The combined effects of Open Banking, the General Data Protection Regulation (GDPR) and developments within artificial intelligence could see banks offering life insurance.
“The real challenge is synchronising banks’ data into the old and archaic insurance processes in the old insurance offices and ensuring incumbent insurers are prepared to accept information in a new way, and accept risks around life insurance,” says a c suite executive at an insurance data platform, suggesting that the newly opened data channel between bank and underwriter is in need of innovation.
In a 2018 Morgan Mckinley, report, director Cem Baris suggested insurance firms have so much data it can be difficult to manage it. “[T]he main challenge that is obstructing insurance companies benefiting from the availability of so much data is finding the right ways to exploit both structured and unstructured data.”
The data that banks already hold on their customers offer invaluable insight – an asset that Jon Dean, head of retirement strategy at Altus Consulting, believes is an excellent vehicle to convert customers to life insurance policy holders.
“The life insurance market is growing, but the trend is for multi-cover type insurance, for example life assurance with critical illness cover and income protection insurance.
“This type of total protection can be better adapted to the customer’s needs over time. The other sort of opportunity is in income protection. Banks can see those spending patterns including when major life events, like the birth of a child or mortgages, can trigger the need for life insurance or income protection based on the transaction data,” says Dean.
While such events may signal banks and insurers to potential life insurance candidates, Dean also believes that Open Banking has provided access to even more granular proxy data, such as gym membership, smoking and lifestyle patterns.
The data previously bought and employed by underwriters has been hampered by GDPR and makes data analysis a more challenging task. Speaking to Insurance Business, Clive Rumsey of REaD Group outlined the challenge posed to insurance companies under GDPR, and specifically the need to obtain permission in order to market to potential customers: “Thanks to a power shift away from companies and into the hands of the consumer, insurance providers will have to compete more fiercely for continued custom,” said Rumsey.
There are two options for banks, according to Dean. Firstly, they can stick to their current course and form closer partnerships with established insurers - running into the “old, archaic” data plumbing problem outlined by the data platform’s chief executive.
Alternatively, banks can risk insurance companies offering alternative savings and investment products that could see the latter poach customers.
On the former option, there is “massive opportunity” for banks considering offering life insurance, according to Peter Colis, CEO of US insurtech, Ethos.
“JP Morgan values a customer at $50,000 over a customer’s lifetime so one of the primary initiatives is often to reduce churn of customers by adding value and ensuring that your customer doesn’t leave to the next new and flashy service,” says Colis, encouraging partnerships with insurtechs to stay ahead of slower competition.
The chief executive at the insurance data platform agrees. “The big driver is customer retention,” he says. “Life is just another part of a whole range of insurance services that banks can sell and make money on. People rarely shop around for the cheapest quote, it’s more what’s convenient. That’s where the bank can step in.”
While banks would like to be providing sticky services, fending off challengers and generating extra revenue, it is a “nice to have” but not a priority, believes Altus’ Dean who points says life insurance is only profitable at scale.
“The question for banks is do they just stick with affinity partners or do they go full bore into the markets themselves? I don’t believe banks have that appetite.
“There are strong capital requirements that fall under the EIOPA Solvency regulation in addition to Basel which they already have to follow as a bank, it would undoubtedly force them to hold more capital in an environment where they already have to hold lots of capital.
“Banks who have had life insurance companies in the past have outsourced administration to third parties to keep costs low,” says Dean.
The ball is in the insurtechs and data plumbers’ court to provide a more customer-friendly, technologically superior and cost-effective solution, to disrupt the legacy affinity partnerships between large incumbents and banks, according to Colis.
“We can algorithmically underwrite a 75-year-old without needing your medical exam, that's how good our technology is. Analysing all these proxies for how you live your life is the real beauty and innovation of it,” says Colis.
On the subject of cutting costs through automation, one need only look to the case of Fukoku Mutual Life Insurance that replaced its entire underwriting team with IBM’s Watson Explorer.
“Insurtechs still need the underwriters to take the capital risks,” says Dean, “but if it’s about running insurance more cheaply, there’s an opportunity for insurtech.
“Ultimately, I see the opportunity of a big bank using its branding and combining it with an insurtech’s technological expertise, whether it be a strategic partnership or an outright acquisition.”
A spokesperson for Nationwide said: “We currently have no plans relating to the development of Open Banking and Life Insurance, but this is likely to form part of our future strategy.”