Open Banking and Insurance: Use Cases and Future Trends

The centuries-old insurance industry has been traditionally reluctant to change. Yet open banking is poised to change this, levelling the playing field for insurance providers.

Modern consumers expect the process of obtaining insurance to be as effortless as ordering a takeaway. With the COVID-19 pandemic pushing insurance online, legacy providers can no longer ignore their web experiences to compete with digital-first startups.

By integrating open banking, insurance businesses can stand out. This innovative financial framework can offer tailored personalisation, instant and convenient payments, streamlined onboarding, and more. Let’s examine how insurance providers can leverage this groundbreaking technology.

What Is Open Banking?

Open banking was first introduced in Europe by PSD2, a regulation that mandated banks share data with licensed fintech companies provided consumer consent. Previously, traditional banks held a monopoly over customer data. The new philosophy of data transparency allowed third-party providers to create innovative products and enhance user experiences.

The open banking ecosystem is run on application programming interfaces (APIs). In the software world, they are sets of rules and instructions that allow entities to communicate with each other. Banks use open banking APIs to share data with authorised providers securely.

The two main types of open banking providers are licensed as a Payment Initiation Service Provider (PISP) and an Account Information Service Provider (AISP).

PISPs can access read-only financial data shared by traditional banks with consumer consent and authorise payments on consumers’ behalf.  As a result, PISPs eradicate the need for consumers to insert their debit or credit card details, ensuring a smooth user experience.

AISPs are authorised to view customer data, such as bank account information, and aggregate multiple data sources into a single interface. Credit agencies commonly require AISP services to access a customer’s credit history.

Open Banking for Insurance: Use Cases

As mentioned above, the use cases of open banking are versatile, and the potential for innovative solutions is untapped. Let’s take a look at the most popular ways of combining open banking and insurance.

Underwriting

Traditionally, insurance underwriting has been a time-consuming process. Outdated systems and inefficient methods often hindered insurers' ability to use consumer data effectively. Underwriting, the method through which insurers evaluate business risks and set premiums, has always required meticulous risk assessment.

Open banking can streamline underwriting by delivering precise, current customer data. This allows insurers to more accurately gauge risk and make better-informed decisions about pricing and coverage.

Open banking simplifies the application process, too. Customers can digitally share their financial data with insurers, eliminating the need for physical document submissions. This saves both time and effort.

Submitting Claims

Open banking can simplify the insurance claim process, transforming what has been a complex task in the past.

Insurance providers can swiftly verify a customer's identity and confirm details by accessing their data. This efficiency can speed up the claim processing, leading to quicker payouts and more satisfied customers.

Payment Processing

Open banking can streamline insurance payment processing, integrating with solutions like account-to-account (A2A) payments.

Through open banking APIs, insurers can effortlessly execute transactions and improve the checkout experience. Clients benefit from this simplicity, as they no longer have to input payment details manually.

Anti-fraud Measures 

Open banking can support insurance providers in combating fraud by improving anti-money laundering (AML) and Know Your Customer (KYC) procedures.

The information transparency provides instant access to a client's transaction history, payee information and payment locations. By examining a customer's financial data, insurance companies can spot irregularities or suspicious activities.

Personalisation

Open banking offers a wealth of data, enabling insurance companies to analyse their customers' behaviours to gain a deeper understanding of their risk profiles.

This insight allows them to create more personalised insurance products and services. Through data analysis, insurers can tailor their offerings to more closely align with individual customer needs, leading to increased satisfaction.

Open Banking Benefits for Insurers

• Simplified AML&KYC: Open banking can streamline anti-fraud processes for insurance providers as it facilitates easier access to necessary data.
• Reduced Costs: By leveraging open banking, insurance companies can lower operational expenses. Automated data retrieval and processing reduce manual efforts and associated costs in underwriting.
• Better Products: Open banking empowers insurers to create a more tailored insurance experience. Access to detailed financial data enables the development of offerings that better match individual needs and risk profiles.
• Customer Satisfaction: Enhanced personalisation and efficiency can lead to higher customer satisfaction. The seamless and swift processing of claims and underwriting improves the overall customer experience.

Overcoming Challenges

Open banking technology, while promising numerous advantages for insurance, also presents certain challenges and concerns.

A primary challenge in the insurance industry is adhering to regulatory compliance. Insurers must navigate strict regulations and guidelines in relation to open banking. For instance, in Europe, PSD2 sets the standard, but regulations can vary in other countries. Additionally, these regulations are constantly evolving, with PSD3 set to introduce new laws about APIs and security in 2024.

Another obstacle is the dominance of inflexible legacy systems used by many insurance companies. These systems often lack the capability to integrate with third-party providers, which may stop insurers from fully leveraging open banking.

From Open Banking to Open Insurance

The shift towards online insurance is clear, and it offers huge opportunities for open banking integration. The global online insurance market, valued at $53.2 billion in 2021, is projected to soar to $330.1 billion by 2031, according to Allied Market Research.

Open insurance is an emerging term in the industry, yet to be precisely defined, but it is a derivative of open finance. As the next step of the open banking sector, it would require all financial institutions, including insurers, to share customer data with licensed fintech companies.

Open finance, while still in progress, is poised to foster a more competitive environment and personalised products. The key advantages of an open insurance policy include levelling the competitive field and harnessing data-driven innovation.

Open Banking with Noda

Insurance companies willing to overcome these challenges, should choose a reliable open banking provider. At Noda, we prioritise customer understanding, efficient operations, and growth.

Noda is a worldwide payment and open banking provider for seamless business transactions. From payment facilitation to financial analytics, Noda has got you covered. Our platform uses cutting-edge AI and machine-learning technologies. Your payments are our priority.