"Open Finance & Insurance: Embracing technology, APIs & decentralized systems for inclusive, efficient, & innovative financial services."
Anand SinghSenior Counsel,Transport & Insurance
Open finance in a utopian world refers to a financial system that is inclusive, transparent, and accessible to everyone, regardless of their location, income, or background. This system is based on use of modern technologies such as blockchain, smart contracts, and decentralized systems to provide financial services and products that are accessible to everyone, including those who are traditionally underserved or excluded by the traditional financial sector.
For a better understanding of open finance, it is important to understand “Open Banking”, being the predecessor to open finance. Open Banking refers to a financial services model that allows consumers to share their financial data with third-party providers, such as fintech companies and other financial institutions, using open APIs. Open API is an application programming interface made publicly available to software developers. These are published on the internet and shared freely, allowing the owner of a network-accessible service to give a universal access to consumers. This also enables third-party providers to access a customer’s financial data with their permission, allowing them to offer new and innovative products and services.
Open Finance is a much broader concept, where individuals and organizations can access financial services and products through decentralized platforms and applications, and this is not limited to banking products and services. A great example of open finance acting as an enabler is the efficiency it can bring to buy now pay later (BNPL). A lender willing to lend a customer under BNPL can have access to customer’s credit history and financial health in 9vreal time, thus helping them with much better assessment at the time of the purchase. By removing intermediaries and making use of smart contracts and blockchain technology, open finance offers greater transparency, security, and access to financial services. The goal of open finance is to provide financial freedom and opportunity for everyone, not just those with access to traditional financial institutions.
Like most financial services, the insurance industry is also facing one of the most disruptive times.
Like most financial services, the insurance industry is also facing one of the most disruptive times. Advances in digital technologies, increasing competition from innovative and nimble rivals and flat investment returns are forcing traditional insurers to radically transform their businesses. To stay competitive, insurers need to do two seemingly contradictory things at once. On the one hand, they must develop complex, highly personalized products to meet customers’ needs. On the other hand, they’ll need to make the origination process much simpler, so that even highly complex products can be sold directly via online and mobile channels. This is where the open finance framework could potentially play a major role.
In the concept of open business models, APIs will be the means through which open insurance companies share their policyholder data and other information on products and services. With these open applications, insurtechs and major insurers can combine their expertise to create new solutions, offering something that would be impossible to achieve on their own. Using open insurance ecosystems, insurers can automate several processes, improve intraorganizational collaboration, and introduce innovative new features. These capabilities are becoming increasingly important in a post-COVID-19 world where consumers expect 24x7 service, instantaneous responses, and accurate solutions. One of the most successful examples of use of APIs and open insurance is the very famous Lemonade, which provides API access for distributors, who can sell Lemonade insurance through their own platform by simple combination of Lemonade’s APIs with the distributor. The way Lemonade has revolutionized the insurance industry, and especially the seamless claims payments has become a case study for entire world and sets the ground for the use of open finance in insurance sector.
We consider some of the most predictable advancements that we can expect with open insurance. Innovative minds behind the technological revolution that we are currently undergoing will certainly come up with more exciting ways to utilize open insurance.
Service Providers can utilize the huge flows of real-time data that open insurance unleashes to launch a host of new customer offerings.They can improve the customer experience substantially by using real-time data and analytics systems to deliver on-demand, personalized services, and experiences with customized pricing. Insurance quotes, for instance, can be assessed far more accurately by using automated systems to process vast volumes of customer information and related data to gauge risk. This improves the insurer’s risk management, replaces cumbersome and inefficient manual estimates and processing, and allows customers to benefit from cover tailored to their specific needs. Close interlink with customers will also enable insurers to introduce new ecosystem services that combine their products with value-added offerings supplied by business partners from outside the insurance industry. Insurance providers can increase their interaction with customers and encourage their customers to share their data by offering them extra services or better prices. New real-time risk protection and mitigation services, for example, will not only improve customers’ perceptions about the value they’re getting from their insurers and thereby boost retention rates. They’ll also enhance the insurance providers’ risk management and reduce their loss ratios.
Open insurance will create more opportunities for consumers to benefit from sharing their data with service providers. They will be able to make better, more informed decisions about their insurance needs. For example, policyholders will be able to identify where they’re underinsured and require additional cover.
Open insurance gives industry players a bigger market for their products and services. It enables them to extend their distribution footprint beyond their traditional markets by securing alliances with new business partners. They can then integrate their products with the non-insurance offerings of their business partners to deliver a broader and more enticing seamless customer experience.
The more partners and customers those insurers gain through their open insurance initiatives, the more appealing they will become to prospective new partners. The “network effect” that occurs in open insurance provides insurers that are early movers with a wealth of new business opportunities. They’ll have more to offer potential partners than insurers that were slow to embrace open insurance.
Insurers that adopt open insurance can better monetize their proprietary information and data services. For example, they can use their extensive technology infrastructures to provide other organizations with transaction processing services. Alternatively, stakeholders could use application programmable interfaces (APIs) to offer other companies specialized applications such as payment services, risk analysis or customer acquisition.
Open insurance will enable insurers to create new revenue streams by positioning themselves earlier in their customers’ buying processes. For example, greater access to real time customer information gives insurers the opportunity to alert policyholders to appropriate risk management solutions as soon as their circumstances change. They’ll then be able to move quickly to provide customers with the cover they need. Open insurance allows insurance industry stakeholders to increase their revenue streams through cross-selling, by providing their customers with value-added products and services that have been sourced from their ecosystem partners.
The network of alliances and business partnerships that underpins open insurance allows insurers to fast-track product innovation. They can draw on the skills and resources of their partners to swiftly design, develop and launch products and distribute them quickly to many consumers. Traditional bottlenecks, created by legacy systems and outdated processes, can be speedily bypassed.
Open insurance offers insurers considerable savings in operating costs. These can be achieved through improved transaction speeds and efficiencies, reduced development, and maintenance expenditure, decreased data duplication, lowered fractional costs and the roll-out of automated straight-through processing.
Operating improvements achieved through open insurance are likely to ripple along the insurance value chain. For example, improvements in an insurer’s processing efficiencies will often spread to the operations of its business partners and intermediaries.
There are several other use cases, such as decentralized claims management, which will allow individuals to submit claims directly to the insurance provider, without the need for intermediaries. This will reduce the time and costs associated with the claims process and ensure a more efficient claims process. Similarly, using decentralized systems and data analytics, insurers can assess risk in a more efficient and accurate way, even for smaller risks. This can help to reduce costs for insurers and make insurance more accessible for individuals and small businesses.
While the use of technology and open APIs is the next phase of evolution of the industry, and the adoption will therefore be organic, regulatory framework that supports such adoption can act as a catalyst. However, this could also give rise to new/amplified risks such as data security, cyber risks, interoperability, liability, ethical issues, and broader consumer protection risks. Collecting and sharing data about insurance policies or other open insurance-related data can reveal sensitive information about the health, behaviour, and political views or other personal details of a person. It is therefore important to have a balanced approach, which also considers the other applicable laws, such as those applicable for data protection and financial services.
Saudi Central Bank (SAMA) issued the Open Banking Framework for Kingdom of Saudi Arabia (KSA) in November 2022, as part of KSA’s fintech strategy. The framework includes a comprehensive set of legislation, regulatory guidelines and technical standards based on international best practices to enable banks and fintechs to provide open banking services in the Kingdom. Similar guidance documents were also introduced by other regional regulators, Operating improvements achieved through open insurance are likely to ripple along the insurance value chain. For example, improvements in an insurer’s processing efficiencies will often spread to the operations of its business partners and intermediaries including the Central Bank of Bahrain, the Dubai Financial Services Authority, and the Financial Services Regulatory Authority of ADGM, and the UAE Central Bank is also expected to issue its own set of guidelines in near future.
To unlock the benefits of rapidly advancing technology and thrive in the fast-changing insurance industry, insurance stakeholders need to embrace open insurance. By opening their data resources to other organizations and sharing and consuming data and services from multiple sources, insurance providers will be able to adopt innovative value propositions and business models. Open insurance will open the industry stakeholders to new revenue streams, increase their engagement with customers, improve their operating efficiencies and gain greater agility. Furthermore, collaboration with a wide variety of ecosystem partners can propel insurers beyond their traditional markets.
For further information,please contact Anand Singh.
Published in August 2023