Overview of Portfolio Management System When an individual investor or company has a sufficient...
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.
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.
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.
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:
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:
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.
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.
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.
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:
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.
The IRDAI will only grant permission if the following requirements have been met:
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.
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.
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.
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.
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.
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:
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.
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.