Why online insurance is a black box: even to regulators

One insurance regulator sets out how he is wrestling with the problem of detecting selection bias at online brokers and struggling to push the industry to protect itself from cyberattacks.

Ever wondered how comparison websites rank insurance policies for you to buy? So do regulators.

The question is increasingly urgent as more people turn to lightly regulated fintech start-ups for help with potentially life-altering financial decisions, and trust online sites with in-depth personal financial data.

Industry regulators charged with protecting policyholders are scrambling to keep up as the industry rapidly shifts from using door-to-door salesman carrying an armful of paper forms to digital distribution platforms.

How can watchdogs hold robots responsible for advice? Detect selection bias in online brokers’ algorithms? Or even prevent hackers from stealing citizen’s financial profiles stored by insurance companies and selling them on the dark web?

Hong Kong’s Insurance Authority, or the IA for short, is wrestling with just these issues in its first year of operation. The IA has recently created a sandbox, a place for insurtech firms to experiment with new ideas, under the watchful eye of the regulator.

In a potentially industry-changing shift, the IA is moving to directly supervise insurance intermediaries by mid-2019. But who or what is an intermediary in the digital age?

“Who do you sue when you take advice from a robot?” mulled Andrew Wat, a cyber security and data analytics expert at the Applied Science and Technology Research Institute (ASTRI).

The IA is talking to online brokers to work out whether they are engaging in intermediary activities, John Leung Chi-yan, the Insurance Authority’s chief executive, told FinanceAsia.

Comparison websites such as medical insurance provider, NowCompare.com in Hong Kong, and government-backed compareFirst.sg in Singapore and Malaysia’s medical brokerfish.com, are proliferating across Asia.

“We are also concerned about how they come up with their recommendation – how they rank different products? It is not a sand box; it could be a black box,” said Leung who was previously the commissioner of insurance and has worked for the Hong Kong government since 1987.

They may claim to be independent but there could still be some bias, the regulators just don’t know.

To be sure, as well as posing challenges, online platforms offer consumers easier comparison of policies, a faster claims process and lower premiums due to lower distribution costs.

But the dangers of buying insurance online in a hurry are manifold, say traditional brokers. People tend to plumb for the cheapest option and skip the small print.

“People make simple, transactional decisions online,” said Mark Bromhead, managing director at Village Insurance Direct, which generates much of its medical and insurance sales by referrals and does not sell insurance online. “The more commoditised areas such as car insurance have seen the most change.”

More insidiously it is often unclear how much online brokers get paid for pushing certain policies, or how any selection bias manifests itself in rankings. For example, medical insurers pay slightly more than life insurers, said an industry source. To be sure, insurance companies could sway offline brokers as well. 

“It is an area that we have to be vigilant,” the IA’s Leung said in the interview. 

The IA will draft 20 sets of rules and guidelines by mid-2019 on licensing, conduct, selling process and disciplinary measures.

“Should online brokers by regulated – definitely yes, otherwise clients have no recourse,” said Bromhead.


The IA also set up a fast-track application process in September for authorisation of insurers owning and operating solely digital distribution channels. As of December the IA had received some 30 enquiries about the fast track process.

In January 2017, Aviva set up a digital platform in Hong Kong with Tencent and private equity firm Hillhouse to sell basic life insurance products.

China’s first online insurer ZhongAn Online Property & Casualty Insurance, backed by Ping An, Tencent, Alibaba and SoftBank, listed in Hong Kong last year, raising $1.5 billion on a market valuation of $10 billion, showing investors’ confidence in the potential growth of insurtech.

For investors backing these fintech firms, increased vigilance by watchdogs could eat into profits by hiking the cost of ensuring compliance. In the most dramatic scenario, companies could be shut down for regulatory breaches.   


As online platforms grow in number and size, the IA is also looking to make sure the industry can protect itself from increasingly sophisticated cyberattacks.

While policyholders are less likely to have money stolen than people using, say, ebanking or online stock broking accounts, they can still have detailed personal financial information stolen and misused, says ASTRI’s Watt.

"This is an area of concern for us. There is a regulatory and even reputational risk for the insurers. We are considering a cybersecurity strategy to ensure that the insurers are resilient in the face of a various cyber attacks,” said Leung.

Some insurers in Hong Kong are using an information-sharing platform provided by ASTRI. However, multinationals in many cases don’t join as they feel their group’s cybersecurity programmes are already resilient. 

“This slows development of the industry. Some MNC’s don’t want to share, some decisions are hindered by the distance of their headquarters,” said ASTRI’s Wat. 

Intelligence sharing tends to be more useful for local small to medium businesses that have some IT support resources to apply they knowledge and generally makes the sector more resilient to a cyber attack.

“We are considering requiring the sizeable insurers to undergo an independent audit of their cyber security system,” said Leung.

“We as the regulator don’t have the expertise to do the audit ourselves. They would have to engage a third-party to help them audit their be some basic requirement on the auditor’s qualifications. We are starting to discuss this with the Federation of Insurers. Hopefully in the not too distant future we can roll out this initiative,” Leung said.

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