3 min read
Open banking has become a buzzword in the financial industry in recent years. It refers to sharing financial data between institutions to provide customers with better and more tailored financial services. While this practice has been more commonly associated with banking, its importance for the insurance industry cannot be understated.
Insurance companies can use open banking to access financial data from their customers, such as spending patterns and credit history, to understand their risk profile better and provide more personalised insurance products and services. By analysing this data, insurance companies can create more customised products that better meet the needs of their customers, ultimately leading to higher customer satisfaction and loyalty.
Open banking can also help insurance companies streamline their underwriting processes by providing more accurate and up-to-date customer information. This can help insurance companies to assess risk more effectively and make more informed decisions about pricing and coverage.
In addition to these benefits, open banking can improve the customer experience by simplifying the insurance application process. By allowing customers to share their financial data directly with insurance companies, customers can avoid the need to provide paper copies of bank statements and other financial documents. This can save time and reduce the hassle of applying for insurance.
How open banking is changing the insurance industry
Open banking is transforming the insurance industry in many ways. It enables insurance providers to create personalised policies, detect and prevent fraud, and streamline claims processing.
Personalised insurance policies
With open banking, insurance providers can access a customer's financial data and use this information to create personalised insurance policies. For example, if a customer has a history of paying their bills on time and maintaining a good credit score, the insurance provider can offer them a lower premium rate. Similarly, if a customer has a high credit utilisation rate, the insurance provider can offer them a policy that includes a higher deductible.
Improved fraud detection
Open banking also allows insurance providers to detect and prevent fraud more effectively. Insurance providers can identify irregularities or suspicious activity by analysing a customer’s financial data. For example, if a customer makes a claim for a car accident but has not been paying their car insurance premiums regularly, this could indicate fraudulent behaviour. Open banking enables insurance providers to detect these activities and prevent fraudulent claims.
Streamlined claims processing
Traditionally, filing an insurance claim has been lengthy and complicated. However, open banking makes it easier for customers to file and process claims. By accessing a customer's financial data, insurance providers can verify their identity and confirm their financial details quickly. This enables insurance providers to process claims more efficiently, which can result in faster payouts for customers.
Concerns and challenges
While open banking technology has the potential to bring many benefits to insurance, including increased competition, innovation, and transparency, it also raises concerns and challenges.
Another challenge of open banking in the insurance industry is regulatory compliance. Insurance companies are subject to strict regulations and guidelines, and they must ensure that they comply with any new regulations related to open banking. Failure to comply with these regulations could result in significant fines and reputational damage.
Integration with legacy systems
Many insurance companies operate legacy systems not designed to integrate with third-party providers. This could make it challenging for them to take advantage of open banking and its benefits. Insurance companies will need to upgrade their systems to ensure they can work seamlessly with third-party providers.
Customer trust and education
Open banking is still a relatively new concept, and many customers may not be familiar with it. Insurance companies will need to educate their customers about open banking and the benefits it offers. They will also need to work to build trust with their customers and ensure that their data is being used responsibly.
What insurers can do to stay competitive
To stay competitive in the new open banking landscape, insurers should consider the following:
Embrace innovation: Insurers should embrace innovation and be open to working with third-party providers to create new products and services. They should also explore how they can use customers' financial data to offer more personalised insurance products.
Invest in technology: They should invest in technology to enable them to access and use customers' financial data securely and effectively. This could include developing their APIs or working with third-party providers to access customer data.
Partner with fintech providers: Insurers should consider partnering with fintechs to leverage their expertise in open banking and other emerging technologies. This could help insurers to stay ahead of the curve and offer innovative products and services to customers.