About the author
Tom Austen, Consultant
Tom is a Consultant at Oxbow Partners. He has a first class degree from LSE.Contact Tom
March 10, 2021 Tom Austen
This article is based on some of our research for the 2021 Oxbow Partners InsurTech Impact 25. We present our updated view on the future of insurance and provide detailed profiles of 25 technology-led businesses well-positioned to help insurers succeed.
It has been over 5 years since Open Banking was introduced as part of the European Parliament’s Payment Services Directive 2 (PSD2). The aim of Open Banking was to stimulate innovation in the financial services industry by allowing consumers to give access to their banking data to authorised third parties. It follows the general principle of data regulation in the EU (set out in the GDPR), that the individual is the steward of their own data, but that it can be in the interest of the individual to share that data easily with others.
The standardised APIs giving access to bank data that have emerged as a result of PSD2 have contributed to the growth of over 300 Open Banking based fintechs with over 2.5m UK users.
Open Finance is an extension of Open Banking principles into other areas of financial services. It is currently in the consultation stage but could lead to insurers having to share underwriting and policy information with InsurTechs, again with the objective of making it easier for innovative new entrants to gain a foothold.
Open Banking is, therefore, a live opportunity for insurers whilst Open Finance is a potential threat. Insurers should be working out how to address both in their business models.
Marketplaces are a feature of many online propositions, and thanks to PSD2 now also of banks. Revolut and Starling are two UK ‘neobanks’ which have harnessed Open Banking to allow them to provide permissioned data to their marketplace partners, which include insurers. For example, Revolut partnered with Qover, an InsurTech and Oxbow Partners Impact 25 Member, for a “fully embedded” insurance offering and Starling has a partnership directly with Direct Line Group.
Allianz has gone a step further and spent double-digit millions of Euros to create its own Open Banking platform, HeyMoney. This currently allows Allianz’s German customers to aggregate their bank account information, manage contracts and receive financial advice. The objective is to provide value to the customer for sharing their data (“value exchange”) whilst, of course, finding opportunities to sell more products.
A more cost-effective approach might be to partner with 2021 Impact 25 Member OptioPay.
OptioPay provides a white-label Open Banking platform to allow any insurer to offer a rewards platform to their customers. In other words, rather than providing only financial services to customers, they can now send personalised offers from selected retailers. Some of those offers could even be from the insurer’s own customer base, allowing commercial customers to create a revenue stream from their insurance premium. In the 2021 Impact 25 report – which is being released on 24 March 2021 – we argue that this is an example of an insurer being the genuine orchestrator of an ecosystem – the holy grail for many.
We see lots of opportunities for insurers to differentiate their proposition using Open Banking. The key will be to think about the “value exchange” rather than just seeing it as an opportunity to obtain data for the purposes of selling policies.
UK insurers might also find that Open Banking could be beneficial for their FCA Pricing Fairness response. We believe that the new rules will require insurers to differentiate increasingly on proposition, and Open Banking could provide a way to protect value in the back book.
Open Finance, on the other hand, is not so obviously good news for insurers. At the simplest level, would you be happy to provide your customer underwriting and policy data to a third party who might offer rival products? For example, Lemonade could have a “get data from Aviva” button on its application form.
Furthermore, the cost of funding the Open Finance transition will fall in part on incumbent insurers – the 9 largest UK retail banks have contributed over £100m to the Open Banking implementation entity. Insurers will need to provide real-time access to all customer data, which will require aggregation of data from multiple product systems and long-standing challenges like customer matching across those systems to be resolved.
But the news need not be bad for all. Innovative intermediaries are likely to proliferate when Open Finance comes in and some of the barriers to entry are removed. For example, knowing a customer’s renewal date is like gold dust for intermediaries, who know when to target an ‘education’ campaign at that individual to explain the benefits of their product. Innovative insurers will be able to spin up these relationships quickly when they have standardised their APIs and collect better, consistent data allowing them to monitor those relationships better.
As ever, the winners will have turned adversity to their advantage.
To speak to a member of the team about Open Banking, the future of insurance propositions, the UK Pricing Fairness review or any other topic, please contact us here.
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