1. Home
  2. Meet our experts
  3. Content from our experts
  4. Open banking: How could the insurance industry evolve?

Open banking: How could the insurance industry evolve?

Confused.com C icon
Our expert panel review all content. Learn more about our editorial standards and how we operate.

Open banking is a system where consumers grant permission for financial and banking services to access and share their financial data. These institutions - whether that's insurers, lenders, or fintechs - can then access consumers' transaction data, spending habits, and more.

In the UK in 2016, the Competition and Markets Authority (CMA) ruled that 9 of the largest banks must allow startups to access their data. This was the beginning of open banking in the UK. There are currently 322 organisations that take part in it.

Nearly a decade on, open banking is still developing. However, we're yet to see much traction in insurance.

What's happening with open banking and insurance? What are the potential benefits and obstacles? And what's the role of price comparison websites (PCWs)?

In the banking sector, open banking technology has improved customer experience, it's easier to share data and a wide range of new products. It's made it easier for customers to apply for loans, as well as to use innovative financial products such as budgeting apps.

What benefits could open banking bring to the insurance sector and its customers? From my perspective, there are 3 main benefits.

1. Open banking can offer more accurate policies and premiums

By providing access to customer financial information, open banking unlocks more data for insurers. Insurers can use this data to provide more accurate policies, both for their benefit and that of their insurers.

With open banking, insurers can see whether customers pay bills on time, whether they're in debt, and how much they regularly spend. All of this can inform more accurate premiums.

This data could help insurers assess customers requesting monthly payments. As this is essentially a short-term loan over 12 months, insurers need to understand whether customers will pay it back. Checking a customer's financial history could be a good way to assess that.

Accessing data on individual customers could benefit insurers as the general insurance pricing practices (GIPP) rules may not apply. GIPP makes sure insurers offer the same premiums to any 2 customers who are like-for-like, no matter whether they're new customers or loyal ones. Open banking could let insurers show that customers are different - and so should be priced differently.

For consumers, this could mean more competitive pricing. A greater amount of data available to insurers means greater accuracy of premiums. Plus, it could show insurers that particular customers are reliable borrowers - and so they could benefit from lower interest on monthly payments.

2. Open banking can help make the claims process smoother

Open banking could also help to streamline the claims process.

Using open banking, insurers could access relevant data to support claims. For example, they could quickly verify what the claimant spent. So, if repairs on their home came to £4,000, the insurers could use open banking to see this - meaning a quicker claim for all involved.

Open banking could speed up the process of payment too. For instance, it would allow insurers to pay directly into customer bank accounts, for a frictionless user experience.

Smoother claims aren't just a benefit for customers. Insurers could save on costs of lengthy claims processes too.

3. Open banking can help tackle insurance fraud

A customer giving permission for open banking would be a promising sign that the customer is legitimate. A fraudster (assuming they're not a one-time opportunist) is unlikely to have a 'normal' bank account history - and so wouldn't agree to open data sharing.

Not every customer who refuses permission is a fraudster though - data privacy is a concern for many. But insurers could use the transaction information to understand more deeply who the customer is and help to prevent fraudulent applicants.

For insurers, this offers an additional level of protection against insurance fraud, in particular fraudulent applications. But there's also a benefit for customers too.

The government estimates that fraud adds £50 onto every insurance premium each year, as it costs the industry billions annually. Better fraud protection through open banking could reduce costs for customers.

If there are such strong benefits to using open banking, why are insurers not doing it already? I see 3 key issues here.

1. Insurers aren't certain that customers will be on board

For open banking to work in insurance, customers have to be on-side with sharing their data. The trouble is that it's not immediately clear that they would be.

According to the ABI, over 80% of consumers say they're concerned about organisations sharing information about them when they don't have permission to do so. Over 50% say they're uncomfortable even when they have given permission.

So it makes sense that insurers would be reluctant to spend money changing their operations if they can't be sure they'll get customers on board.

Ultimately, customers need a benefit in exchange for sharing their data. The most obvious would be financial - customers want to see lower prices. According to Capco, just short of half of consumers say they'd share data for cheaper premiums. This suggests there is an appetite among consumers to share data, which is good news for insurers.

Yet finding the balance between investment and benefit is a calculation that insurers need to make. They may also want to wait until there's evidence that more consumers are willing to share their data.

2. Many insurers are still using legacy systems to manage data

Many insurers are using outdated data systems. This poses another obstacle to the implementation of open banking.

For instance, the databases that most insurers rely on - LexisNexis or the Motor Insurance Bureau (MIB) - are the same ones that they've been using for decades. These tend not to work in real-time, instead taking a couple of days to update.

The limitations of these systems mean that it's difficult for insurers to implement and connect new data sources to them. For example, open banking runs through an Application Programming Interface (API), which isn't easily integrated with older insurance databases.

At the same time, insurers may be reluctant to share information with each other. This is understandable: insurers want to guard their data for a competitive advantage. However, this lack of sharing could be detrimental to the industry as a whole.

3. Insurers aren't under any regulatory obligation to embrace open banking

If we look back at the adoption of open banking in the financial industry, one of the most important drivers was regulation.

The CMA ruled that 9 of the largest banks in the UK have to allow startups to access data. Similarly, the Payment Services Directive (PSD2) in Europe compelled banks to open up their data to third-party providers, accelerating the open banking movement.

In insurance, there hasn't been an equivalent regulatory obligation to force a digital transformation. As a result, there's no urgency for insurance companies to invest in insuretech insurance products.

Nothing is on the horizon at the time of writing. But with the GIPP rules, regulators at the Financial Conduct Authority (FCA) have shown that they're willing to improve the insurance experience for customers.

Open banking won't replace the customer journey entirely. However, it could be a useful tool to make the customer journey simpler overall. And it wouldn't take much for insurers to implement this soon.

One place to start could be the claims process. Open banking data could be used in a limited way, while the benefits could be communicated clearly.

Insurers can communicate to customers by saying "if you give permission for us to use open banking, we can process your claim more quickly." Insurers can then use this limited usage as a way to understand whether there is buy-in from customers for this service at all. If this is popular with customers, insurers can add more open banking features.

Alternatively, insurers may not need to manage customer data permissions themselves at all. Instead, they could rely on PCWs such as Confused.com to manage these permissions on their behalf.

PCWs are where most customers return to in order to get quotes and renew their insurance policies. As such, they inevitably have an important role to play if open banking ever becomes a mainstream part of the insurance industry.

Today, PCWs and insurers are already sharing data to calculate quotes. Plus, they're using information shared from third parties, all within the short period between a customer application and the quotation loading. Open banking would only provide an additional source of data, which PCWs can use to inform customer quotes.

At Confused.com, we'd be happy to manage this, if it makes it easier for consumers to access more competitive pricing.

Open banking has helped to revolutionise the financial industry. But a lack of regulatory pressure and clear benefits to the customer has stalled its transition to insurance.

If open banking becomes the norm in insurance, PCWs continue to be at the forefront of the customer journey. We can connect consumers and insurers to get the most accurate data possible and deliver greater benefits to customers.

Find out more about what we do at Confused.com.

Share this article

More content from our experts