While open banking is still a relatively new concept, it is well on its way to driving business innovation and supporting tech-powered collaboration across all industries, and offering new service-oriented products. Open banking is incredibly flexible, having the ability to enrich any industry, helping streamline payments, facilitating necessary financial data sharing, as well as simplifying and automating accounting processes. The insurance sector is no exception.

Rolands Mesters is co-founder and CEO of Nordigen, the first free European open banking API that provides regulated connections to major European banks. Here discusses how open banking drives insurtech towards greater transparency and personalisation.

The need for digital innovation within the insurance industry is strongly felt by insurers themselves, with 86 per cent of experts surveyed by Accenture in 2020 claiming a need for rapid digitalisation to maintain a competitive advantage.

There are numerous ways in which open banking can help the industry to become more transparent and more personalised in its approach. Open banking enhances the user experience, speeds up automated insurance calculation, and reaches a wider audience of customers by providing them with products and services that are uniquely tailored to them.

Enhanced automation and a more data-driven approach

The focus of open banking is on secure financial data sharing, sourced from bank accounts and consensually communicated through a third party to improve services. Bank account information gathered through open banking is a treasure trove of invaluable data, that when placed in the right hands can be utilised to revolutionise the industry and provide the opportunity to create the ultimate customer-centric experience.

Data gathered through open banking provides deep insights into consumer and corporate behaviour and spending habits, which otherwise would be impossible for insurance companies to obtain. Data on proper car maintenance and property protection are just a couple of examples of data points that could be monitored by insurance firms when onboarding new clients and calculating pricing and creating personalised insurance policies. Detailed data analysis will improve decision-making and enable insurance experts to approach each situation on a case-by-case basis to be able to provide the most relevant service and create flexible solutions.

Data analytics can also allow companies to develop automated tools based on machine
learning technology to help forecast clients’ future behaviour, automate workflows, streamline corporate processes, and decrease costs. It also creates a system that is boosted not only by data but also AI-powered data analysis rather than manual input and analytics, which enables the system to work continuously without needing consistent supervision, as long as in-built governance is implemented, additionally helping minimise the potential for human error and speeding up internal processes.

New business models for fairer conditions and lower risks

Approaching each insurance customer based on analysis of their financial data through open banking will lead to more accurate risk assessments, protecting the company, and creating insurance policies that more accurately represent risks posed by specific clients based on their individual data. Using open banking helps to evaluate customer validity, highlight red flags in their financial transactions and spot fraudulent activity. Risk assessments will no longer be focused on general guidelines based on demographic analysis but on specific individuals and their habits, behaviours, and financial data.

Established examples of insurance providers that operate on personalised approaches are already emerging. ByMiles is aimed at occasional and low-mileage drivers, deeming the more traditional approach to car insurance to be unfair to vehicle owners who seldom find themselves behind the wheel. Instead, ByMiles chose a pay-per-mile approach, with drivers only paying for the amount they’ve driven.

The company was actually the first insurtech provider in the UK to obtain an open banking licence and they have since started to experiment in using it for customer verification and scoring, as well as payments. Their CEO, James Blackham, has spoken out about open banking and has backed the notion of using open banking within insurance as a more transparent and flexible approach.

Lemonade is another great example of when insurance meets open banking. The insurer has taken a truly novel approach to its service, offering a fast and easy-to-use digital product that can be accessed 100 per cent digitally in seconds. The firm offers a wide range of different insurance services, including homeowners’ and pet insurance, and utilises open banking to create more personalised packages and integrations for their customers.

A look ahead

In February 2022, open banking reached 5 million users in the UK. There is no doubt that we are at a point where the practice will continue to establish itself as the must-have financial tech for businesses across all industries.

New business models and the enhanced level of automation and digitisation brought forth by open banking will benefit the insurance sector, speeding up processes and risk assessments. The change within the industry will bring long-lasting benefits to customers, who will have access to better and more diverse services and products, contributing to a more sustainable economy on the whole.