Open Finance refers to the extension of open-banking-like data sharing and third-party access to a wider range of financial sectors and products, including in the insurance market.
The FCA highlighted in its recent market study on general insurance pricing practices (October 2019), that Open Finance and the increasing use of consumer data have the potential to transform how consumers use financial products.
With this in mind and following the development of Open Banking, the FCA has recently published a Call for Input to explore the opportunities and risks arising from Open Finance.
What are the current insurance issues which Open Finance could help with?
The FCA has identified the following as areas which Open Finance could help address:
- Comparison: the difficulties consumers face when trying to compare products based on factors other than price;
- Control & Understanding: the lack of control consumers have over their data and the lack of understanding as to how insurance products are priced;
- Loyalty Pricing: some consumers paying higher prices despite similar risk characteristics (i.e. loyalty pricing); and
- Complex Distribution Chains: complex distribution chains leading to poor customer journeys and increased costs in some cases.
What can Open Finance do for insurance?
The FCA sees Open Finance as a potential opportunity to offer solutions to the problems identified in the insurance market, including:
- Like-for-like product comparison ‘dashboards’ based on features the consumer is most interested in (rather than comparisons based on the features that a price comparison website chooses to show).
- Aggregation services that allow consumers to see all their policies in one place could:
- Make it easier for them to identify whether they are over or under insured.
- Allow customers to view value measures on their current policies (which may encourage more engagement).
- Bespoke deals and products based on a customer’s lifestyle and/or financial habits, which are better suited to their needs.
- Higher consumer understanding of risk profiling that allows customers to know about and therefore demonstrate ‘good risk’ characteristics (e.g. by sharing telematics information, or data from other Open Finance sources).
- Some ‘good risk’ customers could benefit from improved sharing of data (although this could also exacerbate the difference between ‘good’ and ‘bad’ risk customers in some cases).
- Services monitoring changes to the consumer’s circumstances which could then flag if changes to the policy may be needed (e.g. if they are likely to become under-insured).
- Making information more accessible to the customer e.g. information from the Claims and Underwriting Exchange, so they feel more ‘in control’.
- Pre-population of insurance quotes for application 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 better/competitive deals.
What are the challenges of Open Finance?
Open Finance brings with it opportunity, but also challenges, with the FCA identifying a number of risks that it could create.
- For example, Open Finance could lead to the exclusion of particular categories of customers (i.e. those who opt out of data sharing) and cause disadvantageous pricing for those customers.
- It could also result in the misuse of customer data.
- The FCA suggests it could in fact lead to poor consumer outcomes (notwithstanding it having the opposite of intentions). For example, auto-switching could lead to disengagement from customers (rather than increased engagement) as customers are no longer part of the decision making process. Or customers may become solely focused on price, ignoring those other factors affecting suitability. Whilst Open Finance aims to reduce friction associated with larger transactions the FCA’s view is that it may lead to harm where the requisite advice is not taken.
- Open Finance may also have a negative impact on competition if, for example, firms try to tailor products to match dashboard features.
- Last, but by no means least, Open Finance brings with it significant operational concerns including the upfront costs and the challenge of addressing legacy IT systems (including the requirement to standardise data metrics for sharing across the market). IT development and change management will therefore be big concerns, likely to have an impact on the desirability and feasibility of both the timetable and scope of the Open Finance project.
This Call for Input gives firms an insight into the FCA’s vision for the future of the UK financial services market. The FCA asks firms a series of questions, the answers to which will shape its approach to policy in the next few years.
All responses on the Call for Input need to be with the FCA by 17 March 2020. Please get in touch if you want any help in responding, before it is too late.
Authored by Clare Douglas