Open Finance - Reducing the complexity of insurance

One of the biggest challenges when purchasing insurance is the complex nature of the product. Many customers are put off by the sheer volume of data they must enter, only to receive lengthy policy documents filled with jargon. In fact, less than 50% of customers understand what factors determine the price of their insurance policies.

The Insurance Distribution Directive has already gone some of the way to simplifying the purchasing journey for customers, by ensuring a consistent and jargon free policy summary is provided. However, price comparison sites still focus on only a few key factors, such as price and Defaqto rating, rather than tailoring offers to the specific needs of the customer.

Many insurers are already using supplementary data to enhance their risk based pricing models. The likes of Vitality and ByMiles use customer data on health/ fitness metrics and car telemetry respectively to price customer premiums and incentivise risk reducing behaviours.

Why is Insurance complex today?

Complex products

The technical nature of insurance products makes side-by-side comparison very difficult for consumers. Comparison sites have gone some of the way to improving this, allowing customer data to be provided to multiple insurers at once, but many of the products aren’t truly like for like.

Fragmented portfolio

Most people hold multiple policies across multiple providers, for example having travel, car, home, and mobile phone insurance with different companies. Our customer research shows that the majority of individuals (65%) would find it useful to see all their policies and providers summarised in a single app.

One size fits none

Customers are increasingly looking for personalised deals when it comes to insurance. Our research shows that most customers would happily share their data with other providers so they can receive offers that are tailored to their profile and specific needs.

How could Open Finance help the insurance industry?

Policies all in one place

Within traditional banking, many have commented that aggregation will just become a commodity.

But across insurance it feels like more of a pipe dream – and yet this is overwhelmingly the feature that customers want to see most.

Companies such as Brolly provide a service that allows customers to see the details of all their policies in one place. Brolly also provides actionable insights by using AI to assess various policy documents to check for things like duplicate or missing coverage.

Automatic renewals and switching

Once the technical rails have been created to aggregate policy information, a third-party provider could begin to automate the renewal and switching process.

When a car insurance policy is due to expire, for instance, the intermediary could automatically go back out to the market and source the cheapest quote. The consumer could then consent to their details being passed to the new provider, and the policy is automatically established. This may result in third-party providers owning most of the customer interactions, rather than the insurers themselves.

Personalised pricing

If insurers are given access to more data on a customer, they could monitor changes to customer circumstances to flag if policy changes are required. This detailed view of customers’ data from other financial providers would also mean insurers are able to offer bespoke products and deals. Companies like Lemonade are already opening up elements of the insurance value chain, offering what they refer to as ‘open-source policies’ where both customers and industry experts are able to shape the policy itself.

Similarly, Honcho has created a platform where insurers can bid for policies based on an individual’s specific needs. Customers have full transparency across the bids and are given a policy that is right for them. Honcho currently has bespoke connections with insurers, but Open Finance could automate this and increase coverage dramatically.

Considerations for implementing Open Finance in Insurance

Start with digital

Although aspects of the industry have embraced digital to support comparison tools and rapid pricing, large chunks remain very manual. Institutions will need significant transformation before they can leverage Open Finance’s true potential. This isn’t just about customers either, sharing data will improve operational processes in the long run.

Be aware of marginalisation

As pricing models have access to more and more customer data, there is a real concern around marginalising customers. In the same way that customers with poor credit history are refused loans, individuals with unfavourable data may be priced out of certain products.

Business model

Incumbent insurers have valuable proprietary data which could be leveraged by new players with more powerful analytical models. Established insurers will need to be incentivised to share this data – financially or through partnerships – or be mandated by regulations. Either outcome will lead to a shift in the landscape.