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Open Insurance - Are you ready to ride the wave of disruption?

07 Jun, 2022

An article to illustrate the importance of Open Insurance and why every insurer should pay attention. This covers what it is all about and the key drivers which should lead to its adoption.

Ever wondered how Uber ride-hailing works and what is the secret behind it?
Q: How does it determine the geographic location of the user as well as that of the potential drivers?
A: Uses the Operating System – iOS or Android.

Q:How does it calculate the distance between the user and potential drivers and most practical route?
A: Uses MapKit and Google Maps.

Q:How does it push notifications to announce the imminent arrival of the driver to the user?
A: Uses Twilio, a real-time text messaging cloud communication platform.

Q:How does it facilitate payment via the app without cash?
A: Uses Braintree, a payment company.

Q:How does it send a receipt via e-mail?
A: Uses Mandrill, a transactional email app.

I am sure you have noticed by now where I am going with this – a $95 billion market capitalisation company (when last checked!) which mainly utilises multiple Application Programming Interface (API) services offered by other companies to provide an outstanding customer experience. The use of APIs coupled with micro-services architecture - an approach in which a single application is composed of many loosely coupled and independently deployable smaller services - has also been successfully deployed by other organisations such as Amazon, Netflix and Etsy to quickly achieve scaling advantages, greater business agility, and unimaginable profits.

This secret sauce of API is key to understand why we should be excited about Open Insurance.

So, what is an API? Put simply, it is a set of clearly defined methods of communication which allow applications to communicate with one another. APIs can be connected to many other systems and applications, without harming or impacting other functions. It should not be confused with Robotic Process Automation (RPA), which is a software robot designed to mimic human actions to complete a specific task, and a whole different topic.

The API integration has resulted in a level playing field for large and small companies. From the customer’s perspective, it is indistinguishable whether the product has been created by a start-up or a large organisation. Thanks to the API ecosystem, you no longer need to be a giant to make a great impact.

What is Open Insurance?
“Open" has recently become a new buzzword in the financial services industry, especially with Open Banking but what does this new buzzword really mean?

"Open" refers to an organisation’s capability to expose their services to the outside world. This allows external partners (or even competitors) to use these services and provide additional applications, as a value add, to their customers. This trend is made possible by the technological evolution of open APIs - acting as digital "ports" for communication.

This brings us to the topic of how to define Open Insurance? According to European Insurance and Occupational Pensions Authority (EIOPA), a broad definition covers the access to and sharing of personal and non-personal insurance-related data, usually via APIs to partners, communities and start-ups, to create new services, applications and innovative/disruptive business models.

Open Insurance enables organisation to utilise, monetise and integrate their services.

What are the drivers for Open Insurance?
As we all know insurance is a risk-averse business (no surprises there!) and some of the changes are initiated because of regulatory initiatives to provide benefits to the end consumer and it may well be the case with insurance - recent example of FCA's General Insurance Pricing Practices Market study comes to mind.

So will regulators force insurers to adopt Open Insurance?

It looks unlikely at the moment that they will follow the example of the banks where legislation such as Payment Services Directive (PSD2) and Open Banking Standards forced banks to open their data resources. However, there are certainly other forces in play here which may compel insurers to openly embrace this initiative (no pun intended).

1. Integrated customer experience: Other sectors such as travel, retail and banking are already providing an integrated, personalised and multi/cross-channel customer-centric experience. This is not the case for majority when it comes to insurance which is still a product-centric offering. Customers would love to receive a tailor-made offering based on their needs and usage which is starting to be addressed by InsurTechs.

2. Capacity to innovate:As insurers engage their resources to adhere to ever changing regulatory landscape and delivering ongoing transformation initiatives to reduce operational costs, they are left with little time to focus on innovation – a perfect opportunity to partner with new entrants and providers who can give them much needed agility.

3. Rise of InsurTech: According to the latest quarterly InsurTech briefing by Willis Towers Watson, global investment in the InsurTech sector reached an annual high of US$7.1 billion (approx. £5.16 billion) for 2020 despite the challenges faced by the (re)insurance industry throughout the year. Given the rising trajectory of InsurTech, it is easier for established players to collaborate than compete and to do so will require having an open API ecosystem in place. We can see some success in the insurance market especially through InsurTechs providing peer-to-peer (e.g. Lemonade in US and Friendsurance in Germany) and usage-based Insurance (e.g. Cuvva and By Miles).

4. Data, data and more data: The World Economic Forum figures estimated 44 zettabytes (ZB) of digital information was collected in 2020. Insurance businesses rely heavily on data to accurately estimate their actuarial models and feed a dynamic pricing model. With the easy accessibility to Big Data and AI capability, insurers are better positioned to utilise large amounts of data and therefore it makes sense to connect to external parties and get specialised data for an accurate view of the risk.

5. Pace of technology change: Internet of Behaviours (IoB), Distributed Cloud and Hyperautomation are some of strategic technology trends for 2021 predicted by Gartner. Some of these changes are happening at a rapid pace and for insurance organisations to keep track of it can be a daunting task. Why not partner with specialist providers to keep abreast of technological advances?

What are your views? Do you think established insurers are keen to work with new entrants to enhance their mass-market offerings? Are there other drivers for Open Insurance which will speed up the process of adoption?

Hope you enjoyed the article – Please feel free to comment, connect and/or reach out to give feedback at: rkrishnan@meruconsulting.co.uk

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