What is open insurance?
Among the many buzz words taking the insurance industry by storm this year, ‘open insurance’ ranks among the top. The term has been used by insurers, insurtechs, investors, governments and regulators but everyone seems to have a slightly different definition.
Perhaps in recognition of this emerging technology and the role it may play in the near future, the European Insurance and Occupational Pensions Authority (EIOPA) recently released a Discussion Paper on Open Insurance. The Discussion Paper contains this definition:
EIOPA has considered open insurance in its work so far in the broadest sense, covering accessing and sharing insurance-related personal and non-personal data usually via APIs
I like this definition. In other words, open insurance allows insurers to exchange data about particular customers (such as the subject insured and claims experience), and for insurance data about customers to be easily sent to the insurer from other places, such as from IoT devices relevant to the insurance cover. Open insurance may therefore facilitate the sharing of data between competitors.
Why is open insurance emerging?
The emergence of open insurance is largely coming off the rise of open banking. Open banking has been rolled out in many countries around the world. Some countries have rolled out open banking on a structured basis with regulatory bodies taking a proactive approach, while others have been industry led.
Some key events in the evolution of open banking:
- 2015: European Parliament passed the Payment Services Directive (PSD2), which requires banks to create methods for third parties to work securely with the bank’s data if customer consent is provided.
- 2016: UK Competition and Markets Authority issued a ruling which required the nine largest banks to allow licensed startups access to transaction-level data by January 2018. A specific Open Banking Implementation Entity was created for this purpose.
- 2018: Hong Kong Monetary Authority issues the Open Banking Framework for the Hong Kong Banking Sector
- 2019: Australia passes legislation paving the way for the Consumer Data Right (CDR). The CDR is first being rolled out in the banking sector. It is not yet known when it may be rolled out to the insurance sector although it has been flagged.
In its interim report dated September 2020, Australia’s Select Committee on Financial Technology and Regulatory Technology recommended the expansion of the CDR to superannuation and then to other sectors such as insurance.
Open insurance as an enabler
Under open banking initiatives, financial institutions exchange transaction level data with other institutions or other financial service providers. This access can be at a ‘read’ or ‘read and write’ level.
Read level access (data sharing) could enable third parties to develop applications which allow customers to see all their accounts in one place, more easily switch from one provider to another with information pre-populated, and search for a better deal in terms of loans, accounts and credit cards with their financial profile information transferable.
Read and write level access (initiation of payments) could enable third parties to develop applications which perform funds transfers on behalf of customers.
Open banking therefore enables the creation of more value for customers. By requiring participants to comply to generally accepted (or regulated) standards, the ecosystem gains trust from consumers and operates more efficiently.
Open insurance initiatives can also have similar potential:
Consumers: Making it easier for data to be provided to insurer for risk analysis and selection, enabling consumers to more easily shop around for the best insurance policy for their needs without needing to re-enter their data each time, enabling the creation of more tailored products and services.
Insurers: Encouraging competition by removing (or significantly reducing) switching costs for consumers. New businesses, products and distribution models may be facilitated.
Open insurance initiatives may interact with other ‘open’ initiatives, such as open banking. This will enable insurance entities to obtain data from banking providers about customers, with their consent.
What are some hurdles? Is it all good or bad?
Customers won’t be calling ‘open sesame’ on their data if they are not comfortable with how it will be used and the security of the entities that will have access to it.
In any situation where there is exchange of data, information security and privacy concerns come to the fore. Under Australia’s CDR, the concept of an accredited data recipient has been created. An data recipient can be accredited to receive data under Australia’s CDR regime after going through an application process. An accredited data recipient must comply Information Security requirements and with the CDR Rules which set out the Privacy Safeguard requirements. The competition and privacy regulators have joint responsibility for enforcing these rules.
But there are also other issues at play here which government and open insurance players need to be across.
Underwriting processes typicallyinvolve commercially sensitive decisions based on data so insurers may not be willing to share certain data points. Competition in the industry may be adversely affected if this information was to be more easily accessible.
Open insurance may lead to more granular risk analysis and pricing. In my recent article on the evolution of the shopassurance phenomenon, I observed:
Analysis undertaken by the Actuaries Institute suggests that as more data is used, a significant number of individuals who are currently paying a premium correlated to the ‘average’ risk will be able to pay a lower premium.
However, those who do not consent to sharing data with the insurer, or where the data shows they are higher risk, may be required to pay a higher premium.
The result of the Actuaries Institute’s analysis is depicted in the diagram below with a larger number of people grouped in the red high-risk zone.
The axiom that insurance involves the sharing of risk is still correct, but the sharing of risk is more correlated to each individual’s contribution to it in the pool than currently possible.
Source: Actuaries Institute, The Impact of Big Data on the Future of Insurance Green Paper
A higher premium may make insurance unaffordable for some. These people may switch from being insured to uninsured, increase their excess, or reduce their sums insured.
This means they are likely to suffer financially if a claim event ever occurs and are more likely to require support from public services, which could mean a strain government resources,
An additional concern is that the data being used to justify a higher premium may be inaccurate.
These are all issues that need to be considered.
Open insurance is open for discussion
As discussions around open insurance continue to take place, particularly around new frameworks and standards, it is important to keep in mind that insurance plays an important role in society in helping protect what matters most.
Open insurance has significant potential to dramatically transform the way insurance companies conduct business, develop products, and change the way customers buy and interact with insurance products. It certainly is exciting to be able to unlock this potential. In shaping the development and implementation of open insurance in coming years, policymakers and corporates should have an open mind; not just replicate what open banking does, but make it work for the insurance industry and the people it protects.
Tim Chan is an insurance & insurtech lawyer at global law firm Norton Rose Fulbright and Founder of The InsurTech Lawyer blog. He regularly advises insurers and startups on emerging legal issues affecting the industry. Follow Tim on Twitter: @timinsydney