The UK is widely seen as a leading insurtech market and is recognised to be at the forefront of a number of innovative developments including parametric technology, embedded insurance, telematics and AI-driven underwriting. The progress and growth we have seen in 2023 will continue to form the basis for the development of deeper, more meaningful, relationships between traditional insurers and technology-driven participants in, and entrants to, the sector.
It would appear inevitable that 2024 will only see further innovation and growth in this sector – but what themes will this bring with it? It is clear the UK wants to be an attractive place for insurtechs (and fintechs more broadly), but what does that mean from a regulatory perspective?
Our key prediction is that we will see the next stage in the insurtech market evolution – from a competitive start-up focussed market to a strategic ecosystem focussed sector – the aim to continue the digital transformation and leverage the combined knowledge and skills of traditional insurers and technology driven firms.
Increasing regulatory support for insurtech growth
This year we have seen Lemonade obtain PRA authorisation through a UK branch of its Dutch insurance company – this reflects the regulator’s drive for and willingness to embrace technological innovation in the UK and to embrace models outside of the norm. Lemonade is now the third insurtech firm in the UK to receive UK authorisation following in the footsteps of Zego and Marshmallow (however, both of these operate under the jurisdiction of the Gibraltar Financial Services Commission (GFSC)).
The PRA is actively working towards a more accommodating regulatory framework that will allow new entrants to the market. The new mobilisation regime proposed as part of the review of Solvency II seeks to enhance competition and foster innovation in the UK and to make regulatory requirements more appropriate for the risks posed to the PRA’s objectives. The thresholds at which Solvency II will become applicable will be raised which will make it easier for smaller and possibly micro-focussed or niche insurtech firms to enter the market. The New Insurer Start-Up Unit jointly established by the PRA and FCA is also indicative of the regulators’ efforts to support those thinking about setting up a new insurer in the UK.
Regulation of platform providers
The insurtech sector encompasses far more than start-ups. It is made up of insurers, distributors and technology service providers who all wish to use insurtech solutions to distinguish their product and optimise their offering. Whether these are data solution providers or infrastructure solution providers – insurtech platform providers are wide-ranging and diverse. Regulating this broad spectrum of market participants means there is no universally applicable solution.
We’ve seen outsourcing and operational resilience remain high on the regulatory agenda for some time now and, under the existing framework, firms who use outsourced and other third party services are required to take responsibility for managing risks arising from those arrangements. Firms are required to ensure their contractual arrangements with third parties allow them to comply with their regulatory obligations - greater levels of risk management are needed when a firm increases its dependence on outsourced and third party service providers.
However, HM Treasury has noted that no single firm can adequately monitor or manage the systemic risks that certain third parties pose to the supervisory authorities’ objectives, including UK financial stability, market integrity and consumer protection. These systemic risks may arise when firms rely upon a small number of third parties to provide services which, if disrupted, could significantly affect the authorities’ objectives.
Over the course of the next year we will also see further oversight of critical third parties – CTPs – as a result of the Financial Services and Markets Act 2023 (the 2023 Act). The 2023 Act includes a statutory framework for HMT to designate providers to the financial services sector as CTPs if in HM Treasury’s opinion “a failure in, or disruption to, the provision of those services (either individually or, where more than one services is provided, taken together) could threaten the stability of, or confidence in, the UK financial system”. CTPs could include cloud providers, data analytics providers and claims management service providers, amongst others, if their services are considered systemic. The 2023 Act establishes a new set of powers for the regulators to directly regulate CTP service suppliers, rather than rely on financial services firms to manage risks through contractual arrangements. As the proposed regime targets third-party service providers that are unregulated and outside the financial services regulatory perimeter, we may see greater oversight of certain insurtech platform providers as their importance to the industry grows.
Strategic partnerships between insurtechs and traditional insurers
As we look to the new year, it is with an expectation of collaboration and mutual development between insurtechs and the rest of the industry rather than straight competition.
Increasing digitisation means that all insurers are using some technology elements to drive their underwriting, distribution and claims processes. Whether they are going it alone or using third party providers, technology is fundamentally changing the way that insurance is written and administered in the UK - these increasingly interwoven relationships between traditional insurers and more technologically advanced establishments ultimately lead the market to a position where all participants are potentially “insurtechs”; using technology to drive innovation in insurance.
However, both traditional insurers and insurtechs are still navigating their paths – individually, and crucially together. Insurers seeking to find a way that will allow them to capitalise on the innovation and experimentation offered by insurtechs. Insurtechs seeking to rely on the funding and stability offered by seasoned market participants.
Other participants in the insurance market will look to monitor the success of the Lemonade – Aviva model to determine whether this is a model that might work for them.
The insurance sector has moved forward in recent years and taken significant steps towards digital transformation, both in terms of digitising their operations and also the way in which they communicate with customers. However, there is still much work to be done across the sector.
Complex product portfolios, complicated distribution networks, limited resources and established practices all against the backdrop of a highly regulated environment have made the switch to a modern technology platform difficult. Firms are however increasingly aware of the benefits of leveraging digital technologies and 2024 is likely to bring more firms investing in technology solutions in order to respond to emerging trends. We expect to see firms innovating, speeding up the underwriting process, bolstering operational resilience and continuing to work on the modernisation of legacy systems in order to compete with legacy-free, tech savvy start-ups.
Embedded insurance and distribution channels
Insurers hoping to utilise technology to provide more flexible, more convenient customer experience (which is now expected by consumers who have an increasing range of choice) will no doubt result in the continued growth and appeal of embedded insurance solutions. Embedded insurance is not merely offering an existing product online or via a mobile app, the development of open application programming interfaces (APIs) allow insurers to analyse data and offer the right policy at the right time - at the point of sale on whatever the customer’s platform of choice is. Unprepared insurers will either lose market share or need to adapt their distribution channels in order to maintain customer engagement.
The regulatory concerns applicable to the sale and distribution of insurance products, however, are no less significant when firms are looking to embedded insurance solutions – customers purchasing products that are not appropriate for them, or customers paying increased prices due to remuneration paid to firms in the distribution chain who incur little cost or deliver little benefit. Firms need to adequately consider the value of the products or services provided to customers, as well as failures in product design, weak oversight of the distribution chain and poorly designed distribution strategies. Indeed, the FCA has recently reminded firms of its expectations to make sure that firms are checking their products are providing fair value to their customers. More than ever, in this digital age, customers need to be aware that they are buying insurance, what its scope is and, just as importantly, isn’t, how much they are paying for it and that it delivers good outcomes.
For firms that can work with technology service providers, existing platforms and forge new distribution partnerships whilst continuing to ensure the transparency of the insurance product offered and its price – embedded insurance solutions have the potential for an eventful 2024.
UK – US Insurtech corridor
In March 2022, the UK’s Department for International Trade (DIT) launched the UK-US Insurtech Corridor, in collaboration with Insurtech UK, the US Department of Commerce, Connecticut Insurance and Financial Services (CTIFS) and the Metro-Hartford Alliance. The Corridor is part of the Financial Innovation Partnership between HM Treasury and the US Department for the Treasury. It is the first ever state-level financial services partnership between the UK and the US and is intended to remove barriers to doing business as an insurtech in each jurisdiction. The project aims to help participating US and UK entities by making information about each market more easily accessible, and by providing access to connections, business and investment opportunities in each market.
With the number of participants taking part in the program continuing to increase (the InsurTech Corridor has allowed more than a dozen UK insurtechs to prepare for entry into the US market), we expect to see further development of insurance industry trade links and innovation between the UK and the US.