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PA OPINION

The next wave of FinTech

RegTech and InsurTech are the new focus for investment into FinTech, driven by increasing regulations, data, cost pressure and customer demand.

The Fintech industry is growing every day, with innovative new players transforming financial services. Historically, the focus has been on finding areas where banks aren't serving their clients sufficiently. Legislation, such as PSD2, plays well with those ambitions and major banks across Europe are opening up their systems with APIs that enable faster development of third party solutions for banking clients.

The next wave of Fintech is flowing into relatively untouched areas, such as regulatory compliance and insurance. Financial Service Institutes (FIs) struggle to keep pace with regulation and implement new controls and reporting requirements in existing operating models and IT-landscapes. At the same time, the insurance industry has been lagging behind on customer experience and operational efficiency.

During 2017, PA partnered with Stockholm School of Economics to research the development of RegTech and InsurTech. The report concludes that the developments within RegTech and InsurTech are faster than the Fintech industry on average. This is because consumers, fintechs and incumbents can all gain great value from the development.

In the RegTech section of the report, we examine how new regulations are affecting financial incumbents and what technology is available to meet these challenges. We focus on the underlying regulatory drivers of RegTech, suggest a taxonomy, examine Swedish players, look at how RegTech plays out in a set of regulations, and predict possible future scenarios. In the InsurTech section of the report, we examine how the insurance industry is adapting to the development of insurance-related technologies.

One key conclusion is that long term regulatory pressure requires FIs to rethink their data infrastructure and take a holistic view of their clients. To stay competitive, FIs should look for technologies that will let them provide the best service at the lowest cost and cooperate with those firms or individuals that are best at providing compliance. One of the most important aspects of regulatory management is how to handle information. FIs must comply with existing regulations to manage new data and information changes, while adapting to evolving regulations. Thus, an actor management solution must aim  to ease the process across the whole lifecycle of  a commercial relationship to all types of actors. With new technologies, management of this process is vital to enable digital service offerings and open banking platforms while being compliant.

FIs should evaluate which parts of their services  and operating processes could be outsourced  to more efficient technology companies to  remain competitive. It's important to highlight  that the RegTech industry is still immature and  not all solutions are perfect. For that reason,  we recommend FIs cooperate with RegTechs  and participate in the development of this exciting new industry. The long-term consequences of  these regulations, if firms can take advantage  of economies of scale, is a horizontally integrated financial industry characterised by digitisation  and built on a Lego-type structure.

InsurTech is a relatively new development and the report outlines how customer needs and wants have shifted. Individuals may be less loyal to their traditional providers, and more willing to explore new and better solutions for their financial endeavours. Growing access to data, for example from smart watches, gives insurers the opportunity to monitor behaviours and predict accidents, which could potentially lead to a decrease in risk premiums for the customer. Technology may be the catalyst for the most impactful change since the beginning of the insurance industry – the shift from reactive to pro-active business models. Not only is the distribution model changing, the products are evolving as well.

One interesting observation in the report looks at the megatrend of the sharing economy. The Swedish insurance industry is remarkable in its tradition of mutual insurance. Arguably, many of the so-called P2P platforms developing today are really repackaging the notion behind a managed mutual insurance platform, similar to the offerings of P&C insurers Länsförsäkringar and Folksam, or life insurers Alecta and Skandia.

Swedish incumbents and InsurTech startups have reason to be optimistic about the future of the insurance landscape. For the startups, there are signs of increased risk capital on the market, and customers are on the lookout for more personalised, proactive, and cost-efficient insurance products.

It's unlikely, at the current stage of InsurTech development, that new entrants will be able to competitively offer a full insurance product without the aid of incumbents or partners. This is due to the high capital requirements and complex regulatory compliance hurdles, as well as the disadvantage of newness that hampers consumer trust. Therefore, a scenario emerges where incumbent insurers and newcomers can co-exist to improve service quality, reduce cost, and generate returns on investment by partnering and cooperating.

The Swedish insurance market offers an attractive breeding ground for industry collaboration based on the increasing number of InsurTech startups, demand for innovative startups to invest in, and incumbent insurance companies with extensive knowledge and experience. Sweden not only hosts InsurTechs that operate within the Swedish market, but an increasing number that look beyond Sweden, such as BIMA Mobile and Enerfy. With nimble operations and global perspectives, these companies aim to establish themselves as partners and providers of technology services that transcend national boundaries. Stockholm, as well as other cities in Sweden, are well-positioned to host technology companies that can innovate in the insurance industry.

For incumbents, it's vital to participate in these developments to accommodate future insurance customers who will demand proactive, personalised, and intuitive insurance products. While incumbent insurers have already started to partner with startups, they still face challenges in reinventing themselves for future policy holders. Further collaboration with InsurTech startups might prove a viable solution.

For more detailed insights, download our full report.

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