Governments need to update regulations to enable the use of tech-driven insurance solutions.
Encouraging innovation while protecting consumers is a delicate balance for both governments and insurers, and in the process of researching the latest IDF report, Technology and Innovation: Tools to help close the Protection Gap in Microinsurance Markets, we heard stories of both under- and over-regulation, as well as accounts of imaginative insurance, and supervisors collaborating with their counterparts in other government departments: A2ii (the Access to Insurance Initiative) and others are doing great work in identifying and publicising best practice in this area.
Regulating for tech-enabled risk management
The landscape is shifting rapidly and traditional legal and regulatory silos are being broken down and challenged through new products, market players and partnerships. In order to regulate or legislate for new risk management technologies, decision-makers need to understand both the benefits and limitations, what products do/don’t do, and what safeguards need to be put in place or enabling structures enacted.
It is predicted that weather-related losses will continue to increase due to climate change, potentially creating an even bigger protection gap. At the same time, technological developments are enabling a range of ways to bridge this gap. There is exponential growth in the volume of affordable, real-time data from satellites, mobile phones and other sensors. Analysed by AI, this stream of data is now is giving the world a real-time in-depth view of natural hazard (and other) risks.
As the granularity of data (hazard and vulnerability) and the ability to analyse it improves, we might move from risk transfer products based on parameters which stand as a proxy for actual loss (rainfall for drought or flooding; wind speed for property damage), to near-actual real-time knowledge of actual or anticipated losses.
At a large scale, more data and more accurate modelling should attract market players to invest in creating products so that risk can be transferred to capital markets. A better understanding of weather and other natural risks brings important co-benefits to sovereigns, permitting adaptation and resilience measures to be put in place, mitigating risks to lives, infrastructure and livelihoods.
With risk modelling and mapping expertise, (re)insurance companies can in turn play a key role in building and sharing knowledge on resilience to fill knowledge gaps at the sovereign and sub-sovereign level. Project partners can assist in putting together resilience “frameworks” to support the building of resilient infrastructure and communities.
For example, the Zurich Flood Resilience Alliance, launched in 2013, is a multi-sector partnership focused on pre-event risk reduction seeking practical ways to help communities strengthen their resilience to floods and save lives. With Zurich as its catalyst, the Alliance includes charitable and academic partners including the International Federation of Red Cross and Red Crescent Societies (IFRC), MercyCorps, London School of Economics and Wharton Business School.
Insurers, governments, and others who seek to close the protection gap must continue to think carefully and innovatively about how technology can be used.
Insurers need to carefully consider the products and services which are needed in any given market. There will be significant differences between – and within – markets, so due consideration should be given to the different needs and inter-dependencies between low income and emerging middle income segments.
Insurance regulation must also evolve to accommodate and appropriately regulate InsurTech and other innovations. Regulators need appropriate technological resources and skills themselves. Regulatory sandboxes and regulatory dialogue at national, regional, and global levels are important and the IAIS (International Association of Insurance Supervisors), A2ii, and several regulatory jurisdictions, are taking important steps in this regard. But the insurance industry also needs to engage with regulators in developing insurance markets to educate them about technological developments and other innovations.
Governments have a role to play too by encouraging the collection and sharing of critical data – such as sea level, population movement, building density, drought. Such data will support the development and sharing of risk models for emerging countries.
Governments also need to update key laws and regulations to enable the use of technology-driven insurance solutions. They must update regulation of intermediaries to accommodate new forms of insurance distribution, particularly to sovereign entities and ensure that data privacy rules do not inappropriately impede the use of data in responding to a catastrophe.
Insurers at their end could certainly investigate making use of the risk models developed in other fields, such as emergency response planning and disaster response deployment.
There is much work to be done but the rewards could be great for governments, consumers and (re)insurers in developing markets. The application of new technologies and their co-development with international partners could at last assist the emerging economies in closing the protection gap, as well as increasing understanding of risk and integrating resilience planning.
This article was previously published in Insurance Day.