Clifford Chance

Insurtech is one of the hottest issues for German insurance companies, IT/technology companies searching for opportunities to grow, invest and gain market share, and for private equity and venture capital investors attracted by this fast-growing market. However, players in this market need to understand the frequent changes to the legal and regulatory framework.

Regulation

Insurtech - and how it is defined, how it is implemented and the how it is regulated - is the subject of lengthy discussion in leading German law journals.

The designation of insurtech serves only as a classification of businesses operating predominantly in the insurance sector using IT to digitise insurance products and business processes. These businesses include:

• Start-up companies providing insurance (or insurance broking) 
• Existing insurance companies venturing into start-up companies; setting up their own start-up companies; or using and investing in new technologies within their own business. 

Insurtech businesses can be divided into those that perform broker-like activities (broker level or broker-related insurtech), and those that offer insurance services and/or insurance products themselves (product level or product-related insurtech). 

One of the main discussions in the German insurtech sector is about the regulatory requirements for different kinds of insurtech. Not all insurtech businesses qualify as insurance companies (from a German law perspective), as qualification depends on the services they are providing. A regulatory distinction can be drawn between non-regulated insurtechs, broker-related insurtechs and product-related insurtechs."

It is important for insurtech companies to assess the regulatory framework, the requirements to be met, and alternatives to be considered, when starting a new business. In general, a newly established entity using specific kind of technology might not be regulated (under German law) as long as it does not qualify as an insurance broker or insurance company. 

Broker-related Insurtech

The business of broker-related insurtechs is comparable with "stationary" brokers, selling insurance products (mainly to customers). Brokers need to consider only limited regulation requirements under the Insurance Mediation Directive (IMD) – taking into account the Insurance Distribution Directive (IDD), being passed, but not yet implemented into national law, and German trade law (and not German insurance regulation law as such). A business licence is required as soon as the business qualifies as a broker business (meaning that it is the intention to sell insurance products, assist in concluding such contracts or advise in connection with insurance products). Where an insurtech qualifies as "broker", it is required to file for a business licence (but not for an insurance licence). Consequently, setting up a broker-related insurtech is relatively quick, easy and requires lower capital requirements. As a result, broker-related insurtechs have gained a sizeable share of the market. 

Product related insurtech

These are more heavily regulated as they are classified as insurance companies. Under German law they are required to have a specific legal form, sufficient equity capital, qualified staff and a proper organisation. Becoming a regulated insurance company is highly complex, time-consuming and comparable to receiving a full banking licence (Vollbanklizenz). 

The main focus in the product-related insurtech sector is not the formation of new insurance companies, but the implementation of insurtech components and tariffs by existing insurance companies. These include the use of healthcare wearables in existing health insurance policies or Telematic Tariffs – pay as you drive – policies offered by automotive insurers. 

As this market is rapidly growing, new players are likely to gain substantial market shares and, may be of interest for conventional insurance companies as partners or M&A targets, and for venture capital firms looking for investment opportunities. 

Pay as you drive motor insurance

The German automotiv insurance sector is offering "telematic tariffs" – also called pay as you drive tariffs. Mobile phones/apps or specific devices installed in the car, track the drivers' behaviour and driving style. These decrease customer premiums for demonstrably safe drivers and allow insurance companies to reduce their own costs for damage claims. It offers a more tailored approach to underwriting and setting premiums. Some insurers have already started trials and launched the first Telematic Tariffs in 2016. 

Healthcare insurtech

These primarily make use of health-related information from data sources such as wearables or smartphone apps and provide customers with incentives for agreed behavior that minimises risk. These insurtechs are able to act at the product level (such as purely online health insurance companies), but they are mainly used in traditional insurance products, such as private health insurance policies or supplementary insurance coverage. 

Called "pay as you care", this model means that in the future the price of insurance coverage will not mainly depend on abstract parameters (such as sex, age or weight), but on the insured's own behavior. 

Broker apps

One of the most important developments in the German market is the rise of numerous start-up broker apps, which are used to compare insurance tariffs and to administer the policies of different insurers. These have attracted a lot of venture capital and, as they are less regulated, it is easier to enter the German insurance market. It is questionable whether these are advantageous for the insured but, in general, these companies try to simplify insurance coverage and the handling of existing insurance policies.

Peer to peer insurtech

On the product related side (but with a strong broker-related component) peer to peer insurtechs aggregate groups of policyholders who pay a premium perceived as “fair,” provide mutual support in the event of loss, and reduce or refund premiums if there are no claims. One essential feature is to bring together, and provide mutual protection for, the smallest possible groups of policyholders with the most similar risks possible. Consequently, they use a high degree of selectivity to bring together only “good” risks so as to reduce the loss probability of each individual policyholder and, the overall loss probability of the peer group. In so far as the selection mechanism works and the policyholders constitute a particularly homogeneous group, a low premium can be offered.

However, there are two significant drawbacks. There must (from a regulatory perspective) be a continuing guarantee that the insurance company will be able to perform in the event of loss, so these types of insurers tend not to be suitable for (potential) large losses. Second, this peer-to-peer approach leads to either the unavailability of corresponding insurance cover for high-risk insureds or coverage being offered at unaffordable premiums.