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Innovation through new technologies has brought a change in the way operations are carried out in almost every sector and has now reached insurance, one of the oldest and most traditional industries. The way we avail insurance has stayed stagnant for years and the industry has conveniently resisted changes. However, a variety of breakthrough technologies are set to spur a fundamental transformation of this sector. These technologies will alter the existing business model resulting in massive improvements to meet the requirements of consumers, especially in the post-COVID-19 world.
What is Insurtech and why is it needed?
Insurtech, a subset of Fintech is a portmanteau of the words ‘Insurance’ and ‘technology’. It includes platforms that allows access to insurance services with automated processing of claims, more personalized services, interaction through chatbots, improved evaluation of risk by use of wearable devices, telematics, Internet of Things and more, at lower costs. It has resulted in the elimination of intermediaries, who have now been replaced by virtual agents establishing a direct relationship between customers and insurers.
Services like microinsurance and peer-to-peer insurance are also easily accessible via such platforms. Microinsurance offers on the go insurance against specific risks for a relatively short period of time offering coverage for even a two-day vacation. The process to buy these policies is automated and takes up only a few minutes. On the other hand, peer to peer models allows the sharing of insurance needs within a self-selected group of consumers. Such group comprises family members and friends who pool resources to buy insurance products. This model reduces the risk of fraud and offers multiple benefits to its customers.
The need for Insurtech arose as the Insurance industry is currently grappling with lowest customer satisfaction levels. Internal processes are often too complicated, interaction with the end consumers is limited and digitization of the industry is slow. Being a highly regulated sector with multiple barriers to entry has further hindered its growth. These factors combined with a major shift in customer expectations and behaviours fuelled by the spread of Coronavirus pandemic have paved the way for innovation. Moreover, it has been predicted that the present crisis will accelerate the growth of Gig workers and an on-demand economy which will result in prioritization of digital and short-term services. This includes access to short-term medical insurance. Offering such products will help the Insurance companies to quickly recover from the impact of a regressing economy.
Application of technology in Insurance
There are several ways in which technology is reshaping the industry which has resulted in cost reduction, improved underwriting, and personalized services to meet the demands of consumers in the post-COVID-19 world. Use of Artificial Intelligence-based chatbots can now allow customers to interact with the insurers round the clock. Chatbots can emulate human behaviour which makes them capable of engaging with new clients, give basic advice and ask simple questions before offering a product. In the long run, they have the potential to eradicate intermediary based structure altogether, exactly the way millennials prefer it. This will not only ensure social distancing but access to continuous service as well. Furthermore, Artificial Intelligence(“AI”) has also reduced the time it takes to process claims. For example, machine learning models like Lemonade can quickly assess the severity of damages and predict costs from the available data in a few seconds to minutes.
Internet of Things, which is a network of interconnected devices, collects, stores and releases continuous streams of Big Data to determine behavioural patterns of policyholders. This data is further used by the insurers for underwriting, a systematic process of measuring risks and predicting monetary compensation. Devices used to collect data include Telematic sensors installed in vehicles to track driving habits, wearable or personal devices such as FitBits to monitor health-related metrics and location-based sensors fitted in homes or offices to improve responsiveness to fires, floods or theft.
Insurers are also using Drones as they can easily access isolated and dangerous areas, especially after disasters and aid in an effective collection of aerial data. This not only cuts costs but also fastens the claim process. Usage of drones will be more beneficial during the present times when implementation of social distancing norms has become necessary. Similarly, Virtual reality is being used to improve underwriting as it can create 3D images of buildings and reconstruct accidents. Moreover, Blockchain technologies and smart contracts are being used to maintain an immutable record, eliminate fraudulent claims and to immediately settle claims.
Overall, in the postCOVID-19 world, usage of technology in the insurance industry will ensure that the rise in demand for a variety of new products is met. This will help the consumer to meet any increased expenditure for a certain defined event at a lower price which includes critical illnesses among others. Secondly, rather than payment of fixed premiums over time, a customer would be charged based on the extent to which a certain activity is being performed.
Legal challenges to Insurtech and the road ahead in India
The Insurtech industry has a lot of potential, however, it is likely to encounter multiple legal challenges. One of the major obstacles being faced by the Insurtech companies is an inflexible regulatory landscape. The insurance industry is averse to disruptions and new entrants usually fail to comply with the existing regulations. Specific regulations for growing innovation in insurance have not yet been laid down, barring their entry. Furthermore, the insurance sector is highly competitive and capital intensive which has put new entrants at a major disadvantage.
Another major obstacle is being posed by access to a copious amount of granular and sensitive data by the Insurtech companies. These companies are likely to face additional challenges as regulations related to consumer’s personal data are increasing. Moreover, there are no solid regulations in place to govern the functioning of emerging technologies like Blockchain, AI, drones, IoT which is bound to result in privacy issues and cyber-attacks. Their use in the absence of any proper regulatory mechanism brings in the question of liability in cases of technological faults especially in use of AI where attribution of liability is still a hotly debated grey area. Unfair profiling of certain classes of customers by algorithms while underwriting or claim processing is also a valid concern which undermines the right to equality.
To overcome some of the above challenges, India is undergoing major regulatory reforms. In India, data protection is regulated under the Information Technology Act, 2000 and the Information Technology (Reasonable Security Practices and Procedures and Sensitive Personal Data or Information) Rules, 2011. However, for additional protection, the Insurance Regulatory and Development Authority of India (“IRDAI”) has prescribed a supplementary framework. It includes multiple regulations that require insurers to maintain the confidentiality of data. These regulations are namely:
a. IRDAI (Protection of Policyholders’ Interests) Regulations, 2017
b. IRDAI (Outsourcing of Activities by Indian Insurers) Regulations, 2017
c. IRDAI (Health Insurance Regulations), 2016
d. IRDAI (Maintenance of Insurance Records) Regulations, 2015
e. IRDAI (Third Party Administrators – Health Services) Regulations, 2016
Furthermore, IRDAI has also issued guidelines on Information and Cyber Security and the Guidelines on Insurance E-Commerce to ensure that organisations implement procedures to prevent misuse of confidential data. Cybersecurity guidelines are applicable to all records, information and data received by the insurers and other third parties. On the other hand, the e-commerce guidelines govern the websites and mobile applications which are used to sell insurance products. The guidelines are only enabling or prescriptive in nature. However, these developments are likely to intensify due to release of the draft of the Personal Data Protection Bill, 2018 and declaration of privacy as a fundamental right in the case of Puttaswamy v. Union of India.
IRDAI is also closely observing the innovative developments and has initiated many discussions around it. It constituted a working group in 2018 to examine the use of portable devices in the insurance sector. In May 2019, it introduced a regulatory sandbox programme and issued guidelines to foster the growth of innovative products after a ten-member committee released its report on the same. A batch of 33 Insurtech proposals was approved under the scheme in January 2020. This scheme will allow insurers and technology companies to collaboratively experiment with new products under relaxed regulations. This will help the regulator in drafting policy after gauging real-life implications of such products. This confirms that India is bracing itself to revamp the insurance industry and will see a tremendous growth in the near future.
Conclusion and suggestions
The change in the Indian insurance sector is inevitable. The stakeholders are preparing themselves by gradually shifting their practices to embrace innovation. However, India still has a long way to go as it is likely to struggle with the rising demand for such products in the post-COVID-19 world. To make the process easier, the author has the following recommendations:
- The current guidelines are restricted only to insurance companies and there is an absence of specific laws or regulations governing wearable devices, drones, AR/VR etc., which is likely to result in assimilation of consumer’s data by third parties. To govern the collaboration of Insurance companies with multitude of platforms for technologies like blockchain, drone and AI in insurance, new laws or regulations need to be laid down to guarantee complete transparency. This is to put in place appropriate arrangements taking into account the role played by all the parties involved, making them aware of risk implications and bringing them under the purview of law which will make it difficult for such parties to escape liability ensuring increased protection to consumer’s data.
- As the current insurance industry is too rigid, the future regulatory scheme must allow for a smooth disruption of the traditional insurance ecosystem to provide fillip to the entry of new companies. The regulators must plan a consistent approach to disruption, putting innovation at the heart of strategies. This can be ensured by simplifying the procedure to enter the Indian insurance market or by encouraging the traditional companies to invest in new models for their long-term sustainability. The same can be achieved by framing new regulations for Insurtech companies to simplify the process of registration. The amount of registration fee must be lowered, and the minimum paid up capital requirement be relaxed. Amendments can be made in the existing regulations to incentivize companies to invest in innovation.
- The regulator must observe and understand all aspects of the emerging trends in the sector to draft an appropriate policy. For example: Few Insurtech companies prefer decentralised platforms like blockchain to store data, which will mean that the regulator will have to access such platforms to conduct audits. Hence, the regulator must keep track of such developments while framing the policy.
- The regulator must ensure that the insurers strictly comply with the privacy regulations to protect the data of consumers. Moreover, the current cyber guidelines issued by the IRDAI are only prescriptive in nature, posing a high risk of data breach. Therefore, there is a requirement for more stringent regulations specifically applicable to Insurtech products as they require access to vast quantities of data. To achieve this, the regulator must analyse privacy regulations and guidelines being issued by multiple jurisdictions that target the insurance industries which include, inter alia, the General Data Protection Regulation(GDPR)
These steps should be expeditious to fill the lacunae in the law and to safeguard the interests of the stakeholders.
(This article is authored by Pravi Jain, a third year student at National Law Institute University, Bhopal)