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Innovation in Insurance- Regulatory Sandbox for Insurance Products

Varun Hariharan

| Updated: Apr 29, 2020 | Category: Finance Business, IRDA License

Regulatory Sandbox for Insurance

In this day of technology and digitization, products and services have to be tested to know the potential impact on the stakeholders. These stakeholders include the direct public, shareholders, promoters and consumers. When such products are tested, specific parameters are used to understand the outcome. These are used by all forms of industries in the market. Once the innovators know results, the products are introduced in the market. The only issue is when certain products are heavily regulated in the market. Testing this form of product would be considered as a challenge to the inventors. This can be taken care of by testing the product in a proper environment, which supports the need for the development. Such environments are called as incubators or tech spaces.

These incubators and tech spaces make room for technical and financial products to be tested. Once these products are tested, they would be released in the market. These products have full support for development from the government. On the successful outcome of the products, these are launched. Once products are launched, they are continuously monitored by regulators and government. The main reason behind launching these products is innovation. Through constant innovation, more products can be developed and launched. This will directly affect the development of financial and technology products, thus improving the system of innovation. Such an approach can also be used in the area of finance. This form of controlled environment where innovators get access to launch their products with full support is called a Sandbox.

Regulatory sandboxes are considered for financial, technology, and related products where there is constant innovation. These forms of products require continuous monitoring as they would directly affect the stakeholders at large. Financial solutions products are sensitive areas and require regulation and compliance. Hence, these products are tested in a controlled environment before they are launched. Regulatory Sandboxes are present for all financial products- Regulatory Sandbox for Insurance, finance, and tech sectors form the central ambit for innovation.

What is a regulatory sandbox? Regulatory Sandbox for Insurance

This is considered as a legal approach supported by the government for launching products that require compliance with the laws of the land. Regulatory Sandbox for Insurance, Micro Finance, Insuretech are some of the regulatory sandboxes which are used. For example- Regulatory Sandbox for insurance products would consider all forms of innovation regarding the use of a particular type of insurance product. Products that are not offered by normal life and non-life insurers would come under the purview of regulatory sandbox for insurance based products. Therefore regulatory sandbox for insurance works in a way that requires constant innovation, less cost, and more amount of time for product testing.

Overview of Regulatory Sandbox

Regulatory Sandbox was brought out and tested first in the United Kingdom. This was related to financial products that were offered by a company. One of the well-known fintech company world remit, which has products related to remittance along with several fintech, wanted to test the products of Bank Negara Malaysia (BNM).

There were specific barriers associated with the same use of the products in Malaysia due to legal and regulatory obstacles. The product was tested in a regulatory environment and developed according to the needs of consumers. Proof of Identification was verified through the use of mobile phones by an application that needed to be downloaded. This was successful, and BNM wanted these products to be launched at a regional level in the UK. After success, specific guidelines related to electronic KYC (electronic Know your customer) was implemented by BNM. Through this regulatory sandbox approach, the bank was capable of introducing their services in another country, with the use of innovation. Therefore the mechanism behind the regulatory sandbox approach is to develop products that are not previously offered in the market. This form of innovation is considered for regulatory Sandbox for Insurance based products.

Features Related to Regulatory Sandbox for Insurance

  • Regulatory Sandbox has to be in a controlled and tested environmentFor example, when a Fin-tech and Insurance regulator wants to introduce their product, they should consider the environment where regulatory sandbox for insurance based products are launched. Regulatory Sandbox for insurance based and insurance-linked products can be tested. Once these products are tested, there is sufficient scope for understanding any form of flaws in the product. Regulatory Sandbox for insurance is one of the types of products that are considered for the environment for testing a product. The following are the features of regulatory sandbox:
Features Related to Regulatory Sandbox for Insurance
  • Helps in removing barriers- Certain sectors in the economy are heavily regulated and require governmental intervention at various levels. A classic example of this is the BFSI (Banking, Finance, and Insurance Services) sector. Regulatory Sandbox for insurance is heavily regulated. By testing their products in a controlled environment, they would have the added advantage of the relaxed norms which are present in the controlled environment. Some products may not be allowed under normal conditions. These products would be allowed only through the regulatory sandbox. Therefore innovation in the areas related to regulatory sandbox would provide a suitable environment to try out new products. Regulatory Sandbox for insurance products can be launched in this way at a domestic level.
  • Producing Products in a limited amount of time with less cost- Another advantage of the Regulatory sandbox is the products can be tested and launched in a limited amount of time. Many innovators would consider this beneficial. Regulatory sandboxes consider providing a period of 6 months to a year to test the products. Innovators would spend more time and effort during this period to bring out the product. They would not utilize a lot of money to produce the product. Regulatory Sandbox for insurance products can also produce life and non-life based insurance products through this method. Innovators in the insurance sector would have more time to think about suitable alternatives to regular insurance products. This is considered as an added advantage for different areas around the world.
  • Government Support- One of the most important benefits is the need for proper support from the government.  As there are many relaxations, the innovators can test any form of product as long as they are compliant with the regulations imposed by the regulatory sandbox framework. Regulatory Sandbox for insurance has specific requirements as per the IRDAI (Insurance Regulatory and Development Authority of India). While most of the regulations are relaxed, some of the mandatory rules are not relaxed. Therefore an insurance-based innovator has to consider all options available with government support.
  • Inclusion of Finance- Another advantage is the financial inclusion aspect of regulatory sandbox approach. Inclusion is the form of access to finance to all sections of the society. What products are offered by insurance companies to a more significant extent would also be provided to rural sectors of India. Regulatory Sandbox for insurance is one of the classic examples of financial inclusion. Products developed under the regulatory sandbox for insurance can also be offered to the lesser developed sections of the society. This can be offered on the basis of use of the insurance product or an insurance product is developed when the policy holder starts using the product. Regulatory Sandbox for insurance helps in developing products that would meet the needs of the rural economy. Innovators can develop application based insurance products for rural sectors. They would also have the benefit of training individuals in the use of these products.

Therefore regulatory sandbox mechanisms around the world use the above features. Regulatory Sandbox for the insurance sector will develop if the innovator/ insurance company utilizes the above features.

Regulatory Sandbox – Perspective from the Reserve Bank of India (RBI)

The RBI has considered frameworks regarding the use of Regulatory sandbox for products leading to innovation. Some of the products which can be offered under this framework are the following:

Regulatory Sandbox
  1. Regulatory Sandbox for Insurance;
  2. Regulatory Sandbox for Payments;
  3. Regulatory Sandbox for Artificial Intelligence; and
  4. Regulatory Sandbox for technical linked financial products.

With this, the RBI brought out the requirement of the proper utilization of a regulatory sandbox mechanism. The RBI enshrined the following objectives and principles:

  • Testing of financial products in a controlled but regulated environment.
  • Risks related to a new form of innovation in financial products.
  • Understanding the system of the Regulatory Sandbox through the basis of having an efficient incubator space or a system.
  • Create financial products with diligence, thus embracing the need to develop responsible financial products which can be offered to customers.

Under the RBI System for Regulatory Sandbox, the following features were considered:

  • The principle of ‘learning something from doing’ was considered as a primary importance. Through this, only the mechanism of regulatory sandbox was developed.
  • Useful feedback would also be a reason behind the development of a regulatory sandbox related to finance products.
  • Financial inclusion is also one of the central aspects of the regulatory sandbox, which was considered in the features above.
  • Regulatory Sandbox would create more products in the market.

Thus for the banking and finance environment, the system of regulatory sandbox has been developed and implemented.  The insurance sector has also adopted this system. The IRDAI has developed regulatory Sandbox for insurance products.

Regulatory Sandbox for the Insurance Sector

For the banking and finance sector, regulatory sandbox mechanisms have been developed by the Reserve Bank of India. Similarly, the IRDAI has introduced this framework for Insurance based and insurance-linked products. The regulation which governs the Regulatory sandbox for insurance is the Insurance Regulatory and Development Authority of India (Regulatory Sandbox) Regulations, 2019 (” Regulatory Sandbox Regulations”). The regulatory sandbox regulations came into force in 2019. These regulations would be applicable for two years.

Primary Objectives of These Regulations

Primary Objectives of These Regulations
  • Ensure Balance- One of the main objectives of the regulations was to maintain a balance between the developments of the insurance sector and to protect the interests of the insurance policyholders. By striking a balance between the two, the main aims of insurance would be achieved. Apart from this, there is scope for constant innovation in the insurance sector.
  • Protect Data of Consumers– Data Protection and Privacy is considered as one of the main areas of insurance. Regulatory Sandbox for Insurance should enforce the need that while new products are developed, the stakeholders and policyholders interests are maintained. This would also include the protection of sensitive data of policyholders.
  • Relaxing the norms- Another objective of the regulatory sandbox for insurance is to relax the amount of compliance-related issues for insurance. While there is no scope for the monitoring authorities to relax the mandatory laws, specific other regulations related to the products can be relaxed. The motive behind this is to increase the number of innovative products related to insurance by relaxing the laws which make the products inoperative on a usual basis.

In these regulations, an applicant would include the following:

  • An insurance company;
  • Insurer;
  • The broker or intermediary of the insurer;
  • An individual that has the minimum net worth of Rs 10 Lakhs in the previous financial year and engaging in products related to insurance; and
  • Any other person or entity which is recognized by the IRDAI.

Regulatory sandbox for insurance would, therefore, apply if the applicant has a net worth of 10 lakhs and is taking part in the business of Insurance. Under these regulations, Regulatory Sandbox for insurance would include a controlled environment where financial based products can be tested. These products and services do not need to be fully compliant with the existing laws related to Insurances.

Application to be a Part of the Regulatory Sandbox for Insurance

To make an application under the Regulatory Sandbox Regulations, the applicant has to ensure the type of products or services offered would be to promote insurance-based activities based on innovation.  The following categories would the Regulatory Sandbox for insurance apply to:

  • Underwriting Services;
  • Insurance Products;
  • Claims and Policy Servicing;
  • Distribution and Advertising of Insurance based Services; and
  • Any other area which is specified by the authority.

If an applicant wants to make an application to take part in the regulatory sandbox for insurance, then an online application has to be made. The relevant documentation regarding the insurance must support this. A fee of Rs 10,000 has to also be paid with the application. The activities have to be permitted activities that are allowed under the Regulatory Sandbox for Insurance.

Conditions for Granting Permission

The IRDAI will only grant permission if the following requirements have been met:

  1. The products which are mentioned in the application promote the use of Insurance in India.
  2. The products would take into consideration the policyholders interests when offering the services to the policyholders.
  3. Applicants would protect the personal information and data.
  4. It would promote insurance services which would directly affect the development of the economy.
  5. It will help in ensuring that insurance products and services are offered to all areas.
  6. The type of products and services offered by the applicant would be compliant with the laws related to the Insurance Act, 1938 and the Insurance Regulatory and Development Authority Act, 1999.
  7. Any other requirements as per the specifications of the authority.

An application for regulatory sandbox for insurance products and services will only be granted if the above conditions are met. It will help in ensuring that insurance products and services are offered to all areas. It would also help in effective innovation of various insurance-based products and services.

Cancellation of Application

IRDAI has the power to cancel an application if the applicant breaches any of the above conditions.

An application can be extended if the applicant requires the need to extend such an application to test the products and services. The Chairman will scrutinize such an application and, if considered, will be given six months extension for completing the project.

Monitoring

The applicant has to ensure that there are sufficient systems in place to monitor the products which are offered to policyholders. These monitoring norms would also apply to the protection of sensitive information, which is present with the applicant.

Review and Suggestions

The authority can review regulatory Sandbox for Insurance products from time to time. After review, the authority can make recommendations related to the use of the products in the industry.

Report of the proposal

Once the outcomes of the project have been met, a report has to be submitted to the authority. This report has to be submitted within 15 days. The report should have the suggestions made by the authority and the feedback of potential policyholders.

If the proposal is successful, then the products can be introduced into the market with the consent of the authority. However, the products have to comply with the rules of the Insurance Act 1938 and the Insurance Regulatory and Development Authority Act 1999.

The above regulation shows that the regulatory sandbox mechanism in the Insurance Industry has a practical framework for monitoring.

New Insurance Products- Impact of the Regulatory Sandbox Mechanism for Insurance

The regulatory sandbox framework for the Insurance sector came out in 2019. The authority opened up applications for insurance and technology applicants to come out with their ideas and products related to insurance. In 2020 further applications have been considered. Out of more than 173 products that were tested in the regulatory sandbox, 33 proposals have been approved. This means that the approved proposals would roll out as insurance products that can be launched for consumers. There were conditions imposed by the authority regarding the sale of the number of approvals to customers. Some of the products which are successful due to the regulatory sandbox framework are:

  • Application-based insurance monitoring- Some applicants came up with the idea of introducing the health status of policyholders and provide new products. One such example considered here was the Diabetes Mellitus Programme that is offered by ICICI Lombard. The application would monitor the sugar levels constantly. Based on this, the eligibility criteria for diabetes insurance would appear.
  • Motor Vehicle- Payment as you use model – This form of insurance would be applicable when the policyholder uses the motor vehicle. As the individual policyholder uses the car, the premiums and the coverage would change. Therefore the policyholder would only have to pay the premium when he/she uses the vehicle. ICICI Lombard and Tata AIG implemented this model.
  • Floating Motor Policy- In such a product, the policyholder can add and remove vehicles to a single policy. Apart from this, the policyholder can activate or deactivate the policy as per his needs and requirements.

Apart from the above insurance products, some companies have come up with Artificial Intelligence-based products. Thus from the above, it can be understood that the regulatory sandbox mechanism for insurance products helps in developing innovative insurance products for the benefit of the policyholders.

Conclusion

Regulatory Sandbox mechanism is beneficial for every industry which is heavily burdened by regulations. The sandbox mechanism helps to develop products with the use of innovation. Innovators would get the added advantage of relaxed rules when they participate in the regulatory sandbox. Apart from this, they get full support from the government for carrying out the activities. To ensure that an effective regulatory sandbox is created, there has to be constant monitoring by the government and concerned authorities. The IRDAI has created specific regulations regarding Regulatory Sandbox for Insurance. These regulations apply to applicants who carry on the business related to Insurance. To ensure more amount of innovation and development of products, such frameworks must be used more frequently.

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Varun Hariharan

Varun Hariharan has completed the Legal Practice Course from BPP Law School, Manchester. He has a Masters in Commercial and Corporate Law from the Queen Mary University of London and LLB Honours from Bangor University, UK. He specialises in law related to corporate, artificial intelligence and technology law.

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