The promise and perils of InsurTech

In recent years, the rise of financial technology (FinTech) has attracted much interest, in part, due to the rapid technological developments to the provision of financial services. New technological capabilities augment present and future capacity to address persistent needs, generating various opportunities for the finance industry in terms of, among other things, improving financial inclusion, providing more tailor-made financial services, or filling gaps left behind by existing services.

The insurance industry is not immune from the FinTech phenomenon, though it seems to have been affected at a different pace and in a qualitatively different manner from its banking counterpart. Insurance technology, a subset of FinTech manifested as InsurTech, has nevertheless permeated every corner of the insurance sector. Observers predict that ‘there is more room for growth, and therefore disruption, in the insurance sector’.

In the foreseeable future, the most exciting arena of InsurTech promises to be Asia (more specifically, China and Southeast Asia (SEA)). Granted, most tech-based insurance ventures have to date been in the United States; but China and SEA countries are taking an increasing share of InsurTech deal flow. The rise of Asia in this regard has been attributed to several factors, including the relatively higher e-commerce penetration in China and SEA and the fact that people in China and SEA are not ‘locked into’ traditional insurance products sold by traditional firms. Most importantly, many customers in China and SEA simply cannot afford ‘gold-plated insurance’ due to more moderate incomes and are more willing to adopt cheaper options.

The increasing uptake of technology by insurance companies is evident. Advantages of InsurTech from a business perspective include: (1) more precise measurements of underlying insurance risk with big data; (2) improving insurers’ investment activities through the use of algorithms, artificial intelligence (AI) or other new methods; and (3) offering insurers greater protection against operational risks, such as prevention of insurance fraud or money laundering, among other things. At the same time, InsurTech also benefits customers by: (1) presenting them with a wider range of tailor-made products and services; (2) making it more convenient and less costly for consumers to access insurance products or streamlining certain processes (e.g. claim processing). Needless to say, the rise of InsurTech has had and will continue to have a massive impact on the insurance sector and could even revolutionise the operation of insurance companies and the function of the insurance market.

However, the introduction of new technology implies that there will certainly be corresponding issues to resolve. The wide scope of application of InsurTech makes it challenging to view it as a homogenous industry with a single solution. Instead, a holistic approach is required to tackle potential problems arising from InsurTech, drawing from experiences in other fields where technology meets finance.

Current academic literature has mostly focused on the transformational capabilities of InsurTech innovations. Thus, there is an academic lacuna around the legal and regulatory perspective of InsurTech, leaving questions such as how regulators should respond to the rise of InsurTech unanswered.

Our forthcoming paper entitled ‘The Promise and Perils of InsurTech’ thus, attempts to fill this gap in the literature by exploring the benefits and, more importantly, the key risks of and problems with developing InsurTech, as well as examining potential regulatory solutions. This analysis will be of great assistance to jurisdictions that are reviewing their regulatory frameworks to facilitate the development of their nascent InsurTech sectors.

Part II of this paper details the rapid pace at which investment in InsurTech has been growing, the many useful applications of technology in the insurance sector and the overall benefits brought to different market players; Part III enumerates the main risks associated with and problems faced in developing InsurTech; Part IV discusses Singapore’s experience in facilitating InsurTech and proposes future regulatory reforms to spur its development; Finally, Part V concludes. Overall, this paper argues that regulators should eschew a parochial or hard-line attitude (ie, completely uniform standards) and generally adopt a flexible, principles-based approach to facilitate the beneficial use of InsurTech, while monitoring potential new issues such as technology risk and data accuracy, etc. within the existing regulatory framework.

Ultimately, InsurTech may have huge potential benefits to insurers and end-users, though it may come with new risks such as cyber security and technology risk management. Therefore, this paper stresses that it is important that regulation supports InsurTech companies with reliance on meta-regulatory approach and principle-based regulations, and that regulators do not impose such onerous regulatory frameworks that they destroy the potential economic benefits which InsurTech promises.

Lin Lin is an Assistant Professor at the National University of Singapore.

Christopher Chen is an Associate Professor at the Singapore Management University.