Caveat: I am not a compliance lawyer and this article does not constitute legal advice. It has been written to provide a helpful starting point to tech platforms looking to make insurance products available to their customers. But firms should always seek their own legal advice.
As the role of SaaS platforms grows, an increasing number of online platforms are looking to make insurance products available to their customers. In the last article I discussed the product life-cycle of an insurance policy, and the activity of introducing customers to insurance and insurance products on your platform. For platforms who wish to do more than make introductions for customers to purchase insurance elsewhere, there are a range of options available, which are described below.
In most European countries, an unauthorised firm is not permitted to sell insurance. In particular, it would not be permitted for an unauthorised firm to conclude an insurance transaction under its own brand. At some point during the sales process it would be necessary to introduce an authorised insurance intermediary into the journey to conclude the sale with the customer, and it needs to be clear to the customer that they are dealing with this authorised firm, not with the unauthorised introducer. Similarly, “interactive” conversations with customers to answer questions, are a regulated activity and cannot be undertaken by an unauthorised firm.
For this reason, when it is important for a firm to be able to offer insurance under their own brand, it is common for them to seek their own authorisation as an insurance intermediary. For example, most banks have become directly authorised in order to sell home and other types of insurance, as have many online travel retailers who want to sell travel insurance.
The process of becoming directly authorised typically takes between 6 weeks and 4-6 months, depending on the country and context. If a firm already has other forms of financial services authorisations (e.g. to sell banking products) then the process will generally be faster. It is also important for the firm to have at least one individual who has a relevant insurance background, so that they can demonstrate how they will comply with the various insurance sales regulations.
Uniquely, the UK also has a lighter form of authorisation, known as the Appointed Representative (AR) status. An AR is appointed by a broker or other insurance intermediary, who takes responsibility for their actions. This permits the AR to undertake the full insurance sales process under their own brand.
Most people would view these activities as being the core activities of insurance companies, and indeed traditionally, it has been insurers who perform these activities. However, when it comes to fully digital insurance propositions, this is much less true, particularly outside of retail insurance.
Many traditional insurers have struggled to migrate their products and processes into the digital world, constrained by legacy technology platforms and processes. This has allowed a wave of insurtech businesses to emerge, filling a gap in the value chain, as illustrated below.
So technology platforms looking to implement a digital insurance proposition often start their conversations with traditional insurance companies, but end up partnering with an insurtech because this is the only way to get real time pricing, electronic policy issuance, and web/app-based customer servicing and claims.
Some technology platforms may decide to build this section of the value chain themselves, and from a regulation perspective there are really no barriers to doing so: once a platform is registered as an insurance intermediary, they are typically also authorised to price or administer insurance policies.
However, the biggest challenge when creating a new insurance product is finding an insurance carrier to back the product (see next section). Unless the platform has exceptionally strong insurance pricing and product management skills in-house, they are going to find it very difficult to persuade an insurance carrier to put their balance sheet at risk by backing the product - hence why many of them end up partnering with insurtechs.
As described in my previous article, issuing promises to pay a customer in the event of an insurance claim is a regulated activity because the authorities want to ensure that the firms making these promises are able to deliver on them. In most countries, only insurance companies can issue insurance policies, and the process of becoming an insurance company is lengthy, expensive, and requires a significant capital base.
For this reason, even insurtechs who have been trading for many years, typically work with existing insurers to source their capacity. It is very unlikely that many technology platforms will find it optimal to set up their own insurance carrier.
In certain situations, platforms can achieve their objectives to protect customers without needing to sell those customers insurance policies. For example, at Hokodo, when we partner with invoice financing and factoring platforms, we sometimes protect the small businesses borrowing from those platforms against the risk of non-payment of their invoice without directly insuring them. Instead, we insure the factoring platform itself, and the factoring platform offers “protected” financing to its customers rather than an insurance contract.
We have seen certain other situations where a similar approach can work, particularly with online marketplaces.
As platform businesses continue to grow in relevance, we expect them to become increasingly important distributors of financial services, including insurance. We believe this presents great opportunities for these platforms, including the opportunity to earn commission revenue, and to help solve their customers’ problems in a convenient and seamless way.
However, it is important for these platforms to be aware of the constraints that come with entering the highly regulated world of financial services. When platforms are looking to partner with insurance product providers, to offer insurance on their platform, they should ask these providers not just about their product and technology capabilities, but also their experience working with unregulated distribution partners to navigate the regulatory constraints.