Embedded Insurance #13: Regulation, Innovation and Insurtech

Sibylle Fischer
January 28, 2021
Startups, Innovation
Insurance regulators are finding novel ways to support and test insurtech innovations while mitigating risk to consumers.

The insurance industry is in a period of enormous change and growth, driven in part by transforming customer needs and expectations but also by the technological innovation represented by the insurtech ecosystem, which continues to create new opportunities for the industry and the people it serves. While the industry’s heavy regulations present some real constraints when it comes to speed and adoption of new products and services, there are an increasing number of avenues within the statutory framework that were built expressly to support and streamline insurtech innovation. Protected yet flexible environments like the regulatory sandbox, as one example, can actually help nurture and streamline innovation as products and services are vetted and tested in a controlled environment that also seeks to minimize legal hurdles.

The regulatory sandbox: an opportunity, not an impasse

In recent years, incumbents and industry regulators have watched the insurtech ecosystem push its traditional market boundaries with emerging technologies and outside-the-box partnerships. From special commissions and task forces, to scoring rubrics and rating agencies, regulators have had to reinvent some of their processes in order to monitor these innovations while maintaining adherence to strict consumer safeguards. 

Regulators in Europe and the U.S. created innovation sandboxes and related tools out of a need to provide a new paradigm for regulating and testing within the statutory environment. One early example was the UK’s FCA Regulatory Sandbox, which since its launch in 2016 has provided a protected environment for testing innovative businesses with real consumers. Within the sandbox environment, there are generally several key objectives: to minimize resource costs and reduce time-to-market for applicants; to streamline the authorization journey and build in regulatory consideration from the onset of product and service development; and, finally, to determine the right consumer protections for novel products and services.

In many ways, this kind of regulated environment supports innovation through encouraging strategic and targeted investment and effort. While for most participants the goal of the sandbox is to emerge with full authorization, others find real and valuable learnings that can improve their offerings before bringing them to market. The regulatory sandbox, therefore, favors thoughtful investments and customer-driven innovations, within a protected framework that guarantees  consumer safeguards remain top-of-mind.

Fostering innovation alongside regulation

While it’s possible the prospect of compliance may deter some tech companies from innovating within highly regulated industries, for most serious insurtech and fintech startups and founders it merely forces them to apply more rigor to their existing processes. After all, there is no escaping governance when it comes to insurance. While small businesses may be able to evade regulation or fly under the radar for a short time, regulatory arbitrage is never a viable path forward, as scaling any business within this space will surely mean an eventual exposure to regulatory safeguards. By that same token, regulators also have a responsibility to the consumers they serve, making sure that new protections and technologies that can benefit them are being prioritized and treated fairly within their existing systems. A principles-based approach to regulation, currently more popular in Europe than elsewhere, seeks to do just that, by refocusing on broad principles (i.e. is this product in the general interest of the public? Is this service unfairly discriminatory to a segment of consumers?) versus rigid adherence to existing rules and regulations.

As the pressure to deliver value with new technologies increases, regulatory bodies and industry innovators must work cooperatively to ensure they are targeting the right products and services in the value chain for regulation and supervision. Insurers would be best served by making sure their own internal compliance and risk management programs are functioning appropriately, as we see increasingly that having the right team in place can be a competitive differentiator when it comes to bringing new innovations to market quickly and cost-efficiently. Bottom line: when managed effectively, regulation and innovation make good partners, revealing new business opportunities and creating better products and services for customers.