Is “open banking” the first step towards “open insurance”?

There has been a lot of noise about consumer data rights and open banking recently, and the potential transformative impact across various industries. Amongst the excitement from technology enthusiasts, a very real regulatory shift is occurring which will enable individuals and businesses to demand that their data be shared with third parties.

At Simfuni, we wanted to get to the “so what does this mean for the insurance sector” part. So, on top of our own deep dive, we teamed up with Akahu, New Zealand’s leading open banking technology provider, and Frollo, who lead the charge in Australia, to get some perspective on where it could or is making an impact within insurance (without the jargon).

 

What is open banking?

Open banking could be described as a combination of systems and regulation that enables third-party service providers to access a consumer’s banking information (with that consumer’s consent). The purpose of open banking is to equip consumers with modern rights in relation to their data, and to promote competition and innovation. The idea is that a purpose-built data-sharing regime will lead to simpler comparison and switching of financial products, experiences that can be easily tailored to different consumers, and entirely new experiences.

It all starts with the ownership of customer data. If the customer owns the data, then surely they should be able to share it with whoever they give permission to access it. If access to data is mandated, then the next question becomes how that access is facilitated. This is commonly referred to as Consumer Data Rights (CDR), and in Australia where a CDR regime has been operating for over 4 years already, the third parties that can access permissioned consumer data via the CDR regime are referred to as Accredited Data Recipients (ADRs).

Around the world, governments have been focusing in on consumer data protection, privacy, and access rights, and regulating the use, access, and transferability of that data. Open banking is arguably a product of this global regulatory shift towards consumer protection and rights.

 

 

What has been the shift toward open data?

Three main factors have driven open banking adoption across multiple geographies: regulation, API technology, and customer expectations. This section provides an overview of the key factors in Australia and New Zealand.

Australia

In 2017, an open banking review was commissioned by the Government which produced The Farrell Report the following year. The report made 50 recommendations on the regulatory framework, the type of banking data in scope, privacy and security safeguards for banking customers, the data transfer mechanism, and implementation issues. The Government agreed to the recommendations with a phased approach starting from July 2019. This has evolved with detail into the specific data sets that must be made available over the phases. Interestingly, Insurance Council of Australia (ICA) contributed a submission to the review. The ICA raised concerns about the intention of the open banking legislation being applied to other sectors in the future without full consideration of how the CDR would apply, noting the substantial differences between the banking and insurance sectors.

So in Australia, regulation has been a major driver of the open banking regime.

New Zealand

New Zealand has taken a slightly different approach. Payments NZ, a company owned by the largest New Zealand banks, has been leading the development of open banking standards across banks and other stakeholders. Progress via this industry-led approach has been slow, and after warnings of regulatory action, the government has recently taken action.

An announcement by the Commerce Commission on 20 August 2024 stated that it has granted Payments NZ “conditional authorisation to work with current and future API providers (i.e. banks) and third parties (e.g. fintechs) to develop and apply a partnering framework relating to the provision of API services by API providers to third parties (the Proposed Arrangement).” The granted authorisation is intended to streamline partnerships between third parties and API providers, and accelerate the rollout of open banking in New Zealand.

The Customer and Product Data Bill started the legislative process in May 2024. You can track the progress of the bill here and read it here. If enacted, this bill will become New Zealand’s CDR regime.

The Insurance Council of New Zealand made a submission on the bill. The submission included broad support for a consistent approach in CDR, but highlighted similar concerns as the ICA about the CDR being built around banking and caution about not recreating the issues that have been experienced in Australia, noting “lessons can be learnt from their implementation to simplify ours”.

 

What we have seen around the world where open banking has had time to mature

Payments

Payments have been, to date, the most explored and implemented feature across open banking, with third parties joining the dots (APIs) between the banks, customers, and merchants. The current state across the Australian and New Zealand insurance industry is that direct debit dominates the volume of transactions, closely followed by credit and debit cards, with a proportion paying by direct bank transfer.

We asked Josh Daniell, the CEO of Akahu, where there could be efficiencies to be uncovered across open banking payments:

“Open banking payments have some advantages over direct debits:

• The balance can be checked before the payment is initiated, so you get immediate knowledge of whether the payment will fail, and you won’t push the customer into dishonour or overdraft fees.
• If the balance is insufficient, you can trigger a notification to the customer, and intelligently retry the payment by checking the balance periodically.
• You don’t know if a direct debit authority has been revoked until you initiate a payment and it fails, whereas you get an immediate notification if an open banking authority is revoked.
• Settlement is faster
  
  

 

Open banking payments also have some advantages over card payments:

• Open banking payments are significantly cheaper than card payments.
• Settlement is faster.
  
  

Open banking payments have some disadvantages in the context of recurring insurance payments:

• If an insurer enables open banking payments, it would probably still need to support direct debit and cards as payment methods (for customers that prefer these methods or can’t be convinced to change). So it would be another method to build and maintain.
• Some banks impose payment limits that could be lower than some insurance payments (especially if the customer is paying an annual premium upfront).”

 

Claims

Open data principles can streamline the claims process in the insurance sector, offering benefits in terms of efficiency, transparency, and customer satisfaction:

Evidence validation: By leveraging open banking data, insurers can automate the verification of claims, reducing the time and effort required for manual processing. For example, if a customer makes a claim, the insurer can quickly verify the financial transactions related to the claim (such as medical expenses or repair costs) through secure access to the customer’s banking data.

Enhanced fraud detection: Access to real-time banking data allows insurers to better detect fraudulent claims. Patterns and anomalies in the customer’s financial transactions can be analysed to identify suspicious activities, leading to more accurate and timely fraud detection.

Improved customer experience: With open banking, customers no longer need to manually submit numerous documents and proofs for their claims. Insurers can directly access the necessary information with the customer’s consent, simplifying the claims process.

Faster settlements: The integration of open banking can lead to faster claim settlements. Once the required data is verified automatically, payouts can be initiated more swiftly, providing a better experience for the policyholders.

 

Premium funding and open finance

When it comes to delivering a direct ROI, one of the biggest opportunities to utilise open banking could be in the premium funding sector. Financial underwriting evidencing the ability for a policyholder to service a repayment schedule instantly is an opportunity to dive deeper into lowering the cost of applications and speed of approval. A consumer and business could enable direct access to records to rapidly accelerate decision-making.

Spending patterns, credit history, and proof of income are frequently accessed data points across open banking APIs that can be incorporated into origination decisioning. Open finance is the emerging wave in terms of open banking supercharging this sector like never before.

We asked the team at Frollo who recently partnered with AMP Advice for streamlined client onboarding and mortgage applications about open data and improved lending experiences:

“Open banking is revolutionising financial advice and lending for both consumers and businesses in Australia. It offers a quicker, easier, and more secure way for clients to share financial information with advisers, replacing traditional methods like bank statements or screen scraping.

Key benefits for financial advisers include:

1. Speed: Client data sharing now takes minutes instead of days.
2. Efficiency: Comprehensive financial overviews with categorised income, expenses, and products save hours during onboarding and reviews.
3. Provenance: Data sourced directly from financial institutions enhances credibility, particularly for loan applications.

For banks and lenders, the benefits are similar; They process applications faster, improving their 'time to yes'. Additionally, open banking provides higher-quality data, enabling them to better assess credit risk and affordability.”

 

Any sign of movement around "open insurance"?

There is no doubt that open banking has somewhat spurred on the open insurance discussion globally. In 2023, the Global Federation of Insurance Associations (GFIA), who represent the interests of insurers and reinsurers across 70 countries, published the “Dos and Don’ts to guide the concept of open insurance.

We suspect that, like open banking, it will take some time to evolve and for regulation to trigger some change. However, new technology providers will no doubt take advantage of the availability of CDR to deliver new, faster, and competitive experiences across the insurance value chain.

If CDR regulation is applied to the insurance sector, it would create a significant strain on operating systems and staff. However, the insurance sector will be able to take the lessons from banking and capitalise on existing open banking technology when regulatory obligations arise.

 

 

So what could we see in the insurance sector as Consumer Data Rights evolve?

1. Data sharing capabilities: As an insurer, you can share customer data such as policy details and claims history with third-party developers, but only with customer consent. This not only complies with privacy regulations but also opens the door to partnerships that can enhance your service offerings and customer satisfaction.
2. Innovation collaboration: Embracing open insurance allows your company to engage with innovative third-party developers. This collaboration can result in enhanced insurance products, improved risk management tools, and superior customer interaction platforms. It’s an opportunity to stay competitive in a rapidly evolving market.
3. Customer empowerment: By participating in open insurance, you empower your customers with greater control over their personal data. This transparency and control can increase trust and loyalty, as customers can choose to share their data in exchange for more personalised and potentially more cost-effective services.
4. Regulatory frameworks: The transition to open insurance will require navigating new regulatory landscapes designed to protect data privacy and ensure compliance. Understanding and shaping these regulations can be a strategic advantage, ensuring that your operations remain secure and trustworthy.
5. Privacy and security challenges: With the increased sharing of sensitive data, there’s a heightened need for robust security measures. Your company must prioritise cybersecurity to protect customer data from breaches and build trust that their information is handled safely and ethically.
6. Operational innovations: Open insurance can lead to the development of more streamlined operations such as integrated insurance marketplaces, enhanced underwriting processes that leverage diverse data sources, and more efficient claims management systems. These innovations can improve operational efficiencies and customer service experiences.

 

 

 

Why Simfuni cares

As an insurance software solution provider, it’s important that we understand the implications of proposed regulatory developments in the insurance sector and how to prepare and create opportunities for our clients and their customers:

1. We want to know where it can help and be applied to practical value-add use cases across insurance for better customer outcomes and operational efficiency.
2. We want to continue to deliver future-proof insurance technology and support infrastructure for the potential scaled API extraction of designated customer data and the ingestion of data as Authorised Data Recipients.
3. We want to continue delivering cloud and API-first connectivity that enables the configurable ingestion of customer data (designated or not) in a seamless experience from a third party for insurance use cases.

Ultimately, we want our clients prepared and ready to meet customer expectations, comply with regulatory requirements, and deliver efficient, industry-leading insurance experiences. As the markets shift and the insurance ecosystem fills with Authorised Data Recipients and customers, we aim to ensure that our clients are well-equipped to navigate and capitalise on these changes.