Why insurance companies should look to Open Banking

01 / 09 / 2021

The insurance industry faces many of the same challenges as banks and can benefit from the learnings and technological advancements made through Open Banking for insurance companies.

1 min.

Innovation Open payments PSD2 Customer experience

why insurance companies should look to open banking

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Introduction

When the EU Commission introduced the Revised Payment Service Directive - PSD2 - it kickstarted the acceleration of open banking in Europe and indeed the world. Open Banking is not a result of PSD2 but a culmination of much more significant and more long-lasting trends across the digital economy. These trends are fuelled by innovations made by small and large tech companies in close combination with changes in consumer behaviour and expectations. Furthermore, these trends have also been further accelerated by the innovation and proliferation of financial services through the fintech boom of recent years. But development and digitisation will not end there - as we move towards Open Data, it is clear that the insurance industry is indeed facing many of the same challenges as banks, but at the same time stand to benefit from the learnings and technological advancements made through Open Banking.

The top-5 challenges insurers face

Commoditisation of products and services

While improved digital interfaces and increasing standardisation of products have improved efficiency for insurers, it has also been at the cost of customer contact as more and more insurance customers serve themselves. On average, insurers are only in touch with a customer 2.5 times per year, whereas banks have contacts with their customers 35 times per year1 (and the tech giants are connected with their users several times per day).

Disintermediation

With the commoditisation of insurance products, new players and distribution models have seen the light of day. Competition no longer comes from insurance industry peers - but also from financial services actors and even tech players looking to expand revenue streams or to explore potential value-added services to their core products by adding the sale of insurance products to their distribution channels.

Legacy systems and innovation

Like most of the financial services industry, insurers also struggle with legacy systems. Insurance companies spend up to 80% of their IT budget maintaining legacy systems2, while at the same time struggling to build new products and services and gain access to the often siloed data stored in these systems while at the same time also struggling to ensure ongoing compliance with increasingly strict regulations.

Ensuring scale and efficiencies

The legacy systems also provide a major challenge when it comes to ensuring profitability through increased scale or improved efficiency. Insurers are increasingly embracing new technology - especially within data analytics, AI and machine learning to improve processes and services. These technologies allow for more efficient claims processing but also for improved targeting of sales. As these technologies rely on data, insurers must look to expand their data access capabilities beyond their traditional scope.

Talent acquisition and retention

According to The Deloitte Center for Financial Services 2022 Insurance Outlook Survey3, one of the biggest challenges for insurers is to recruit the right talent. Insurers are finding themselves in competition not only with other industry players but also against tech giants. According to the survey, 43% of insurers find it harder to attract talent, and the three types of profiles the companies are most challenged with are 1) Information Technology professionals, 2) Cybersecurity, and 3) Risk management. While the IT talent needed will be deployed across a number of the different projects - from legacy migration projects to innovation - the increased need for cybersecurity specialists is driven by the increased number of cyberattacks in combination with the changes in IT security brought on by an increasingly distributed workforce. access capabilities beyond their traditional scope.

As insurance companies look to tackle these challenges, they should look to explore the opportunities that Open Banking brings to the table. One of the ways to do so is to work with partners with experience in delivering and deploying Open Banking solutions. The insurance companies can then start exploring how the right combination of solutions, skills and technologies can help them mitigate some of the challenges while at the same time exploring new opportunities for better services and increased efficiency.

The opportunities

Open Banking provides the most mature set of APIs across Europe. Insurers can - with the right partners - tap into these and start building their own capabilities for API integration and foster innovation while at the same time leveraging the IT talent of their partners. The Open Banking APIs can provide insurers with new opportunities to reduce operational costs by tapping into the account-based payment rails or improving processes through access to verified customer data, e.g. checking the validity of an IBAN before making a payout.

The customer data can - with the consent of the consumer, of course - also be explored in terms of building up data-analytics capabilities without having to wait for the in-house legacy migration projects to fix the lack of data access. These data analytics opportunities cover a number of potential use cases - including

More tailored products through improved profiling

Easier customer onboarding through validated personal information

Improved consumer dialogues - allowing for pro-active advice based on purchases

Enhanced claim management processes

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