The growing number of companies with technology-driven business models entering the insurance market has already triggered an adjustment process. However, disruptive trends have so far not materialised here, meaning that this period of change is more of an evolution than a revolution – at least for the time being.

Two categories of technological developments

The innovative technologies that are increasingly being used or tested in the insurance market include cloud computing, big data and artificial intelligence (BDAI) and distributed ledger technology (DLT) and the associated smart contracts (see “Further information”).

Technological developments can therefore be grouped into two categories:

• platform and network-driven innovations, such as cloud computing, comparison websites and DLT
• data-driven BDAI innovations, such as robo-advice, chatbots and telematics.

These developments are not occurring separately but rather overlap, since data-driven innovations are operated on platforms and, conversely, the necessary data can only be collected via platforms. This is particularly applicable to the critical mass of data required for BDAI applications.

In theory, the insurance industry can make use of these innovative technologies along the whole value chain and in all lines of business, although the current focus is on property/casualty insurance and insurance mediation. When used internally, these technologies enable a greater integration of systems across sectors, lines of business and company boundaries, thus increasing the potential for automation. At the same time, the technologies allow for a more granular assessment of risks – and thus facilitate the calculation of premiums. The potential of preventive applications to reduce the number and scope of claims should also be noted. For example, telematics tariffs in the area of motor insurance may encourage customers to drive more carefully. However, the market penetration of this technology is still low.

When used externally and at the customer interface, these technologies allow in principle for more customer-friendly service and tailored communication with customers.

Main drivers and challenges

As insurtech can help to make processes digital and fully automated, the hope of cost savings is one of the main drivers. Cost savings can optimise the combined ratio and can lead to reduced insurance premiums for customers. This makes insurtech particularly interesting for insurers in highly competitive lines of business. Service improvements resulting from the use of insurtech can also make a difference there.

Customers, on the other hand, hope that insurtech will improve and simplify communication with insurers, as they have come to expect insurance undertakings to offer the same convenience they are used to in the internet economy, particularly when contacting and exchanging information with their insurance company. It also helps that insurtech solutions often make it possible to target existing and new customers more precisely.

Established undertakings are therefore facing increasing competitive pressure from new competitors, particularly in areas where innovative technologies could result in new market standards.

Traditional insurance undertakings are being challenged to follow suit and use new technologies as well. Insurtech companies have therefore generated new digital momentum in the insurance market, although this has been more evolutionary than revolutionary, as stated above.

The use of innovative technologies presents traditional insurers with the challenge of creating and implementing the necessary expertise while being bound to existing system landscapes (IT legacy), which can lead to considerable project and investment costs. Insurtech companies, on the other hand, must also deal with the supervisory requirements for the insurance business and gain the trust of customers.

Special features of insurance as a service

In order to better assess current developments and the impact of insurtech on the insurance market, it is important to understand what insurance means for customers as a service.

Taking out insurance should give customers a feeling of security. The promise of long-lasting protection assures customers that their standard of living will be maintained at least to a certain degree if disruptive and often unforeseeable events occur.

Requirements from the customer’s point of view

At the outset, however, the benefit of an insurance policy is in most cases rather abstract for the customer, since it merely covers a future need that is difficult to estimate in terms of amount. When entering into a contract, the customer is not able to fully assess the quality of the services provided since this only becomes clear if an insured event occurs. Insurance is therefore essentially a matter of trust.

In most cases, customers have little and only anonymous contact with their insurer. In contrast, contact with insurance intermediaries is more frequent und usually more personal as well.

Due to the characteristics of insurance products, customers mainly judge the quality of an insurance product based on the benefits paid in the event of a claim and often compare their premiums with the amount of the claim payment. If the benefits provided by different undertakings can be compared, the level of the premium is often the decisive criterion for purchasing insurance. Another criterion is how convincing an insurer or an intermediary is in assuring the customer of the quality of service when entering into the contract, despite the existing information asymmetry.

Customer interface as a main entry point

Insurtech can reduce this inherent information asymmetry because it can help to reach customers more efficiently and effectively than before. Digital information and communication channels make it possible to contact and advise customers on a more individualised basis. Nowadays, companies must ensure that their customers can reach them at any time. Insurers can use apps for mobile devices and voice-controlled digital assistants to complement their abstract products with services such as digital health applications and thus increase customer loyalty.

Customer interfaces are essential for two reasons: firstly, direct customer contact offers access to a large amount of relevant data, such as data for product design and subsequent customer contact. Secondly, the customer interface allows the company to increase its visibility and that of the brand, offering the possibility for direct customer relationship management and cross-selling.

Insurtech companies act as intermediaries and provide assistance

The importance of the customer interface is also reflected by the fact that it is particularly attractive for new market participants. This is especially evident on comparison websites or apps that compare offers from different insurers and broker insurance contracts. In such cases, platforms act as insurance intermediaries at the customer interface.

The regulatory requirements insurance intermediaries are subject to differ from those imposed on insurance undertakings under section 1 of the German Insurance Supervision Act (Versicherungsaufsichtsgesetz –VAG). Even if a company is for instance only responsible for approaching prospective customers or handles claims processing on behalf of the insurer, it is not required to fulfil all the requirements of the VAG. Rather, insurance undertakings cooperating with companies based on outsourcing agreements or acting as insurance intermediaries are subject to the requirements of sections 32 and 48 et seq. of the VAG. The market shows that insurtech companies primarily act as insurance intermediaries, deal with claims processing or provide assistance services in the event of a claim. As a service provider for insurers, insurtech companies can often handle insurance-related core processes much more efficiently and thus set new market standards.

Overall, the entry of insurtech companies into the insurance market has so far increased competition at the customer interface in particular.

Cooperation between traditional insurers and insurtech companies

Insurance products usually are credence goods, which means they rely on trust. Trust is something that, to some extent, insurtech companies first have to earn. Customer acquisition costs can therefore be high. Traditional insurers, on the other hand, typically have the trust of their customers and have already established their brand in the market.

Acquiring a critical mass of data as quickly as possible is particularly important for data-driven insurtech companies. Insurtech companies can obtain this data either from their own customer bases or through cooperation with established undertakings. However, since it is often problematic for insurtech companies to generate sufficient data volumes from their own customer base, a growing number of them are choosing to cooperate with traditional insurers that already have large databases. Moreover, traditional insurers are well versed in regulatory and supervisory matters – which insurtech companies can benefit from. Insurance undertakings, in turn, enter into cooperation agreements with insurtech companies and invest in them, as these companies support them in applying insurtech both in the services they provide and at the customer interface.

Key supervisory questions

The main questions that supervisors face in relation to the use of innovative technologies in the insurance industry and the market entry of technology-driven companies are listed below:

1. What do insurance undertakings have to take into account from a supervisory law perspective when using insurtech?
2. Do insurtech companies meet the existing regulatory requirements?
3. Are there systemic and/or concentration risks?
4. Where is there a need for legal clarification?

In particular when answering the first two questions, supervisors must make sure that a level playing field is maintained. BaFin is neutral towards all market participants, but it observes the principle of proportionality. Due to its technological neutrality, the decision as to which innovative financial technology is to be used to provide the service in question is irrelevant to BaFin.

From a supervisory law perspective, sections 23 et seq. of the VAG and Circular 10/2018 “Supervisory Requirements for IT in Insurance Undertakings (Versicherungsaufsichtliche Anforderungen an die IT – VAIT)” are particularly relevant. For example, the performance of impact and risk analyses prior to the implementation of IT projects is essential. The companies must identify and take into account any changes and shifts within existing risk structures that may result from the use of innovative technologies or from cooperation with (new) market participants and the offering of new types of insurance products. Moreover, the staff members concerned, the key functions and, of course, the management board members must have the appropriate knowledge and information required to ensure they can continue to perform their tasks in the future.

In the case of BDAI applications, for example, the company’s compliance function must have sufficient expertise in data protection law. If processes are digitised or outsourced to specialised IT service providers, not only the supervisory authority but also the insurance undertaking, and in particular the internal audit function, must still be able to competently review these processes. Appropriate and effective control mechanisms and documentation are also required for fully automated processes. Also, the management's responsibility may not be outsourced or transferred to another company or to a machine. These are just a few examples to illustrate the focus of supervisory activities so far with regard to the use of innovative technologies.

Technologically neutral supervision

BaFin’s supervisory activities are technologically neutral.

The fact that the number of insurtech companies and new products is increasing is in principle positive. The same can be said for the emerging possibility of using BDAI to determine premiums more risk-adequately and be able to better identify and satisfy customer needs. Nevertheless, it must be ensured that the use of BDAI complies with the data protection laws. The data protection officers of the federal government and state governments are responsible for monitoring compliance with these laws. If the relevant supervisory laws provide for a corresponding protection clause, BaFin will use the instruments available within the scope of the supervision of violations of statutory provisions to address systematic data protection violations. In addition, insurance undertakings must ensure that there is no discrimination, i.e. unlawful differentiation, against consumers.

BaFin also monitors whether the risk structures of supervised undertakings or the industry are shifting. Where necessary, BaFin adjusts its supervisory practice within the scope of its competence. From a supervisory perspective, it is essential that the supervisory authority's information and access options are not restricted and that insurers adequately inform their customers about the risks to which they are exposed.

At the same time, the transparency of supervisory requirements and supervisory practice is a key factor for the competent and practice-oriented monitoring of technological change and the associated structural changes. The exchange of information and discussions with market representatives have therefore been, and continue to be, of outstanding importance for BaFin.

Overall, technology-driven companies wishing to enter the insurance market not only need to familiarise themselves with the regulatory requirements but also need to understand the background of these requirements. Traditional insurers, on the other hand, must familiarise themselves with new technologies so that they can use them for the services they provide and at the customer interface.