BY IAN ONDARI
Disruption. Digital intermediaries. Technological innovation is now en vogue, start-ups have declared open season in the service delivery industry. Similarly at the precipice of this disruption is the financial services sector. It’s now a norm to wake up to a mobile application that halves conventional processes with just the click of a button. Business moguls are no longer octogenarians in bespoke Savile Row suits. Enter the era of twenty-somethings who could care less whether this or that Audemars Piguet is a limited edition.
Blame this phenomenon on the increasing digital literacy or the bulging millennial demographic but the fact remains that no sector is impervious to disruptive innovation, even farming! M-Farm is enhancing farming approaches in Kenya. I have been observing the insurance sector, because unlike other financial services providers it has responded rather uniquely to disruption; disruptive activity is largely prepubescent. I concluded that it was a result of the low insurance penetration. Equally, it could be attributed to the unique hold of data by insurers.
However, these factors do not obviate innovation. Significant interference is visible owing to the considerable number Price Comparison Websites (PCWs) currently active in this sector. Websites like InsureAfrika, PesaBazaar and Bima 247 have generated quite an interest. The Online Cambridge Dictionary defines a PCW as a website that compares the price of a particular product or service in different stores or from different companies.
These websites allow prospective policyholders to compare prices (premiums) from different carriers (insurers). After which, depending on the information keyed in, they generate quotes. Some go an extra mile by giving the option of purchasing insurance. The augmented mobile penetration, according to yearly reports by Communications Authority of Kenya (CAK) mobile phone subscription in Kenya reached the 32.2 million subscriptions by June 2014, has immensely contributed to the shift in insurance distribution channels.
The legislative and policy framework
The current legislative framework on licensing and registration of intermediaries is laid out in Part III of the Insurance Act (Cap 487). However, visibly absent are the provisions for the same regarding digital intermediaries. Market Conduct Guidelines for Insurance Intermediaries, issued by Insurance Regulatory Authority (IRA) in June 2011 are similarly unsuccessful at suitably addressing this impasse. Is it then safe to suppose that the present insurance legislative regime fails to sufficiently address the incipient concerns of unregulated price comparison websites?
At the outset, digital intermediaries present an imminent threat because they collect massive amount of digital data from the consumers. Additionally, insurers underwriting income is at risk, from experience we are aware that online shopping patterns have an impact on product pricing. Will the concept of risk have to be redefined to fit this demand?
What about the consumer?
PCWs are not bound to any compliance framework at the moment. Perhaps holistic application of Market Conduct Guidelines for Insurance Intermediaries would address some of the issues, since they would be bound by the Principles for Conduct of Insurance Business. This would effectively respond to issues regarding standards of integrity, fair dealing, due skill and care, diligence, appropriate disclosure of information (including adequate information about their business, disclosure on the amount of commission they receive due to the transactions, exclusions or conditions and warranty applying to the contract of insurance) and confidentiality. However scrutiny of the legal regime will reveal that the role of PCWs is not clearly explained, particularly in provision of insurance quotes.
The United Kingdom’s financial services supervisor, The Financial Conduct Authority (FCA) conducted a review on PCWs with the objective of recognizing how best to respond to them. The findings were published in July 2014 in a paper: Thematic Review (TR14/11) Price Comparison Websites in the General Insurance Sector. The issues highlighted in this publication included those touching on consumer experience of using PCWs, criterion of remuneration, PCWs’ compliance with existing regulations, provision of appropriate information, and, finally, role of PCWs and services provided.
Of interest in this report are the concerns, which were raised regarding consumer experience when using PCWs. It was established that information given to consumers was insufficient to make informed decisions. An attaching risk of this breach of compliance guidelines (in the Insurance Conduct of Business Sourcebook) was that consumers were likely to incur additional expenses as a result of buying products that don’t meet their needs, ending up with policies with which they might be ineligible to make a claim on or paying more for their cover than needed. Consumer focus on prices displayed in generated quotes, which also distract them from crucial product features such as policy coverage and terms, level of cover, excess levels, limitations and main exclusions.
Extent of disruption in Kenya
The magnitude of this disruption is still being determined with increasing partnerships, this in an effort to harness the consumer insight controlled by third party actors. For instance, in July 2015 Airtel Kenya, a major mobile provider, partnered with Pan Africa Life Insurance (now Sanlam Kenya) to offer a free medical cover to Airtel customers based on the amount of monthly airtime used as the telecommunication company seeks to grow its market share. Worth mentioning is that this agreement was between Airtel Kenya and MicroEnsure. MicroEnsure is self-described as, a local company that specialises in developing innovative products and services aimed at low- and middle-income individuals covering a range of risks related to health, assets, accidents and political violence.
Drawing a parallel, Kenyan consumers and insurers alike are susceptible to similar concerns. Particularly if you take into account the policy uncertainties regarding PCWs. IRA recognises the existence of these web-aggregation portals and has even licensed some, by applying the same criteria used in registration and approval of insurance agents.
The response of advanced economies is proof of both the underlying benefits and risks of innovation. Perhaps the more immediate issue is the threat that PCWs will diminish the role of conventional intermediaries. Their only available options will then be; innovate, integrate or die!
You could say it serves them right, owing to the rampant mis-selling by agents, or failure to remit premiums to insurers. But then again, that would be only one side of the coin.
What if insurers or intermediaries set up their own PCWs? This undisclosed conflicts of interest would mean that the unsuspecting prospective consumer is exposed to the vagaries of preferential pricing. Consumers will lack dispute resolution mechanisms due to the undefined role of PCWs. They will be bound by obscured clauses in the Terms and Conditions (T&Cs) of predatory websites, thereby forfeiting their right to privacy to data-mining tools without the option to opt-out. The bad online experience aside, ill-secured websites are vulnerable to data breaches. Third party malware quarrying for user information; this is because the Internet-of-Things (IoT) has resulted in enhanced interconnection in the cyberspace allowing more pervasive data collection.
Finally, the regulator should be concerned with the MOUs being undertaken by insurers with third parties to access policyholder’s data so as to improve their services and reduce expenditure
Should we regulate?
Traditional regulation theories, when analyzed from the perspective above-mentioned dialogue, will argue for and against regulation of innovation. The rationale behind the Economic Regulation Theory, and according to The Organization for Economic Cooperation and Development (OECD) is that it should be the basis of decisions intervening directly in market decisions such as pricing competition, market entry or exit. So that the net result will be correcting market failures which reduce economic efficiency or competition within a specific market (OECD Reviews of Regulatory Reform: Regulatory Policies in OECD Countries: From Interventionism to Regulatory Governance, 2002). Such an approach will possess the utilitarian tenet of assuming that the objective of state regulation is catering to the overall positive benefit of society. However the economic deregulation crusade will argue, in the words of Luke A Stewart (2010) that, “…regulation imposes an unnecessary cost burden on firms which will cause them to reallocate their capital away from innovation, effectively killing innovation”. In the same spirit, Eugene Bardach in A Practical Guide for Policy Analysis presents social regulation as reducing behaviors injurious to social welfare, creating benchmark standards and imposing sanctions for non-compliance through an administrative apparatus.
The banking sector is a proof that disruptive innovations are inevitable. Tied with increased data connectivity and consumer-driven innovators conventional businesses are being slow-pedalled by digital intermediaries. The role and scope of these entities remains largely undefined and unregulated. Broad regulations such as competition policies, relevant consumer laws and more specific legislation should be enacted to govern the conduct of particular activities and firms.
Effective policy responses present the opportunity of improving operational flexibility while at the same time promoting greater collaborations within the insurance sector. Associated to this concern is the fact that competition has to be secured in virtual spaces. Consumers of insurance products also need protection as a result of the information submitted. This can be achieved by protection of individual privacy, preventing unlawful use of information and maintaining the integrity of digital networks.
