[This post has been authored by Angeline Priety and Nisha Nahata, fourth year law students at Gujarat National Law University, Gandhinagar. Part II can be found here.]
In recent times, data driven sectors have been going over and beyond to harness technology to consolidate, utilise and analyse data from various sources for efficient functioning. In the Insurance industry, these efforts have led to the creation of the Insurtech sector. In Part I of this essay, the authors shall elucidate the emerging models of insurtech and the Indian legal framework governing it. In Part II we shall highlight the challenges that the Insurtech industry faces and proposes recommendations to navigate through them.
Internalising Tech in the Insurance Sector: Mapping the forms
The Sharing Economy: Need to transform traditional models
Sharing economy is generally characterised by an online platform that facilitates sharing of assets which, may be paid or free. The Airbnb market is an example of one such platform. It has proved to be a successful model for carrying out business in the home-sharing and shared mobility models. However, where such highly valued assets such as cars and homes are “shared”, appropriate insurance protection is essential. Traditional insurance coverage does not cut the mark since the sharing economy blurs boundaries between personal and commercial use of assets, thus making liability determination difficult. Flexible insurance products such as pay as you live, pay-per-day travel insurance, etc. seem to upstage traditional forms of coverage. The insurance industry has noticed shift in trends and understood the liabilities since the advent of Insurtech. So far, the sharing economy’s insurance innovation has focused on personal rather than commercial areas. Therefore, the insurance industry is forced to adapt to new business models that emerge as a result of changing technology.
Telematics and Underwriting
Back in 2019, the headliner of smartwatches- Fitbit announced its plans of venturing into the insurance sector to leverage the data resource of a person’s physical activity, daily calorie intake, heart rate and blood pressure and extend its use to the health and life insurance sectors. Through Internet of Things, objects that have sensors installed in them are connected in a manner that allows the inflow of large volumes of data for analysis. Wearables have helped immensely in calculation of an appropriate premium for an insured since they provide insurers an insight into a potential insured’s lifestyle.
Other modes of internalising tech
Tech can be utilised in each step of the business process. In the product development phase, Insurtech has opened markets to short term insurance or purpose-based ones. For example, Etherisc is an insurance company providing flight delay insurance built on the Ethereum block chain, the whole process is automated wherein automatic pay-outs are made once flight delay is detected. As an extension of the previous phase, underwriting tasks by Internet of Things and Big Data help customise insurance products for a policy holder. In the distribution stage, there has been a rise in online policy aggregators who assist consumers in managing their insurance policies and portfolio.
Is India ready to take on Insurtech?
The Indian Government has been fairly active to take note of the strides in the Insurtech sector and has begun to test waters for effective regulation of the emerging market as is briefly summarised below.
Union Budget 2021-22
The Finance Minister outlined various initiatives for the insurance industry in her Budget speech, expected to alleviate the sector’s challenges, including a lack of capital, low insurance penetration and density rates, and the domination of public sector insurers.
The Foreign Direct Investment cap in the insurance sector was increased from 49% to 74% while stipulating safeguards. This is expected to stoke the growth of the sector and more specifically, the Insurtech sector.
IRDAI Regulatory Sandbox Regulations 2019 and Exposure Draft 2019
A regulatory sandbox entails the live testing of ideas pursuant to a specific testing plan agreed and monitored by a dedicated function of the authority. In 2017, the IRDAI began discussions with the aim of refining existing law to enable the use of telematics in the motor insurance space. To this effect, they established a Wearable Technology Working Group to discuss regulatory changes. The study suggested that new technology-based concepts be tested in a regulated sandbox environment for which a Sandbox Committee was also constituted.
In 2019, the Sandbox Committee presented its report, outlining the principles to be followed in developing a regulatory sandbox structure, in response to which the IRDAI released the Exposure Draft on 18 May 2019. Start-ups registered in India are eligible to apply for the Sandbox and on being given the green signal, may enter the testing stage capped at 6 months unless an extension is sought. IRDAI with this move joined the likes of the UK and other jurisdictions who set up Regulatory Sandboxes for this purpose. However, there are certain limitations that the Drafts have not been able to answer yet. As of June 2020, 67 approvals had been given to start-ups testing varied business models including wearable linked health insurance, usage- based Motor insurance etc. This active engagement by the regulator is appreciable and puts India on the Insurtech map.
IRDAI Exposure Draft 2021
The regulations issued in 2019 were scheduled to expire by July 2021. However, the pandemic hindered the Sandbox and many start-ups were not able to complete their testing within the 6-month period, as a result they have been given an extension of six months. Considering all these factors, the IRDAI in January 2021 proposed to extend the validity of the regulatory sandbox guidelines by a period of two years.
Despite the initiatives undertaken, there exist significant challenges to the industry. These concerns will be explored in greater detail in Part II.