News 11/04/23

Opportunities and risks of the digitalising insurance market over the next decade

Digitalisation is going to have a major impact on the insurance market over the next decade. As more consumer data become available, insurers will increasingly be able to offer personalised insurance products. This provides opportunities, but it also creates risks, for example as regards solidarity. These are some of the findings of the Dutch Authority for the Financial Markets (AFM) in an exploratory study of technological developments in the period up to 2033.

The impact of digitalisation on the insurance sector

Increasing digitalisation is going to have an impact on the insurance sector and its supervision. Insurers are gathering more and more data and applying advanced data analysis techniques. This is also changing their operational management and distribution processes, from pricing to claims settlement. The main technological trends range from growing data volumes and more powerful analytics to increasing connectivity. Techniques to access and share data create opportunities for new partnerships and services that were previously impossible.

Changes in the current insurance market

Digitalisation offers tools for high-precision personalisation. Personalised pricing, for instance, can have major consequences for consumers. Digitalisation also enables insurers to further customise premiums on the basis of behaviour, prevention or specific measurements. While this may have positive effects, it can also result in high premiums due to specific risks associated with the insured person. This can negatively affect the current level of solidarity, i.e. the willingness to bear risks collectively. Developments such as automated advice or offering insurance as part of a product or website (‘embedded insurance’) can transform existing distribution practices.

Strengthening the position of consumers with European legislation

The EU is developing regulatory frameworks in order to carefully manage these technological developments. While introducing new obligations, the regulations also offer new opportunities (such as data sharing), with the ultimate objective of strengthening the position of consumers. Cross-border services can lead to vulnerabilities when EU-level harmonisation is insufficient. In other words, when the various Member States apply different supervisory practices.

Call for the sector and policymakers

Digitalisation and the possibility to record everything in data initially held the promise of increasing transparency and improving visibility, but it now appears to have the opposite effect. Visibility for both consumers and supervisory authorities can actually be blurred, due to developments such as personalised premiums, data flows in the insurance distribution chain, embedded insurance and more complex arrangements involving services and products from abroad. In addition, the developments observed potentially reinforce one another. This confirms the importance for the AFM to continue to look ahead, with the sector and policymakers. By joining forces to reduce the risks of digitalisation in a timely manner, we can make sure that both the sector and consumers can enjoy its advantages.