Innovative play in the sandbox


Regulators in this sphere need to be flexible, writes Sanhita Katyal

The triad of financial regulators in India – the Reserve Bank of India (RBI), Securities Exchange Board of India (SEBI) and Insurance Regulatory and Development Authority of India (IRDAI) – proposed a sandbox framework in 2019, which the RBI and IRDAI introduced this year.

Sanhita Katyal

A regulatory sandbox allows live, time-bound testing of innovations under a regulator’s aegis, akin to a “proof of concept”, and of products that may not conform to regulations under the supervision of the regulator, thus permitting usage of a sandbox to test a product without a large, expensive launch. The first regulatory sandbox was rolled out in 2015 in the UK, and many jurisdictions like Hong Kong, Singapore, Canada and Australia followed with this concept.

In order to espouse innovation in insurance products and services, and provide a contained testing space to experiment with fintech solutions, the IRDAI constituted a regulatory sandbox committee last year to glean requirements from industry participants and identify a mechanism for filling up regulatory voids to meet such requirements.

The committee submitted its report in February this year, recommending that the IRDAI encourage innovation by providing a sandbox environment. Subsequently, the IRDAI notified the Sandbox Regulations, 2019, in July, and proclaimed the implementation guidelines in August this year.

Under the regulations, an applicant should apply to the IRDAI seeking permission for testing an innovation related to solicitation or distribution, underwriting, insurance products, policy and claims servicing. Each application will be evaluated based on specified criteria and permission may be granted for six months, which may be extended for another six months.

The IRDAI may grant a relaxation of the regulations, but not in statutes, to implement a sandbox proposal. If the authority is satisfied that a proposal has met its objectives, it may permit the applicant to adopt the proposal under the extant regulatory framework, which will then apply from the date of moving to the present regulatory framework.

Sandboxing may lead to the emergence of new players, and strongly urge incumbents to modernize, thus leading to a dominant use of fintech technologies like machine learning, big data, artificial intelligence (AI), blockchain, etc., in policy management, risk assessment, underwriting and claims settlement.

It has the potential of cutting through regulatory uncertainty by offering path-breaking innovations in products and services to insurance customers, for instance with: chatbots in lieu of insurance agents; the use of wearable health-tracking devices to collect the data of customers and provide benefits from good health metrics in the form of rewards or reduced premiums; newer distribution channels upping insurance penetration in the country; more expeditious claims settlement, boosting customer confidence; and catering to intermittent needs like one-day insurance covering adventure sports, etc.

As per Lokesh Sharma, assistant vice president of legal and compliance at Max Life Insurance, auto insurance programmes that are usage-based, or that deploy telematics to track driving patterns, could be tailored and provide financial incentives to customers to drive less, or to drive safely. Such experimental proposals, although conceived as short-lived, could eventually be looked at with permanence by the authority through appropriate changes in regulations.

However, the sandbox framework could be further honed, since a six-month window may be insufficient to get adequate data or coverage for some innovations. Further, given that early adopters are a rarity in the insurance sector, and customers tend to buy products that have shown defined trends, gaining voluntary and conscious consent to such proposals can’t be taken for granted.

Some insurers may adopt deep discounting strategies to get positives. Innovations in distribution and solicitation will require educating and training agents, which may take away a significant period of the six-month window. It is also unclear how the regulatory mandate of erasure of data will be aligned to other statutes like the Prevention of Money Laundering Act or Income Tax Act, whereby a reporting entity is expected to retain customer data for defined periods.

Considering that an organization would harness resources to frame such proposals, there should be a mechanism to appeal against rejection of an application, or when there is difference in the opinion of an applicant and the IRDAI as to whether an innovation was successful or not.

Finally, application of the proposal en masse following the success of the innovation is difficult as it ultimately has to be brought under the existing regulatory framework, which may not be possible for all innovations, since the raison d’être of the sandbox is thinking beyond the four corners of regulations.

The long-term success of the sandbox will depend on the IRDAI being open to modifying its regulations to bring innovations under the regulatory framework. The kind of applications that the IRDAI accepts in the first 30-day window, between September and October this year, will signal whether the sector will witness disruptive business models or evolve at its current pace.

Sanhita Katyal is corporate vice president, legal and compliance at Max Life Insurance.