The consumer preference for the phygital (a blend of digital and physical experience) approach over traditional pen and paper formats for exploration of insurance requirements is at an all-time high.
Since the insurance industry was tested Covid +ve in the second quarter of the year 2020, the long-established distribution funnels faced disruptive innovation, and the demand for customized solutions and offers rapidly increased over the one size – free size approach.
With the shift in consumer preference, insurance companies need to realize their digital capabilities and plan strategies to collaborate with technology (such as usage of Artificial intelligence and Machine learning to enhance consumer experience) and the evolving digital infrastructure.
The Insurance Regulatory and Development Authority is also working effectively to nurture innovation in the insurance sector. In the year 2019 it notified IRDAI (Regulatory Sandbox) Regulations, 2019 for live testing of new products or services in a controlled regulatory environment.
Recently, in June 2022, the IRDAI extended the ‘use and file’ procedure for the life insurance products, in that way, allowing insurers to launch new products without prior approval of the regulator, earlier, similar reliefs were extended to the health insurance products and general insurance products. This will empower consumers to customize policies as per requirements and encourage insurers to address those requirements quickly.
In this background, there is huge demand for the tech companies to collaborate with the insurance service providers. It may be noted that the tech, if go alone, face number of issues.
Hurdles for InsurTechs
Startups find it arduous to bypass the innumerate regulatory requirements and compliance framework. Although InsurTech startups can collaborate with insurance companies in exploring and evolving digital capacity but cannot themselves set foot in the insurance fraternity without bearing a license as an insurer or intermediary.
In the existing ecosystem, InsurTech startups also face the challenge of integration with outdated systems and protocols used by insurers. Further, with the deficiency of big wallets, these new-age companies have to deal with inescapable setbacks and cost upswings because of aging technology.
With global prominence on data protection, present-age consumers are also intrigued by how their data is collected and what is it being used for.
Notwithstanding the Information Technology Act, 2000 (‘IT Act’) and the Information Technology (Reasonable Security Practices and Procedures and Sensitive Personal Data or Information) Rules, 2011, which prescribe the regulatory framework for data protection in India, the IRDAI has framed an additional framework for the protection of policyholder identity and data, which is required to be followed in addition to the regulatory framework as per the IT Act.
In addition to regulatory restrictions, there are several cybersecurity guidelines and eCommerce guidelines on insurers and insurance intermediaries from transferring the data to third parties.
In a way, these new-age startups create a regulatory grey area as not all InsurTechs come within the regulatory purview of the IRDAI, making them largely unregulated. InsurTechs being in its infancy, the pricing and competition is another setback, as insurance companies are the only clients for InsurTechs, competition is stratospheric, and this knocks down the pricing of InsurTech services to rock bottom.
The road ahead
InsurTechs by the way of taking an equity stake in the insurer itself can bridge the hurdle of commercial limitation (upper bracket cap on the amount that can be paid to the agent).
This, accompanied by the flexibility to supply sustained funding might place an e-commerce player/ e-distribution platform in a positional superiority to enter the insurance sector through strategic equity investments in insurance companies.
The Insurance-Digital distribution joint ventures are the new born disruptors of the insurance industry. Considering the uncertainty due to the pandemic and the evolving regulatory constraints, banks are also being encouraged by the Reserve Bank of India to divest their insurance investments.
IRDAI stands in need of capital commitment (provision of sustained capital) from the parties for authorization of such entry into the industry through the acquisition of shares of an insurer. The regulatory body encourages insurers to be autonomous and to limit the outsourcing of core functionalities. In addition to this, Insur-tech joint ventures would need to have the capacity of handling the roles and responsibilities of each partner.
Companies, however, may strike a balanced approach through the collaboration of traditional insurers and new-age digital players, such units must also be properly tied with centres of the strength of both so that they may benefit from scaled capabilities while still having the freedom and space to pursue more ambitious and risky options.
Any cross-sector collaboration necessitates a thorough examination of a variety of elements and market dynamics. Insurtech M&A would also have to deal with the complications and issues that new technologies typically bring.
[The author – Pukhraj Malhotra is a Legal Practice Development Professional, with nearly half a decade of work experience in evolution of the legal fraternity through efforts in management and development of Law Firms. Author is an expert in Practice Development, Knowledge Management, Content Strategy and Legal Reporting]