The world of banking is undergoing a major digital transformation through FinTech solutions, but is not the only field opening the door to technology innovations to catch up with the digital era. The insurance system is investing in tech solutions more and more to meet the demand of the new digital customers. InsurTech funding, in fact, increased by 27% only in the last year, with an estimated grow in profits up to 235 billions in 2021 (report by Juniper).
Such mingling of tech and insurance involves the use of technologies such as A.I., Big Data and IoT to produce predictive models that will significantly affect, for good and for worse, the business model of the insurance industry. Regarding the benefits, there are so many to be listed. From a company perspective, better analytics allow to profile customers in order to personalise products and services, enhance internal processes, provide usage based solutions and improve fraud detection capabilities.
As for the consumers, technology devices based on predictive models may help to provide personalized insurance packages tailored to them: the so called ‘black box’ insurance for cars, for example, works with a small device which records speed and distance travelled and assesses also the driving style through monitoring. Such displace of technology may help also to give benefits to the driver, and the regulatory system is already implementing it: Italy is issuing a bill on competition that will analyze data collected from cars black box in order to give “discounts” on insurance premiums to the most responsible drivers.
However, the growing use of advanced analytics by financial and insurance institutions may also have a negative impact on consumers, due to the granularity of risk segmentations that such technologies provide. For example, customers may be considered undesirable and be restricted from accessing relevant financial services: individuals established in areas known for high rates of micro – criminality may have to pay very high prices in order to get a car insurance policy, or may see their request rejected. This is particularly scaring when we think that devices such the black box may be soon become mandatory, according to a new proposal from the EU.
Thus, the benefits of InsurTech, such as tailor-made and more cost-effective services, as well as better management of risks or fraud might be overcome by serious prejudices towards consumers, such as limitations to access and discriminatory pricing practices, as well as data privacy and security problems.
This is basically the issue which the European Supervisory Authorities (ESAs) focused on in a Discussion Paper launched few months ago, in order to understand what are the solutions and actions that can be undertaken in order to stop the discrimination linked to the use of personalized technologies.
Gabriel Bernardino, Chairman of EIOPA and the current Chair of the Joint Committee, said: “Internet and mobile devices have become a core part of our lifestyle and the ways in which data is generated, collected, stored, processed and used have evolved at unprecedented rates. Entire business sectors are being reshaped by building on data analytics and Big Data has the capability to transform the way products and services are provided with potential benefits and risks for consumers and financial institutions. The ESAs need to understand better what the Big Data phenomenon means for us as consumers, the financial industry and regulators and therefore invites all stakeholders to share their views.”
Amendment to the report, following contributions made by stakeholders, will be issued later in the year.
However, as some companies pointed out answering the Discussion Paper, solutions to these worries may be found in the existing EU legal framework, such as the General Data Protection Regulation 2016/279, the Directive 2016/1148 on Security of Network and Information Systems, the consumer protection Directives as well as the financial legislation, such as the new Insurance Distribution Directive, in force on 23 February 2018, already providing for some rules that address such issues (e.g. artt. 17, 24 and 25, 37).