How will tightening regulations affect the InsurTech sector in 2024?

Due to the advent and widespread adoption of technologies such as Machine Learning (ML) and Generative AI, the InsurTech sector is expected to receive tighter boundaries when it comes to regulations in 2024. But what does that mean for the sector? InsurTech Analyst spoke to a host of industry experts to find out.

Due to the advent and widespread adoption of technologies such as Machine Learning (ML) and Generative AI, the InsurTech sector is expected to receive tighter boundaries when it comes to regulations in 2024. But what does that mean for the sector? InsurTech Analyst spoke to a host of industry experts to find out.

The InsurTech space is poised for significant regulatory changes in 2024, as emerging technologies and market dynamics continue to reshape the insurance landscape. Experts anticipate a wave of new regulations aimed at addressing key areas such as data protection, cybersecurity, and the ethical use of artificial intelligence (AI). These evolving regulatory trends are expected to impact businesses across the InsurTech ecosystem, prompting the need for proactive adaptation and strategic responses.

Speaking to InsurTech Analyst, Aaron Wright, Director of Strategy at Earnix, suggested that the regulatory landscape for InsurTech is evolving alongside the ever-changing technological advancements and market dynamics.

“Looking ahead, the regulatory landscape for InsurTech is poised to continue its evolution in response to technological advancements and market dynamics. As InsurTech firms continue to integrate more sophisticated technologies like AI and large language models, they will need to navigate an increasingly complex regulatory environment. For instance, AI applications in insurance—from underwriting to claims processing—present novel challenges in data privacy, ethical use, and transparency.

“Regulators are still crafting the rules for these areas, aiming to balance innovation with consumer protection and market stability. InsurTech companies must remain agile, adapting to new regulations as they emerge, to ensure compliance and maintain their competitive edge,” Wright explained.

He isn’t alone in his assessment of the state of play in the industry. James Harrison, Global Head of Insurance at Dun & Bradstreet echoed his sentiment, explaining that as technology advanced, so would the guidelines in which InsurTechs can operate.

Harrison stated, “As organisations become increasingly reliant on digital platforms and data analytics, regulators are expected to introduce stricter guidelines governing the collection, storage, and usage of sensitive customer data. Regulations focusing on algorithmic transparency and fairness could particularly impact InsurTech companies that heavily rely on data-driven decision-making processes.”

But why has this become such a paramount issue?

In a sentence, because the need to gain a competitive advantage is so high. To delve deeper, according to research from McKinsey & Company, having strong data and analytics capabilities has become essential in the Property and Casualty (P&C) sector.

The top performers are significantly outpacing their competitors by developing advanced underwriting capabilities based on data and analytics, which offer considerable benefits.

For instance, leading insurers are experiencing enhancements such as a three to five-point improvement in loss ratios, a 10 to 15 per cent increase in new business premiums, and a 5 to 10 per cent rise in retention within profitable segments, all of which is attributed to digitised underwriting.

While this is just a microcosm of a much wider issue, the trend is clear to see. Technology, automation, and AI is paving the way for a more effective future in the industry.

The difficulty is brought about because regulators are still formulating regulations in these domains, striving to strike a balance between fostering innovation, protecting consumers, and maintaining market stability.

The challenge of raising the regulatory bar

As a result of this, the challenge of raising the regulatory bar looms large in the space. As technological innovations continue to reshape the insurance industry, InsurTech firms find themselves at the nexus of transformative change and regulatory scrutiny.

With the integration of sophisticated technologies such as artificial intelligence (AI) and big data analytics, InsurTech companies are pushing boundaries to enhance customer experiences and operational efficiencies.

But this comes with the added scrutiny of having to navigate an increasingly complex regulatory framework.

As regulators strive to keep pace with technological progress, InsurTech firms must adapt swiftly to evolving regulatory standards while maintaining their commitment to innovation and customer-centricity.

This is even more vital when you consider that instances of non-compliance or data breaches can severely undermine customer trust, leading to a monstrous reputation hit.

Harrison explained, “As we have also seen in the past, instances of non-compliance or data breaches could erode trust among customers, leading to reputational damage and loss of business for affected firms. This could act as a double-edged sword with incoming regulations both increasing business costs but further extending to consumer trust and confidence in InsurTech companies due to non-compliance.”

Another factor that firms will be wary of when considering the tightening restrictions is that of startups. Many of these fledgling incumbents won’t quite have a foothold in the industry, and companies that are cash-strapped may not have the resources to react to the changing goalposts.

Meeri Savolainen, founder and CEO of INZMO, was one of many industry experts to point this out, explaining, “Businesses may find compliance with these diverse and evolving regulations challenging, especially smaller startups that lack the resources of larger incumbents. Adapting to stringent data protection laws requires robust cybersecurity measures and transparent data handling practices, which can be costly and complex. Similarly, regulations around the ethical use of AI may require significant adjustments to existing algorithms and business models to ensure fairness and accountability.”

Janthana Kaenpreakhamroy, CEO and founder of Tapoly concurred with the assessment that smaller carriers could find that their days are numbered due to the potential spate of incoming regulations, stating “Smaller players may struggle to meet the stringent requirements, paving the way for mergers and acquisitions.”

However, she stopped short of claiming that potential incoming regulations would negatively affect the industry – even claiming that the stricter legislation could prompt the arrival of a more assured future.

Kaenpreakhamroy said, “This period of adjustment also presents an opportunity for growth. Enhanced consumer trust, driven by improved transparency and security, could expand the market for InsurTech services. In conclusion, while 2024’s regulatory landscape poses significant challenges for the InsurTech sector, it also offers a chance to strengthen the industry’s foundations, fostering a more secure, compliant, and consumer-friendly environment.”

How can you keep pace with the impending changes?

Change is certainly afoot in the space, but adapting and getting ahead of the game is the true litmus test for insurers moving forward.

To deal with these challenges, carriers must invest in compliance tools and expertise to effectively manage regulatory risks.

One key area where the difference can be made is at the board level, as Harrison explained.

He said, “New regulations require a dedicated approach as well as greater accountability by board members towards remaining compliant. Many boards have formed specialised committees to navigate the complex regulatory landscape and combat growing scrutiny. These committees are responsible for ensuring proper governance frameworks are in place to monitor adherence as non-compliance results in significant regulatory fines, not to mention the reputational damage.”

The integration of smart data and automation is paramount for compliance teams in tackling regulatory challenges. By leveraging these technologies, teams can efficiently manage incoming updates, promptly adjust compliance measures, and eliminate the need for time-consuming and resource-intensive reviews.

By doing so they can optimise their organisation – and avoid wasting time, or even worse – disintegrating completely.

Copyright © 2024 InsurTech Analyst

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