for projects in a ‘live’ environment and can assist them in overcoming regulatory issues before proceeding to launch. For the regulator, it allows it an opportunity to understand (and possibly shape) how the technology is evolving and then create and adapt regulatory rules, as necessary, to make them relevant.
As regards new entrants to the market, the Fast Track scheme exists to expedite applications for new authorisation to carry on insurance business in or from Hong Kong using solely digital distribution channels as a means to promote the development of Insurtech in Hong Kong.
These two platforms have positioned Hong Kong for a stronger Insurtech future – important when considering the speed of innovation in the insurance space in neighbouring China.
Insurance companies are highly regulated and complex businesses based on long-term data projections. As a result a steadier pace of change is to be expected that might be found in other, unregulated industries. As noted, so far there have mainly been ‘supply-side’ developments – digitising existing product lines for a broader audience. The touchpaper of an Insurtech boom though is likely to be lit when innovative start-ups reshape the fundamentals of insurance itself. Interaction with the Internet of Things is likely to be a key area in this development and will transform the way insurance providers design their products.
Doubtless there are many interesting changes and challenges ahead, but the regulators will also have to ensure that new products and processes comply with appropriate regulatory requirements. Innovation and technology in insurance business must be used in such a way that gives consumers the protection they need and the peace of mind that is at the heart of what an insured looks for in the first place.
In Hong Kong (and as regards similar initiatives in other jurisdictions) the IA’s Insurtech Sandbox and Fast Track application process will encourage more technology firms into the insurance sector. Flexible regulation in this area is what will enable innovation. This will challenge the traditional insurers – and they have already begun investing significant amounts in technology to meet the competition. This is all good news for consumers – more and better availability of products - but the challenge for all regulators will be to ensure the development of regulatory regimes which not only encourage innovation but, crucially, continue to focus on protecting the customers.