3 April 2019 | House of Finance, Goethe University Frankfurt

Insurance and Regulation in the Digital Age

Peter Skjødt, Director, Financial Stability and Regulation, Geneva Association
Irina Gemmo, Research Assistant and Doctoral Student, Goethe University (ICIR, SAFE)



Digitalization is dramatically changing the economy. New digital technologies promise to transform the insurance sector as well and to extend the role of insurers from risk protectors to risk managers and even to risk preventers. However, this evolution in the insurance sector will possibly not only generate economic benefits but may have also socially unwanted effects. At the 16th Talk of Insurance and Regulation, hosted by the International Center for Insurance Regulation, Peter Skjødt and Irina Gemmo, discussed the benefits and the challenges of digitalization in the insurance sector. Peter Skjødt is Director of Financial Stability and Regulation at The Geneva Association, a Suisse think tank of the insurance industry. Irina Gemmo is Research Assistant at the Chair of Insurance and Regulation at Goethe University Frankfurt.

“Digitalization will affect every part of the value chain of insurers from the development of new products to claims handling,” Skjødt predicted. By using Big Data instruments insurance products would become more personalized because the availability of granular data makes risk assessment more accurate. This would lead to a more effective distribution of insurance products and lower selling costs. Moreover, claims handling would be improved and fraud would be easier detected, Skjødt stated.

However, those improvements will come at a cost – especially for customers: “Due to the increased scope for personalized insurance people with prior health problems and high-risk individuals may face prohibitively high insurance costs or may be denied cover. Moreover, as distribution of insurance policies via internet becomes more common, financially illiterate customers may possibly become overinsured. Skjødt also raised concerns about data protection and the possible misuse of personal data. For the insurers, he expects a flipside as well: As customers gain a better understanding of their own health status, the risk of anti-selection arises.

New competitors push into the market

With the rise of new technology, the competitive landscape for insurers is changing. New technology start-ups, so-called InsurTechs, enter the market. Also, incumbent technology giants such as Google, Amazon and Alibaba are eyeing opportunities in der insurance market. Yet, the relationship between big technology companies and insurers have been more complementary than competitive and mostly generated mutual benefits. “However, some think that this might quickly change if those companies extend their market power towards the insurance market,” Skjødt stated and raised the question how such technology firms should be treated by regulators. “Regulators need to assess the new business models and to examine whether they are adequately covered by the current regulatory framework and whether a level playing field is secured,” Skjødt claimed. Despite these challenges, Skjødt is optimistic that the benefits for the customers will outweigh the detriments of digitalization. For the insurance companies it is essential to pool similar risks and to extend the customer protection which regulation aims to bring about, to new entrants, he concluded.

The effects of screening and monitoring

In the subsequent speech, Irina Gemmo outlined the results of a joint research work with Mark J. Browne and Helmut Gründl, which examines the effects of screening when insurance policyholders value their privacy and therefore do not want to share personal information with the insurer. In the age of digitalization telemonitoring devices, such as wearables or telematic systems for car drivers, can serve to screen consumers’ health status or driving characteristics. However, not all policyholders may feel comfortable sharing information with insurers and thus, rather abandon the option of a premium reduction or accept a deductible. Other low risk consumers with less or no privacy concerns may possibly opt for a cheaper contract without a deductible, which requires the provision of comprehensive personal data.

Gemmo’s theoretical analysis shows that because of these preferences utility shifts in favor of individuals, who choose to share their private information with their insurers. Therefore, the utility of all low-risk insurance policy holders could be improved, if their concerns of information disclosure towards their insurers was sufficiently low.

In a cross-subsidized market individuals with privacy concerns will have to pay higher deductibles in order to subsidize high-risk policy holders. Gemmo argued that in a market, which offers screening contracts, cross-subsidization could decrease or could even be eliminated depending on the number of policyholders, which share their personalized data with their insurance company.

According to Gemmo privacy concerns of policyholders could be remedied by a stronger regulation and enhanced data security. She also suggested a redistribution scheme “although it is unclear what kind of redistribution scheme is desirable,” she conceded.

Another recent research work of Gemmo takes the possibility of self-protection and self-insurance into account. Whereas measures of self-protection decrease the probability of loss, self-insurance reduces the size of a potential loss. Therefore, self-insurance can substitute market insurance. Self-protection is considered to be a complement.

According to the results of Gemmo’s analysis the availability of monitoring technology does not necessarily incentivize policyholders to behave differently with respect to self-protection and self-insurance efforts if they can choose the level of information disclosure to their insurer. The situation looks different if a certain level of information disclosure is mandatory to receive insurance coverage. In this setting, a higher level of information sharing can enhance efforts of self-protection. For measures with self-protection and self-insurance effect, the impact of monitoring on policyholders’ behavior depends on the efficacy of those measures: For very high effort efficacy, high levels of mandatory information disclosure could incentivize individuals to opt for market insurance instead of self-protection and self-insurance.

ICIR Policy Letter 2019