What are the opportunities?
The latest from the FCA is that Open Finance could transform how financial services, such as insurance are used, allowing firms to develop services that benefit consumers and businesses, improve competition, financial capability and inclusion.
Examples include the provision of personal financial management dashboards offering like-for-like product comparisons based on features the consumer is most interested in (in contrast to current available comparisons based on the features that a price comparison website chooses to show). Open Finance could also enable aggregation services that allow customers to see all of their policies in one place, making it easier to identify whether they are over or under insured; acting as a potential means for assisting with the FCA’s aim of ensuring good product value being provided to customers.
The application of Open Finance to insurance could also allow for bespoke deals and products to be developed based on a customer’s lifestyle and/or financial habits, which are better suited to their needs, including the proliferation of ‘on-demand’ insurance. This might also feed into insurance market participants offering services to monitor changes to the consumer’s circumstances which could then flag if changes to a particular policy may be needed.
Open Finance is also seen as a tool which could allow the pre-population of insurance quotes to facilitate streamlined switching. This could extend to consumers being able to share all data held by their current insurer with a number of prospective alternative providers who could then offer competitive quotes. On one view, enabling such switching would go some way to addressing the FCA’s concerns surrounding poor customer outcomes in relation to pricing and the so-called “loyalty penalty” (where firms target price increases at customer they consider less likely to switch provider).
But such opportunities do not come without certain risks
Any auto-switching tool provided as part of the Open Finance initiative could lead to disengagement from customers (rather than increased engagement) as customers are no longer part of the decision making process. In particular, there could be a risk that Open Finance could lead to the exclusion of particular categories of customers (for example, those who opt out of data sharing or who do not have access to technology) which might cause disadvantageous pricing for those customers, including for some vulnerable customers.
The FCA has also identified that the risk-pooling nature of insurance provision could be threatened by increased data sharing and corresponding bespoke insurance, potentially resulting in uninsurable groups and higher prices for many.
Not to mention, the perils of data mis-use arising out of the sharing of out-of-date or incomplete datasets and the related risk of potential bias arising from use of such data by algorithms which decide on access to, and the cost of, insurance. Given the breadth and depth of data that might be involved in insurance, including potentially sensitive data relating to health (for example), such consumer protection, data ethics, and financial inclusion challenges are heightened.
What does all this mean for insurers?
The sharing of customer data, including potential mandatory prescribed access, brings with it significant operational concerns relating to the challenge of addressing legacy IT systems and the requirement to standardize data metrics for sharing across the market. Whilst the insurance market is making great strides to digitalization through projects such as the Lloyd’s Blueprint digital transformation delivery plan (as well as the more recent modernization changes driven by the pandemic), legacy systems are still seen as one of the main barriers facing insurance companies looking to boost their digital touch points. Therefore, IT development and change management will be of concern, and are likely to have an impact on the desirability and feasibility of both the timetable and scope of the Open Finance project in the insurance ecosystem; particularly given the regulators focus on operational resilience which may be impacted where firms are required to make significant changes to their IT systems to support Open Finance.
It goes without saying that whilst potentially transformative, Open Finance could come with a substantial price tag, requiring data to be digital and sufficiently standardized. Developing APIs, new security and legal arrangements takes time and can involve significant costs. From those costs associated with technology development (which could particularly affect those with large back books or extensive legacy systems), to costs of the individual businesses themselves and the costs of any regulatory compliance.
What are the next steps for Open Finance and so-called Open Insurance, more particularly?
The FCA recommends that a legislative framework will be needed for Open Finance to develop fully, but that it will only flourish if the right commercial incentives exists for firms to invest and participate on a sustainable, and most likely reciprocal basis.
According to the FCA, the implementation of Open Finance should, therefore, be proportionate, phased and ideally driven by credible consumer propositions and use-cases. On top of this, the FCA sees any regulatory framework needing support from industry-led common standards, coupled with an implementation entity to coordinate development of a directory, authentication protocols and API tech standards.
All of which needs to be set against the background of digitalization more generally. Including the Smart Data initiative run by BEIS, Digital Identity and the EIOPA discussion paper on Open Insurance (to name only a few).
Open Finance, without a doubt, can facilitate industry-wide innovation and increase the agility of businesses in responding to changes in customer needs and expectations. However, it could also give rise to new or amplified risks such as data security, cyber risks and interoperability challenges.
The key question is whether it is possible for open insurance solutions to find a balance between regulatory objectives related to data protection and competition, while supporting innovation, efficiency, consumer protection and financial stability.
*This article originally appeared in Insurance Day in April 2021.
Authored by James Black and Clare Douglas.
