Financial technologies, also termed as ‘FinTech’ innovations, are reshaping the services of financial services. Innovation in technology leads to new opportunities, building space for new challenges for both the insurance industry and financial supervisors.
FinTech has raised the level for the insurance industry. Customers are looking for more enhanced mobile experiences from all other financial services, as they receive from Google, Amazon, Apple, and other famous tech brands.
Innovations in FinTech apply to a range of new technology and revolutionary business models that can change the insurance business. For the insurance sector, the most relevant innovations are in terms of:
- Emerging technologies for the internet of things (IoT), digital platforms, big data, data analytics, telematics, comparators, machine learning(ML), robot advisors, artificial intelligence(AI), and distributed ledger technology, including blockchain and smart contracts
- Business models designed for peer-to-peer, on-demand, and based on usage insurance
The key drivers of innovation in the insurance industry are technological advancements and the changing priorities of the clients. Both the incumbent insurance companies and new technology firms, or companies known as ‘Insurtech’ start-ups, are looking forward to creating such technologies.
Difficulties faced by insurance supervisor
Developments in fintech are highly disruptive and can have a considerable effect on the insurance industry. Currently, however, the field is too unpredictable to properly determine and appreciate the degree to which such future innovations may impact the insurance sector and its regulation.
The following list throws light on some major challenges that insurance supervisors may have to tackle in the future:
- Supervisors should have a thorough knowledge of how innovations work and can be applied to continuously assess the risks arising from new products and business models.
- Supervisors need to weigh the risks of new technologies against the benefits for policyholders and the insurance industry as a whole and evaluate how to build a proper atmosphere to promote innovation while safeguarding the interests of policyholders, for example, through regulatory sandboxes or innovation hubs.
- To track emerging risks (such as using algorithms for underwriting purposes) and improvements in corporate governance systems resulting from third-party cooperation with InsurTech firms, supervisors and regulators need to analyze and, necessarily, update their prudential regulation system.
- Supervisors need to evaluate whether current reporting specifications sufficiently allow trend tracking and future risk build-up from an emerging technology to take place.
- Supervisors need to understand the effect on consumer safety of fintech technologies and provisions in which consumers are handled equally. For example, security should be in place when using artificial intelligence(AI) and robot-advice technology to ensure that the advice and services offered are appropriate and affordable for the consumer.
- Cooperation and coordination processes with stakeholders, including supervised organizations and associations, other market participants, researchers, financial regulators, and other bodies whose structures relate to fintech technologies, such as telecommunications or data protection agencies, need to be developed by supervisors.
- Supervisors need to evaluate whether they need to develop their supervisory resources and IT infrastructures, as technical advancement often provides supervisors with opportunities to automate specific supervisory processes and enforcement criteria.
- Supervisors need to learn about the latest techniques to understand innovations and identify the associated risks. They even need to prepare to interest and keep talent intact with relevant skillset.
Preparing for InsurTech environment
Practicing the following different strategies can help in adopting preparation methods for the newly evolving InsurTech environment:
1. Engaging with the community –
To engage with the community more wisely, one needs to look out for inspiration and grab opportunities to collaborate.
Multiple business experiences are beneficial in finding new ways of creating value. Insurance companies may collaborate with InsurTech to develop a proof of concept (POCs) or launch incubator programs by setting up partnerships.
2. Concentrating on internal focus –
An understanding of the InsurTech ecosystem’s evolution is crucial. Participating in InsurTech acceleration programs or hosting InsurTech hackathons is also a valuable way to know the importance of joining the setting.
3. Initiating action –
Insurers will have to initiate the necessary steps to invest, collaborate, or transition in the organizational culture.
The insurance sector is ready for reformation, to encourage new business operations, and to optimize production. Insurance firms will have to look to InsurTechs for motivation and collaborations to make headway. Although InsurTech is changing the industry rapidly, it does not seek to replace conventional insurance. Rather, it opens the doors for its peers to widen the value chain and improve overall mobility.