The ongoing development of technology and the manner in which this is used within the insurance sector is transforming the way that products and services are developed, delivered, consumed and serviced. This presents huge potential to benefit not only consumers, as products become better targeted, of a higher quality and/or more cost-effective, but also insurers, who are able to implement more efficient processes, decision making and risk management procedures.
However, EIOPA recognises that these benefits also bring with them potential new conduct and prudential risks as well as the relocation of existing risks. Of particular concern is the potential for the insurance value chain to become fragmented as a result of the impact digitalisation is having on business models. EIOPA has identified that this could result in a “reduced regulatory and supervisory ‘grip’ on the relevant activities” and place additional stresses on existing regulatory and supervisory oversight.
The Discussion Paper
Driven by technological developments, EIOPA has identified three primary drivers of fragmentation of the value chain:
- Technology firms, which fall outside the traditional insurance landscape, demonstrating that new technologies can be used to carry out certain processes in the value chain cheaper, more efficiently and more effectively;
- Customers’ interaction with firms taking place via digital ecosystems and platforms where the insurance product may be only an ancillary offering; and
- The increased offering of insurance policies alongside complementary services to consumers (such as, for example, geolocation services for stolen cars).
As a result of this fragmentation, EIOPA raises concerns including:
- An inability to effectively oversee insurance value chains due to their increased length and complexity;
- Critical activities carried out by firms who operate outside the regulatory perimeter;
- A shift in market powers and structure towards big technology providers and trusted retail brands with customer data and large distribution networks;
- Concentration risk if reliance on a small number of providers develops;
- Competition issues, including the potential development of ‘lock in’ effect; and
- Operational risks, including ICT, cyber, operational resilience, outsourcing, legal, compliance and reputational risks.
Further consumer focused issues include:
- Data privacy and portability;
- Conflicts of interest;
- Inappropriate advice;
- Lack of transparency;
- Increased over- or under-insurance;
- Financial exclusion; and
- Ethical issues.
EIOPA stresses that some of these risks may require regulators to adopt new or revised approaches and questions remain as to the most efficient risk-based approach for supervisors to oversee the ongoing development of the insurance value chain.
In order to gain a better understanding of the state of the market and the potential risks, EIOPA has posed a range of questions to stakeholders. These centre around the following topics:
- Cooperation and collaboration arrangements currently in place, the potential issues these pose and whether there are any other business models that may contribute to the fragmentation of the value chain;
- Insurance platforms and insurance ecosystems, including how these are defined, future plans to develop these services, additional potential risks and whether changes to existing regulation or rules should be introduced in this context;
- On-demand insurance, instant/push insurance and preventative services in insurance;- and
- Potential future challenges in the fragmentation of the value chain, whether likely risks are suitably mitigated and whether there are any other tools that could support supervisors.
Next steps and potential implications
The Discussion Paper is the first step in EIOPA’s assessment of these issues. EIOPA has asked interested parties to revert with their views using the EU Survey Tool by 7 September 2020.
At the moment EIOPA is only asking questions, but the implications of EIOPA’s work in this area could be far reaching. A new, more fit-for-purpose approach to regulation is on the cards. Tech companies may be brought within the scope of regulation for the first time. Higher and more prescriptive standards of oversight and responsibility may be imposed on insurers and intermediaries. More intrusive supervision of the whole value chain seems inevitable. All interested parties are therefore encouraged to engage with the consultation and to keep a watchful eye on how this develops.