Clifford Chance

Extending Open Banking to Open Finance

Following the success of open banking, the UK Government, the FCA and the financial services industry have been considering the "potentially transformative benefits" for insurers and customers alike that could come from open finance, including open insurance. One of the FCA's key cross-sector priorities has been to review the effectiveness of open banking whilst also leading the broader public debate on open finance. The FCA recently published its Feedback Statement on its Call for Input on open finance, which reflects their views on the topic. Their aim is to ensure that this innovation works in the interests of consumers, the customer data to be shared by financial services is owned and controlled by its customers, and any re-use of such data should take place in a safe and ethical environment and under a clear framework of customer consent.

Accelerated by the Covid-19 pandemic, more firms are bringing forward digital transformation to respond to operational challenges and support their customers. However, developing such services in the insurance space currently requires a multitude of fragmented, bilateral agreements between industry players, which, other than compliance with GDPR data portability requirements, results in varying standards.

Opportunities for Open Insurance

Whilst there is no industry-wide definition of "open insurance", it has generally been understood to mean the provision of access to and sharing of personal and non-personal insurance-related data within the insurance industry in order to enhance products and services and improve ways of doing business. 

The opportunities from open insurance to improve the consumer experience are vast. Sharing policy information would make it easier for insurance intermediaries and third-party service providers to develop tools such as insurance and financial management dashboards, which could, in turn, enable consumers to have greater control over their own insurance coverage. This could help consumers manage their risks and assist in the avoidance of double or under-insurance. It could also facilitate faster onboarding with identity verification and KYC data. Automatic policy searches or semi-automatic switching, such as for travel insurance policies when entering an airport or home insurance policies whilst applying for a mortgage, could encourage customers to shop around more frequently and therefore increase competition. Automatic data processing could also reduce costs and allow insurers to offer products at lower costs. Regulators may also benefit from open insurance through faster and increased access to data, which could assist in a more effective supervisory review process and improved oversight of products, transactions and regulated entities.

Ethical Framework based on Consumer Protection

Whilst there are many potential benefits to consumers and providers alike, there are specific challenges to open insurance that must be considered. Collecting and sharing insurance data poses greater risks than other financial data, given that insurers have access to sensitive information such as health records and sexual orientation. Increased data sharing, particularly if combined with machine learning tools/artificial intelligence, could also increase financial exclusion. Even where the data is used securely and anonymously, sensitive patterns could be exposed, which could be used for discriminatory purposes, or risk completely pricing out customers from insurance products. As is the case for any sharing of information between market participants and potential rivals, antitrust rules will also need to be considered and respected.

Given the greater risks of open insurance, there is an even greater need for a robust regulatory framework that encompasses cybersecurity and operational resilience. Taking learnings from open banking, where critics have felt that it has been technology-led rather than user-led, a customer-centric approach throughout the product oversight and governance process in open insurance could be more agile and incentivise innovation in the industry. This could, in turn, build consumer confidence, particularly with how their data is used and how they can control its use and allow new markets to be accessed.

In addition to building a regulatory framework, the FCA considers that key building blocks would be needed for a sustainable open finance ecosystem to develop. These include consumer protections informed by an ethical framework, a liability model and common standards. A "big bang" approach to developing open finance in the insurance space would not be feasible or desirable. The implementation of open insurance should be proportionate, phased and driven by consumer demand. As such, open insurance should start with products that have the best balance of cost and complexity of implementation to consumer benefits such as home and motor insurance before extending into pure protection products.

In this fast changing, increasingly digital world, the message from the regulators is encouraging. There is a great opportunity for industry players to work with the regulators in shaping a consumer-centric ethical framework that benefits all, and it is an exciting time for the insurance industry to continue to develop innovative products.