What is open insurance?

It’s modelled on open banking, which was introduced in 2017 to make it easier for the providers of financial services to offer a better choice of products to consumers. Open banking uses secure data sharing - with customer consent – to improve personalisation, transparency and digital standards.

Open insurance is similar, in that it relies on insurance companies being able to access shared information with the result that customers can make more informed decisions about their insurance options.

Do insurance companies share information already? To an extent they do, particularly when it comes to fraud prevention and the verification of claims histories. By and large, however, insurers operate in closed environments, where all data is kept in the company’s insular system. Open insurance creates an interconnected environment in which consumers can control their data and share it amongst service providers to find the best products and price.

Data sharing through APIs

Open insurance uses Application Programming Interfaces (APIs) to improve and simplify the interactions between insurers, third-party providers and consumers. If you’re not entirely sure what that means, an API is a digital messaging mechanism that enables different applications to communicate with each other. If that doesn’t make it any clearer, imagine yourself in a restaurant. You, the customer, take your seat at your table. The waiter who takes your order is the API that delivers your order to the kitchen. The kitchen is the server or database. The kitchen prepares your food (or processes your request). The waiter is then the API response that brings the food to your table, giving you what you ordered (or, in digital terms, supplying the data or service you asked for).

Customer consent

The term ‘data sharing’ may ring alarm bells for consumers but nothing occurs without the customer’s express consent. The APIs used to share data are secure.

Customer benefits

The result of this data sharing is that third-party providers can analyse customers’ information, that would otherwise be siloed, and present them with options for smoother underwriting and risk assessment, customised policies, fully digital insurance, automated claims processing and better pricing.

Regulation

As with any innovation in financial services, open insurance has arrived ahead of a coherent regulatory framework. Most jurisdictions are basing their evolving regulations on provisions that govern open banking, such as the EU’s Payment Services Directive 2 (PSD2) and California’s Consumer Privacy Act (CCPA). In the UK, the Financial Services Authority is including open insurance in its generalised open finance studies, with an emphasis on fair competition, consumer control and efficient interoperability. Inevitably, it will take some time before global standards are developed and agreed, but the key issue of data security has been addressed.

Examples of open Insurance in action

It’s a relatively recent innovation but there are plenty of examples of open insurance in action.

Lemonade uses machine learning and APIs to access customer data, assess risk in seconds and, in some cases, to pay out claims in minutes.

AXA and Allianz have both created open APIs that enable partners, fintechs and third-party developers to integrate online insurance products into their own platforms.

Zurich Insurance is using wearable health data APIs to adjust life insurance cover and premiums.

Consumers and insurers alike are seeing a range of benefits that will only increase as the practice matures.

Transparency

It gives consumers the ability to interrogate and compare policies, shifting power away from advisers, brokers and single providers. Customers are gaining informed control over their insurance choices.

Personalisation

Because open insurance is much more responsive to real-time data, insurance companies are able to deliver what has often been promised but rarely achieved: genuine personalisation. Health insurance linked to fitness data, on-demand travel insurance and pay-as-you-drive motor insurance are just three examples.

Faster claims processing

Claims processing has long been a source of customer complaints, for the time it takes and the inefficiency of the process. Instead of manual verification that can stretch over weeks, automated claims approval is slashing the time from claim to payout.

Fraud prevention

Insurance fraud has always been a major headache for the industry and open insurance uses AI-powered analytics to study claims, spot inconsistencies and uncover fraud in a fraction of the time it takes traditional methods, and often with greater accuracy.

Increased competition and lower prices

Open insurance also has a levelling influence, making it easier and cheaper for smaller companies to enter the market. The removal of barriers to competition is beneficial to both consumers and businesses.

Broader accessibility

The level of adoption of even the most popular types of insurance reveals a significant insurance gap, with millions of people without essential protections like life insurance (both whole and term) and income protection. Both these types of insurance have traditionally had lower penetration levels than health, home and contents insurance, but their popularity is growing as people come to understand the risks of losing their income through sickness or leaving their families unprotected. Open insurance represents an opportunity not only to increase awareness and adoption rates but also to offer microinsurance and flexible payments options to people for whom traditional insurance policies are unavailable, inappropriate or unaffordable.

Inevitably, a major technological development like open insurance creates its own challenges. The very fact that it’s still something of a novelty means the necessary safeguards are still being constructed.

Privacy and data security

There is widespread public caution about the way personal information is used by businesses and state bodies. Some people don’t even trust the direct debit system, which has been with us since 1964. When open insurance is described as involving data sharing it’s understandable that people will be concerned about data breaches, unauthorised access, misuse and even theft. The industry must demonstrate that it has developed strong cybersecurity and data encryption measures.

Regulation

As mentioned above, at the time of writing there are no global standards governing open insurance and the national financial authorities are still working out the size and scope of the regulation that’s needed. An open insurance company will need to proceed on the basis of existing rules and in the expectation of a comprehensive regime in the near future.

The need for industry standards

National regulation is the first step, but sooner or later, to make open insurance globally effective and reliable, international standards will need to be developed, both to enable effective integration and to establish a level playing field.

Open insurance is a work in progress. Some of its most notable contributions so far include facilitating embedded insurance, developing on-demand cover based on real-time data and enabling innovative startups to break into the market. So what of the future?

The continuous refinement of AI and machine learning will have an increasing influence on the capabilities of open insurance. Global regulation, when it materialises, will cement the position of open insurance into the lives of individuals, businesses and institutions. Embedded insurance will grow ever more widespread. We can expect to see the use of parametric insurance expand, with payouts being automatically triggered by predefined conditions and specific events rather than traditional claims assessments. Eventually it will restructure the insurance industry into a model of greater efficiency and redefine the way we protect ourselves, our families, our assets and our futures.