Open Banking Opportunities in the Insurance Segment

Data has become a commodity in our everyday life and making a good use of it is the new game-up across all industries. Financial services have been heavily disrupted by transparency regulatory directives to better manage users’ data. Open banking initiative is one of the most important directives that has transformed the banking sector that eliminating the banks’ monopoly on consumers’ data. In effect, financial services have successfully responded by creating opportunities for new products and services to be developed, increasing customer choice, and enabling greater competition. One segment that has not experienced this market-driven initiative is insurance which requires a fundamental shift to modernise processes and commoditising data.
Insurtech, open banking in the insurance space and open insurance are all initiatives to build a new school of thought within the insurance segment and create data-driven innovation within insurance firms providing better customer experience enabled by scalable technology.

Where the insurance segment stands today
There are several drawbacks in the insurance segment have been holding innovation such as relying on monolith systems, outdated end-to-end processes, poor insights from consumers‘ data, and lack of innovation to capture latest market trends. Traditional insurers have recently introduced a digitalised customer journey for their end users; however, the digital advancement is less progressive compared to other financial services such as retail, wealth management or payments. Data-sharing practices within the insurance segment is at its very early stage and delivered under laws that are not specifically designed to insurance products.
New entrants that have advanced business models will disrupt the space triggering more innovation in the centuries-old insurance segment. On the other hand, a multitude of players are providing the same insurance packages without any product differentiation and there is little competitive advantage across the industry. In addition, the actuarial calculation of today’s premiums is outdated and there is no scope to capture consumer behaviour. Whether there is a good practice to use consumers’ data, or the issue stands that some insurers are not even storing data at all.

Insurance products with open banking-enabled solutions
Across all regions, it is clear to determine that open banking is set to truly transform financial services for good and that was the case in the EU and the UK as well. Open banking was developed by the EU under PSD2 directive and embedded into UK law under the Payment Services Regulations (PSR) 2017 with the aim to create opportunities for new products and services to be developed by facilitating third-party access via Application Programming Interfaces (APIs). APIs are considered as the intermediary technology for allowing third-party providers access to other banks’ data infrastructures securely.

Open banking has proven to be exceptionally successful across the payment services segment turning it into a very competitive space creating an innovation-driven territory within the enablement of APIs. Accenture's 2021 report indicates that open banking market could be worth as much as $416 billion for the banking and other financial services providers and there is a rapid growth of third-party providers (TPPs) - e.g., in Europe, number of TPPs grew from 100 to 450 in less than two years disrupting established players in the space.

Open banking has fundamentally changed the user experience in different segments of the financial services industry, but the insurance segment has not been sufficiently exposed to it. The scope of open banking can be extended to the insurance segment as well and insurers need to be fully digitalised on the front and back ends to successfully embed open banking capabilities into insurance products.

New data-driven initiative
Open insurance is a new term in the industry; there is not yet a definitive definition for it, but the initiative will be facilitating open finance (granting access of data to third-party) as delivered in PSD2 in the payment services segment. PSD2 mainly focuses on the principle of personal data belonging to the data subject who can decide with whom and when to share their own data.

Insurers will be required to open their data to create a more competitive space and prioritise consumer demands by improving pricing for the end users. The key benefits for this initiative will raise the level playing field and fully embrace data-driven innovation by creating products:

• For consumers, to enable them to easily switch between providers, obtain an improved pricing and better product customisation.
• For insurers, to boost product efficiency and solidifying cost-effective compliance practices.
• For the industry, to increase competition and opening the market to new third-party providers and leverage new technological capabilities.

Several risks to adequately plan for would be: 1) data security whilst sensitive information is shared across providers, 2) service reliability to ensure a frictionless customer journey and, 3) ensure full compliance with laws such as consumer rights and data protection.

The use of data is limited to transactional information and sensitive personal data is strictly impermissible to be used or shared. However, leading insurers will run analytics on transactions to produce better insights in use cases such as:

• An insurance company can improve premiums pricing via open banking (AISP model) to determine whether they have had food delivery in the past number of weeks/months and based on which will dictate health insurance premiums.
• An insurance company can allow their consumers to pay via open banking (PISP model) their premiums by miles and automatically deduct the balances directly from their bank accounts processed under few minutes instead of days.
• Cross-case applications can be built through building strategic alliances between insurers and other financial services firms providing loan origination, wealth, or asset management solutions. On other hand, consumers are provided with more choice and enhanced services that will better meet their needs.

Three business strategies to tap further commercial opportunities within the insurance segment:

 1. Invest in insurtechs
Insurtechs raised $14.4 billion across 644 deals in 2021 reaching a cumulative ten-year total of $43.8 billion from 2012 to 2021 and there is a record-breaking funding across all regions. These capital inflows were directly funded from venture capital to insurtechs, or established players invested in insurtech companies.
This business strategy will be considered as a proxy for innovation whereas insurers will procure all resources required to the insurtech to develop state-of-the-art products.
Benefits: There is no IT transformational programs required to be executed by the insurers. Highly advanced technologies will be developed by the insurtech such as AI, predictive analysis, streamlining processes and building fully automated operating models which will reduce risk exposure for the insurers. Insurers will then provide insurtech with their domain knowledge in exchange of using scaled technology built by the insurtech.
Risks: For existing consumers, the insurance value chain will be disintermediated to the insurtech. New consumers seeking an advanced digital journey with specific customised products will be fully acquired by the insurtech impacting insurers’ branding.

 2. Insurers partner with open banking providers
Incumbent insurers will build a co-customer journey with an open banking third party (TPP) that provides Account Information Services (AIS) offerings. TPPs will then manage consumers’ consent and access their transactional data via open banking capabilities, based on which they will assess suitability of insurance products and customise pricing.
Benefits: insurers will accept to be disrupted in exchange of providing a fully digital customer journey in partnership with the TPP. On the other hand, insurers will have a full access of insightful data collected from account transactions, wearables, smartphone apps, and consumer behaviour.
Risks: customer loyalty will be at risk as the customer journey is partially moved to the TPP. TPPs that have not invested in their IT platform might provide a friction customer experience causing a high churn rate for insurers.

3. Develop internal open banking capability
Insurers will establish a fully operational open banking environment by building API-enabled models. Insurers will capitalise on consumer awareness identifying new business propositions that differentiate them from other incumbent insurers and creating new attractive customer experiences and new revenues streams. This business strategy is an organic approach where insurers will provide insurance products enabled by open banking solutions and leverage core open banking capabilities internally without exposing their own customer base data to third parties. Open banking licence is obtained by the FCA and easily attainable by any provider within 6 months from application submission.

Benefits:

• Insurers will maximise cloud infrastructure by phasing out legacy systems becoming fully digitalised to simplify employee experience and offering an agile customer experience. Insurers will focus more on scalable business model and innovation rather than running outdated IT systems.
• IBM has estimated in their research that IoT landscape will revolutionise the insurance segment by being embedded in electronics that can automatically transfer data and more than 100 billion connected devices will be in use by 2050 creating a massive commercial opportunity for the first adopters. Insurers will build an ecosystem for their users by creating and aggregated dashboard for their finances through Account Information Services (AIS) enabled by open banking APIs. Users will gain a comprehensive view on all their accounts, cards, retirement plans, investments and have innovative tools to customise their own insurance package for all their needs. In addition, consumers can pay using Payment Information Services (PIS) enabled by open banking API to reduce settlement times of incoming and outgoing payments from days to seconds and boost process efficiency for insurers by eliminating the reconciliation task as funds will be automatically allocated.
• In addition, using open banking API guarantees better connectivity, easily builds new integrations, and keeps a growing catalogue of value-added offerings. Open banking API-enabled models also reduce IT glitches, eliminate manual workflows, increase end-to-end automation, streamlining actuarial calculation 24/7 and introducing AI and MI to efficiently handle claims – e.g., McKinsey’s 2017 analysis showed that introducing automated procedures can reduce claim processing costs by 30%.
• Building an internal open banking capability will turn insurers into a factory of enriched transactional data to reduce risk exposure, seek further commercial opportunities and provide a competitive premium pricing by monetising data.
• In Europe, particularly the UK enjoys of a very high regulatory support and high adoption of API and established frameworks, therefore, a developed open banking API built by an insurance firm will allow the first adaptors to explore benefits for own customer base and become a supplier for API business clients offered on white-label solutions to financial services institutions.

Risks: insufficient planning and poor transformation program management can result in high IT investment and unsustainable financial costs without delivering a true value for the insurers and its customer base.

To be or not to be
Incumbent insurers with no clear IT vision will be slow to respond to this new market initiatives and its competitive changes becoming outdated players and losing market share to disruptors – as being insurtech or incumbent insurers that innovated their business model.
Leading insurers seeking to reduce time to market and provide consumers more convenient services will lead the industry creating their own footprint in wider ecosystems by re-designing new processes, reimagining new customer experiences, products, best practices, and business models for the future. Leading insurers will review their digital roadmap adjusting their own strategies on the new market dimensions and industry trends solidifying a position among the fast-track next generation of insurers and creating a scalable operating model.

Conclusion
Doing nothing is not an option as traditional insurers will find new disruptors seizing a significant market share and become as less compelling for their own consumers base and new consumers. Therefore, a balanced, forward-thinking, and future-proof approach is required to pursue an advanced and successful business strategy by efficiently weighing out the benefits and risks involved.