Regulatory Sandbox in Insurance Space

Observations around Insurtech & recent examples of Insurtech

Regulatory Sandboxes in Asia Pacific

• The total transaction volume of Asian Insurance technology (Insurtech) mergers and
acquisitions (M&A) ballooned to US$460 million in 2017, more 3X the previous year’s
level.

• Hugely populated emerging markets China and India were the main drivers of
Insurtech M&A last year, accounting for 73% of transactions. Singapore, Hong Kong,
and other Asian markets combined for the remaining 27% of deals, a huge leap from
the 4% they contributed in 2015.

• Hong Kong and Singapore have well-regulated free markets, mature insurance
customers, and access to international capital markets. These make it easier for
investors to integrate resources.

• The rise of Insurtech has also prompted the Thai Office of the Insurance Committee
(OIC) to develop an industry specific sandbox. The Insurtech sandbox was launched
in June 2017, to further develop digital insurance solutions in the country.

• Monetary Authority of Singapore (MAS), is the most progressive Fintech regulators. As

of now it is having three active sandbox entities. They are, Kristal Advisors – an
artificial intelligence (AI) driven fund management platform, Thin Margin – an online
money changing service and FriendTransfer – a digital remittance service provider. So
far, one Insurtech startup, PolicyPal – an insurance mobile application to help manage
and purchase insurance policies has since graduated from the sandbox.

• In response to a growing demand for personalised services and addressing individual

needs, MAS provides significant investment and resources to spur the growth of
insurtech in Singapore. Over the years incumbent insurers have built accelerators of
digital labs. Examples include Aviva Digital Garage, Metlife’s Lumen Lab, AXAá data
Innovation Lab in Singapore.

• Hong Kong Monetary Authority (HKMA) has launched to facilitate pilot runs of
innovative Insurtech applications by authorised insurers. Also a Future Task Force of
Insurance Industry by the Insurance Authority (IA) of Hong Kong has been constituted
in backdrop of booming Insurtech market.

• The Indian Market has seen phenomenal activity in the Fintech space and currently
is home to more than 1,500 Fintech Start-ups. Aided by the awareness created by
few Insurance Aggregators & Insurtech companies, the Insurance sector in India is
at the cusp of breakout growth.
Suggestions for Indian Insurtech Industry for the Regulatory Sandbox
1. Term Life Insurance is currently less than 1% of the total life insurance premium of the
industry. This disparity is also responsible for the gap in Sum Insured that exists in the
country. Distribution is extremely capable of bridging this gap given a few alterations in the
regulatory system. 3 initiatives that can immediately help in growth are:
a. Separate section under the Income Tax Act (over and above 80C) that gives tax
rebate on premium paid towards Pure Life Insurance policies.
b. GST waiver for Pure Protection Plans ( Term Life and Health)
c. Distributor compensation on such products should not be heavily regulated and
should be adequate, as long as the Insurance company manages this within the
expenses filed in the product which is regulated anyway and has a max capping.
Market forces should be able to determine compensation on these products (both 1st
year and renewal) as long as its within expense limit. This will open up distribution
quite a bit

2. Unit Linked Insurance Plans: Since 2010, a lot of innovation has happened in the
ULIP space where the products are designed to be very customer-friendly. This ius
evident from the reduction of charges in the new-age plans where most of them
have very small or zero charges for Policy Administration and/or Allocation. Since the
only charges levied to consumers are Fund Management and Mortality, these plans
are extremely competitive in the investments landscape. However, the market
penetration of these plans remains a challenge without help through regulation for
distribution. Some initiatives which can help immensely are:
a. Lock- in period to be reduced to 3 years (comparable to ELSS)
b. GST waiver of charges which is currently 18%.
c. Sum Assured multiple should have flexible limits: It could start from a
minimum of 1.5 times the Annualized Premium to 20 times the Annualized
premium. Any option within these limits should be eligible for tax rebate
under 80C. The Maximum limit is important given the customers’ Investment
corpus is not significantly depleted with high mortality charges.

3. Retirement Solutions through Life Insurance Plans: Currently, Life Insurance products
are not the primary choice of consumers in terms of investment into a retirement
corpus. The multiple products that the Life Insurance Retirement plans have to
compete with is NPS. To be able to fairly compete, our recommendations is as follows:
a. Since majority of customers are salaried and hence tax payers, they are
investing tax-paid monies into these pension products. In spite of this, the
pension received is taxed. In order to make the proposition attractive, pension
received from these products should be exempt from income tax.
b. To be at par with NPS, these products should also be eligible for tax exemption
under a special section (much like Sec 80ccd created for NPS)
c. Currently the corpus at the end of term cannot be liquidated more than 1/3rd
the total. Consumers are deterred failing access to their own money. Provisions
must be accommodated to withdraw the entire corpus in special cases such as
medical exigencies.

4. Health Insurance: In spite of low penetration of Health Insurance in India, the growth
rate of premiums has been limited to 30% year on year. The distribution is challenged
by customer awareness and requires a herculean effort to change the customer
 behaviour towards adoption of Health insurance. Basic steps that can change the
Health Insurance landscape are as follows:
a. Enhancing the tax rebate under Section 80D from the current value of
Rs.25,000/- to Rs.150,000 (similar to the current limits set out in Section 80D)
b. GST waiver of charges which is currently 18%.
c. Ability to pay level premiums to 5 years with multiple payment modes as
available in Life Insurance, namely monthly, quarterly, half-yearly and limited
pay.
d. Similar to Car Insurance, mandating health insurance will being about
awareness and high penetration.
e. Creating a regulatory sandbox for product creation to foster ideas such as:
i. Insurance products linked to wearable devices
ii. Products basis customer demographics and purchase behaviour
iii. Premium holiday for young-age customers worried about healthcare
costs beyond retirement.

5. Motor Insurance: Recent regulations and rulings have brought out products for 3 to 5
years which help keeping customer safe from driving on roads uninsured. However,
the affordability of such plans becomes strenuous for consumers. In order to distribute
these products, help is required in terms of permission to finance the insurance
purchase through the banks/loans.

Grey Areas related to the Proposed Regulatory Sandbox

• Fintech is much wider in scope. Insurtech is a part of that. IRDAI would have to
incubate dedicated sandbox catering to Insurance products and Insurtech Companies
only.

• What should an Insurtech startup do when it comes to regulation? Does IRDAI envision
have sole statutory leeway when it comes to Insurance Regulations or what would be
the extent of handholding for the issues falling outside the IRDAI immediate purview.
Unless that happens there would be too many imponderables on the fate of a pure
Insurance startups and their product & services, even if they succeed in the regulatory
sandbox environment.

• What would be the entry Criteria for the Sandbox; for Insurtech startups? for well-
established marketplace aggregators? Would there be any funding assistance for the
experimentation like those in Singapore and UK?

• Would there be any approval procedure of new Insurance Products & services before
they are tested in Sandbox?

• What would be the timeline of Sandbox for a product idea to be accepted or rejected?
2 months/3months/6 months. This has to be defined.

• What would be the evaluation criteria for assessing the feasibility of the Insurance
product and technology?
 • Any proposal to set up the Innovation labs with dedicated managers with technological
and analytical resources which would enable IRDAI to undertake and execute the
entire sandbox experiment?

It’s an exciting time to be in the Insurance industry. We are seeing all sorts of new
technologies come into the value chain to enhance and disrupt the modus operandi of how
we do business. Regulators also need to provide the teams with the ability to come up with
streamlined plans.

It would be really helpful to have a checklist of sorts as mandated by the IRDAI before the
new business applies for the sandbox. IRDAI should also try to convince and incentivize other
government agencies to bring together the power of many rather than that of just one. This
is also important to ensure that initiatives are not pulled in different directions.