The Impact Of Technology Towards Insurance: Are We Ready For Innovation?
In the last several years, we have seen a new crop of digital products and services enter the lexicon of the insurance industry such as usage-based insurance, peer-to-peer insurance, machine learning, robo-advisory, and the emerging phenomenon known as the Internet of Things, to name just a few. InsurTech has permeated virtually every aspect of insurance, from customer service, products, underwriting, and pricing, to marketing and distribution.
On the marketing and distribution front, the InsurTech industry has been grappling with questions like do digital marketing and advertising activities trigger insurance producer licensing requirements, does the provision of value-added services to insureds or potential insureds implicate states’ anti-rebating laws, and how can an entity be compensated for insurance referrals without being subject to insurance regulation? We have seen companies offering a digital platform allowing developers and businesses to integrate insurance services directly into their websites or apps (so-called Application Programming Interfaces, or APIs) having to navigate these issues following several high-profile regulatory actions.
Most of the InsurTechs now use AI and machine learning. The ability of AI and machine learning to analyze data at a very granular level has regulators concerned about various consumer protection issues such as data privacy, fairness, discrimination, and cybersecurity.
For one thing, algorithms may use geographical data or other individual attributes, creating outcomes that implicitly correlate with sensitive characteristics such as race, religion, gender, etc., which insurance laws generally prohibit in the sale of insurance.
In addition, while deployment of machine learning to price risk could help insurers reduce the degree of moral hazard and adverse selection inherent in selling insurance broadly, regulators worry that the increased tailoring of risk and issuance of highly customizable policies reflecting the unique characteristics of each insured could undermine the risk pooling function of insurance and lead to large groups of people or risks becoming uninsurable in the private insurance marketplace.
InsurTech firms getting involved in underwriting and pricing must appreciate the insurance regulatory landscape governing product development or risk potentially running afoul of various insurance regulations. A company that has a model that impacts rate filings, for example, may be acting as an advisory or rating organization and may require licensure under state insurance laws. And even where state law is unclear whether licensing requirements extend to such firms, we have seen regulators insist on some degree of oversight or review of third-party data providers and telematics as a condition to approving the utilizing insurer’s policy rate filings.
Regulators are also now scrutinizing anti-competitive issues with vendors supplying similar data and models to multiple insurers as well as whether the use of nontraditional data sources may be a proxy for prohibited discriminatory factors in the sale of insurance.
And as computing power grows exponentially, it has opened the insurance actuarial modeling world to new and sophisticated forms of data collection and analysis, including data mining, statistical modeling, and machine learning. These evolving techniques have made it increasingly challenging for insurance regulators to evaluate filed rating plans that incorporate complex predictive models.
The Use Of Blockchain Technology In Insurance
Blockchain, as a form of distributed ledger technology, provides multiple parties with access to the same information at the same time and allows for the transfer of information, and possibly assets, among the participants. Many see tremendous potential for this technology in the insurance industry. Although for now, people see the greatest value in its ability to bring efficiencies and cost savings to existing processes in the industry — rather than seeing it as a disruptive force in the development and distribution of insurance products.
Use cases of blockchain adoption by the insurance industry are still very much in the exploratory stage. A logical starting point for insurance companies looking to leverage the benefits of blockchain is the efficiencies that the technology could deliver to the oftentimes consuming and costly methodologies associated with data management and claims administration. The opportunity for insurers to streamline such internal processes is highly attractive to the industry.
However, there are a number of features inherent to blockchain that may be inconsistent with, or at best, ambiguous under, current state insurance laws. In many cases, these laws were written decades ago, before the advent of most of today’s technologies.
As with any new mode of data storage, regulators want to ensure that policy information and personal customer data residing on a blockchain comply with existing privacy and data protection regulations. State insurance laws generally require an insurer’s books and record to be maintained in a particular state and be available to the regulator for inspection and audit. Can these requirements be satisfied by providing regulators with a node on the blockchain? Time will tell, but discussions with regulators have been encouraging.
The Potential Of Smart Contracts In The Insurance Industry
A smart contract is essentially software that checks for specified transactions in the network and automatically executes certain actions conditional on certain prespecified conditions being met.
Smart contracts offer great promise to the insurance industry. For insureds, it could remove the pain points in navigating the frequent time-consuming claims filing process, while insurers see the potential for significant saving in claims handling expenses. A good example of smart contracts’ potential is a relatively new product designed as a fully automated flight delay insurance policy that runs on a blockchain. It allows customers to receive a payout as soon as they arrive at their destination following a delay that exceeds a certain length of time. The process is fully automated, with a smart contract deciding whether customers are eligible for indemnification.
Some in the industry believe insurers may ultimately be able to charge a premium for smart contract policies over comparable coverages utilizing traditional paper due to the claims-free, guaranteed-payout features embedded in smart contracts, to which insureds may ascribe added value. Furthermore, as smart contracts and blockchain technology reduce the administrative, and claims to handle costs, insurers may begin offering previously financially unviable products such as microinsurance.