PSD2 in the insurance industry, an opportunity and model

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Although the insurance industry is not directly affected by PSD2 (the EU’s revised Payment Services Directive), it can still reap the benefits and draw inspiration from the measure in its innovation processes. 

European regulations are paving the way for greater openness in the banking world, starting with the introduction of PSD2 in September 2019. This directive requires European banks to open up their information systems through APIs (Application Programming Interfaces) to offer two new services: 

  • Payment initiation on behalf of a third party – PIS (Payment Initiation Service)
  • Access to bank account information – AIS (Account Information Service) 

This new regulation offers an innovative payment experience and opens up new possibilities by granting access to a wealth of data. 

How can the insurance sector benefit from PSD2? 

  • Offer an innovative payment experience

For insurers operating in today’s increasingly competitive market, a flawless customer experience is vital when it comes to acquiring customers. Payment is one way of improving the customer experience as the payment methods currently used are unsuited to consumer habits. Cheques, direct debits, SEPA payments and even cards each have their own disadvantages in terms of processing costs, fraud risk, onerous reconciliation or non-digital processes.

The new options offered by PIS will benefit both insurers and customers. This service allows users to initiate payments directly from a customer’s account (with his or her consent). The customer must verify themselves with their bank in a known and secure environment to give consent. 

From the insurer’s perspective, PIS payments offer various advantages, namely that payments cannot be cancelled as they are credit transfers. This improves visibility of cash flow and financial risk

  • Data as a tool for growth and innovation

The second service introduced by PSD2 is the AIS, which allows companies to use banking APIs to access certain information from bank accounts. With data now the cornerstone of added value services, the insurance industry could have a lot to gain. 

We envisage a wide range of potential applications, from customer identification at sign-up, to credit checks and personalised offers. For example, by analysing a customer’s incoming and outgoing payments, insurers will be better able to determine that particular customer’s risk profile. With this information, they can then offer prices that are personalised to each customer. 

Open insurance: moving towards the API-sation of the sector

The insurance industry can draw lessons from the banking sector which is opening up with PSD2 thanks to the possibilities offered by APIs. The insurance landscape is in a state of flux at present, with the emergence of several all-digital insurtech companies. These have managed to gain a foothold in the market by providing innovative solutions for distribution, customer service, personalised offers, on-boarding processes and anti-fraud measures. 

Traditional insurers may feel threatened by these new arrivals, but they should view this as an opportunity instead. By opening up their system with APIs, insurers would be able to link up to third-party services. This way, they will bolster their offering for the benefit of their customers. A modular and flexible approach would encourage synergy and innovation, creating a virtuous circle for the entire industry. It would also lead to a more unified customer experience, bypassing the numerous procedures they currently have to deal with. 

Insurers are under no obligation to open up their systems under PSD2 like their banking counterparts. However, there are cross-border initiatives like the Open Insurance Initiative which seek to standardise data exchange within the industry. This is just the tip of the iceberg when it comes to API potential in the insurance sector.