When disruptive technology and regulation meet, the world changes.
Pity the poor regulators faced with competing demands:
- Protect citizens from losing money
- Encourage innovation that drives jobs and GDP growth
- Don’t upset the incumbents too much
Oh, and do all that when technology keeps changing the game. For example, think of Auto Insurance, IOT and Self Driving Cars.
Auto Insurance, IOT and Self Driving Cars
This is just one segment of Insurance, but think of these tough questions:
- Who owns the data? If I let the telematics in my car tell my insurance company what sort of driver I am, do I own that data or does the insurance company? The issues are similar to those driving PSD2 regulation in banking.
- Who is responsible? If I let the car drive while I catch up on Netflix binge watching and there is a crash, who is responsible, me or company I bought/leased/rented the computer on wheels?
Then we have the regulation that used to be simple – Capital Adequacy.
In ye olden days, Capital Adequacy simply meant a Regulator telling the Insurance company how much capital they need to hold in reserve. Only big established firms could play this game. Now think of these tough questions:
- An Insurtech startup is only insuring small items, the sort of stuff that was seldom insured in the past because it was too much hassle, but now a couple of swipes on a phone does it. How much capital do they need compared to a company insuring life, health, house or car?
- A minimally capitalized Insurtech startup creates a digital experience on top of a Reinsurance company platform. Whose capital has to be adequate, the Insurtech startup or the Reinsurance company?
- A group of Hedge Funds, acting like the Lloyds Names of old, offer to cover Insurance through some variant of Cat Bonds and lay off some of that risk into derivatives contracts in the capital markets. Where is the capital and how do we know it will be adequate when the time comes?
Smart Contract meets big legal bills
You sign up for an instant payout policy (real time settlement) where proof of event is recorded on an immutable blockchain. The payout should be automated and immediate, but it does not happen. Who ya gonna call?
You are from Switzerland, but you are visiting New York, the Insurtech startup is in London, but is regulated in Bermuda and the servers are Iceland. Your lawyer starts talking about jurisdictional issues while he plans for a long and expensive project.
Bernard Lunn is a Fintech thought-leader and deal-maker.
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