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Regulation in the times of InsurTech – Interview with Kathleen Köhn (BaFin)

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The InsurTech world is growing up; more and more startups are interested in applying for an official insurance license. To get some first-hand insights, Uli Kleber, The Digital Insurer’s News Correspondent for the German-speaking countries, seized the opportunity to connect with Kathleen Köhn for an interview.

Mrs Köhn is Senior Advisor in the Insurance and Pension Fund Supervision Department at the German Federal Financial Supervisory Authority (BaFin) and Chair of EIOPA’s InsurTech Task Force.

Kathleen Köhn, BaFin 

1. Kathleen, thank you for taking the time to talk about the touchpoints of EIOPA and BaFin with the InsurTech world. On a European level, you are responsible for EIOPA’s InsurTech Task Force. What exactly is the purpose of this task force?

Kathleen: The focus of the task force is to monitor the different developments of the InsurTech scene but also innovative technologies and their outcomes for the insurance sector, not only in Germany but in the whole EU. In doing so, we bear the three objectives of EIOPA in our minds: Financial stability, a single rule book and supervisory convergence and consumer protection. To ensure that these objectives are met, the task force follows a multi-disciplinary approach to get the entire picture of the InsurTech developments. If necessary, the task force also cooperates with other EIOPA working groups or European institutions. Furthermore, topics are also often intersectional and are therefore discussed or even handled with the other ESAs, as it has been done on the report on sandboxes and innovation hubs of the joint committee for instance.

2. How do you collaborate with other regulators and gather market insights?

Kathleen: First of all, we exchange views within the task force to decide on where to focus our resources. At the same time, we conduct proprietary market research, not only with other regulators but also with the industry, for example, through questionnaires to the national competent authorities as well as industry surveys and public surveys. The latter can be found on EIOPA’s website so that interested stakeholders can participate, too. Another way for the task force to gather insights are roundtables organized and hosted by EIOPA, where different stakeholders come together to discuss certain topics.

Generally speaking, BaFin is very interested to get the views of different stakeholders, which are particularly important in a field that is evolving as quickly as InsurTech. Therefore, BaFin has for instance been host to the BaFin-Tech twice so far, a conference on the topic of FinTech companies in order to exchange ideas and opinions with founders and company representatives. Also, InsurTech was one of the major topics of the recent BaFin Annual Conferences of Insurance Supervision.

3. “Challenge the status quo” and “break the rules” are important recipes for success in the startup world. How do you decide when to intervene?

Kathleen: That is actually quite easy to answer: BaFin is bound by the law. So, if an undertaking that falls under the supervision of BaFin violates the law, we have to intervene. At the same time, we remain neutral, also with regard to technology. BaFin’s goal is to ensure a level playing field open for all that play by the rules – no matter if incumbent of startup.

Apart from that, BaFin has a positive view of new participants and market players as they typically increase competition and foster innovation. That is good for the market – and, in the end, consumers could benefit from competition.

4. How often did you already have to intervene with a startup in the insurance sector because they were not playing by the rules?

Kathleen: Speaking for insurance start-ups, we have had to intervene only very few times, so far. However, you should keep in mind that BaFin is mandated to focus on companies which conduct insurance business. Many InsurTech startups are actually registered as brokers or multiple agents. Therefore, they fall under the supervision of the local chambers of commerce.

5. Most of the discussions are around size and companies being “too big to fail”. Why should the regulatory agency be interested in small startups?

Kathleen: The main goal of insurance supervision is the protection of policyholders, regardless of whether they have signed a policy with a large insurance company or a small startup. Thus, we will ensure that business operations in each and every undertaking are conducted adequately and client interests are safeguarded appropriately. At the same time, we also apply the principle of proportionality, i.e. we take into account the nature, scale and complexity of risks.

Let’s take a monoliner that only underwrites glass insurance compared to an insurer that only offers disability insurances as an example: sums insured are typically very different, as are the longitudes of tails of the risks insured also claims assessments demand different know-how and are of diverse complexities. Therefore it could be assumed that both companies have different risk profiles. However, the determination of a risk profile is a rather complex task, where not only the products offered have to be taken into account but a huge verity of parameters (e.g. distribution channels, outsourcing etc).

6. What is the impact that startups bring to the insurance industry?

Kathleen: First of all, startups foster ongoing digitalization. For the moment, we mainly see effects in the field of communication with policyholders but also in the collaboration between startups and incumbent insurers. As startups often lack the customer base, they work together with insurers which can lead to improvements in their value-added chain. This might be beneficial to policyholders, as it could result in improved services, products or prices.

Finally, as I already mentioned, startups increase competition throughout all lines of service.

7. As a startup why should I care about the regulator?

Kathleen: That is, of course, a bold question to ask a supervisor. But apart from having to follow the rules like everybody else, startups should have a very strong self-interest in fulfilling the legal requirements. Why? Because insurance, at its very core, is all about trust. Upon conclusion of an insurance contract, the insurer makes a promise to provide a service in the future. The consumer, on the other hand, will only find out how trustworthy the insurer is when it comes to the moment of payment – which may be many years in the future.

As a matter of fact, we actually received the feedback from some of the newly licensed startups that they felt the BaFin-license improved their reputation and standing in the market place. Thus, it helped them to compete at eye level with the incumbent insurers.

8. When should a startup get in touch with you and what should they consider when contacting a regulatory authority?

Kathleen: Let’s assume, the startup has a proven business model. Before contacting a regulatory authority, the startup should be aware of the regulatory requirements and should have also decided upon a business strategy. To get in touch with us, we have made a contact form available on our website that helps to prepare for this discussion. It is in our own interest to be as transparent as possible because this makes the application process easier for both sides.

9. Which developments in the InsurTech field do you see as a challenge?

Kathleen: A major challenge is to keep pace with the speed of emerging technologies. This is why one of our priorities is to create a regulatory framework that is open and adaptive to evolve and grow with the ongoing developments.

As an example, we are evaluating our supervisory practice based on BaFin’s Big Data and Artificial Intelligence-study published in June 2018.

As a consequence to this study, we initiated a Consultation phase and began talking to stakeholders from the whole sector on how we can evolve the framework to address the emerging issues of big data and artificial intelligence. So, we make it a point to constantly challenge ourselves!

10. Some of the new digital insurers, like One or Friday, decided to incorporate in Liechtenstein and Luxemburg. How competitive do you see Germany as a country for InsurTech startups from a regulatory point of view? How is regulation evolving?

Kathleen: From BaFin’s point of view, regulation should not be associated with international competition.

11. Is there anything else that you have on your heart that you would like to give as a final recommendation for a new InsurTech startup?

Kathleen: There is actually one statement which I hear again and again on InsurTech conferences: that startups state their intention to finally make insurance “cool” or “sexy”. In my opinion, this intention is misplaced. Insurance is not a lifestyle product. Instead, insurance needs to be reliable and trustworthy. When push comes to shove, consumers need to be sure that the insurer will be there for them. In my point of view, this is the essence of the product proposition, even if that sometimes means that there is a certain ring of “boring” to it.

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