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Insurance Article

Regulatory Sandbox: A Tool for Market Innovation

September 11 2019

The regulatory sandbox is expected to bolster innovation in the insurance sector and increase its penetration among masses


The ever-changing dynamics of business calls for innovation in every sector and insurance is no different. In a country like India, where insurance penetration is shallow, innovating products and customising them as per the needs of the masses assumes even more importance.

Realising this, the Insurance Regulatory and Development Authority of India (IRDAI) has created a regulatory sandbox to allow fintech and insure-tech companies to carry out innovation in the sector in a safe and conducive environment.

What is a regulatory sandbox?

Regulatory sandbox refers to testing a product or service in a safe and controlled environment. Here, the regulator, in this case, IRDAI, may or may not permit relaxation for a certain limited period for testing.

The draft regulations for regulatory sandbox in India about insurance were announced on 18th May 2019, and it was put for comments from public and stakeholders till 31st May. The guidelines for its operational issues were issued in August.

A breeding ground for innovation

Providing a workspace where insurers can work in tandem with fintech companies and ideate, test and innovate financial products, regulatory sandbox is expected to give a fillip to the sector and enhance its penetration.

Note that before regulatory sandbox came into the picture, there were no provisions that dealt with experimentation in a controlled environment, barring a few pilot projects under the regulations of health insurance.

The major benefits

The benefits of regulatory sandbox are many. Some of them are:

  • Enhance insurance penetration
  • Compared to developed nations, insurance penetration in India is abysmally low. According to the Economic Survey Report 2018, insurance penetration in India stood at 3.49% in 2016-17, as against 4.77% in Malaysia, 5.42% in Thailand and 4.77% in China [1].
    With innovation coming to the forefront because of regulatory sandbox, the same is expected to boost insurance adoption in the country.

  • Introduction of new insurance policies
  • To introduce any new product or offering in the market, it’s essential to conduct an in-depth analysis. Regulatory sandbox will provide the environment for the same and help insurers craft special products. In fact, they can come with plans catering to the needs of a specific audience.

  • Make claim-settlement fast and quick
  • Though digitalisation and new-age tools such as artificial intelligence and machine learning (ML) are helping insurers bring efficiency in the claims process, yet there’s much scope for improvement. There are cases, where it takes months before policyholders receive the claim amount. Experimentation in sandbox can bring down this time and improve operational efficiency of insurers.

  • • Distribution of sachet-size insurance policies
  • In the past few years, the demand for sachet-size insurance plans has gone up significantly. These are policies that cater to small and temporary requirements, which can be seasonal - for example, a firecracker insurance policy during Diwali.
    With secure testing in a safe environment, distribution for such insurance plans can be made on a large scale. At the same time, KYC process can be further streamlined and expedited.

  • Easy control in case of failure
  • Failures are a part of innovation. However, damage control can become a tall order if failure happens after a product launch or at an advanced stage of testing. With regulatory sandbox, consequences of failure will be easy to control as it’s done in a safe environment on dummies, rather than on a live sample.

Areas of testing and the applicants

Applications of sandbox testing can be done in areas of insurance distribution, products, underwriting and claims servicing, among others. As a first step, IRDAI has already invited applications for sandbox, the last date of which is 14th October 2019.

The applicant can be an insurance firm, agent or even an individual. The minimum net worth should be Rs. 10 lakhs, with a standing of at least a year.

The final word

In a technologically driven world, innovation is not an option but a need. Particularly, in a sector like insurance, the fundamental objective of which is protection, innovation is needed to encompass needs for all against every possible contingency.

For better risk assessment, keep pace with developments and integrate new business models into the existing framework, regulatory sandbox will give valuable learning experience for all stakeholders in the insurance value chain.

The challenge, however, would be to strike a balance between innovation and protection of the policyholders’ interest. Having said that, it’s expected that it would enable insurers to adopt technological innovations quickly and enhance customer experience.

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