IRDAI Regulatory Sandbox Demystified

Over the past two years, I have been helping InsurTechs across the globe in various capacities. And when the Indian Insurance Regulator issued regulation and guidelines on the Regulatory Sandbox, I couldn’t stop myself from talking about it, spreading the awareness and sharing my views. So here I am with my first ever Medium article, demystifying the Regulatory Sandbox in general and its Indian insurance counterpart in particular!

What is Regulatory Sandbox?

While it is Regulatory Sandboxes raining in Indian soil with key financial regulators like RBI, SEBI, and IRDAI rolling out guidelines for the respective industries they regulate, the concept is not entirely novel. The first “sandbox-like” framework was set up in 2012 by the U.S. Consumer Financial Protection Bureau (CFPB) under the name Project Catalyst. In 2015, the U.K. Financial Conduct Authority (FCA) coined the term “regulatory sandbox”

Now that we know the history of regulatory sandboxes, let's understand what they are. Put simply, Regulatory Sandbox is a test regulatory environment to test innovative products and services, for a limited period, with actual customers. The regulatory may or may not relax some of the norms during the testing period. In the case of IRDAI Sandbox, the regulator is willing to relax norms.

Why Regulatory Sandbox?

The IRDAI has set up the Regulatory Sandbox with the intention to increase insurance penetration, support innovation and promote the orderly development of the insurance sector in India while protecting the policyholders. In layman’s term,

Regulatory Sandbox is like the safety net for trapeze artists which helps them try new and more challenging acts, without the fear of injury!

What innovation qualifies for the Regulatory Sandbox?

Each regulator has a certain objective that it wishes to achieve through the Regulatory Sandbox and it is driven by the current challenges it faces apart from many other factors. The key areas that IRDAI sandbox focuses on include the following areas of the insurance value chain

1. Insurance Solicitation or Distribution like Robo advisory powered by machine learning and artificial intelligence.
2. Insurance Products which may include a product that never existed as Zhong An did for shipping return covers.
3. Underwriting using a new source of information, say, using telecom data to predict mortality or using IoT devices for Smart Home Insurance.
4. Policy and Claims Servicing could mean having policyholder, insurer and reinsurer part of same Smart Contract implying quicker claim processing!

The regulator has also identified the overarching requirement that every application for the Regulatory Sandbox must demonstrate the innovation would help increase penetration of insurance in India!

In my mind, while applying for the Regulatory Sandbox one might want to ask, whether the innovation requires relaxations in norms or is too risky to implement in an “open” environment or both!

Who can take advantage of the Regulatory Sandbox?

Theoretically speaking, anyone who has an innovative idea that meets the criteria defined by the regulator and potential to implement it can apply. However, if the innovation impacts products or underwriting part of the value chain, it has to be filed in association with the insurer(s)

Let’s understand this with the help of examples. In case the innovation is confined to advising what products the prospective policyholder should buy, the application wouldn’t need the support of an insurer. However, if innovation implies testing a new product, say on-demand life insurance, it needs to be done in collaboration with the insurer.

Conclusion

Regulatory Sandbox by IRDAI is a welcome move and a step in the right direction that could potentially increase insurance innovation and penetration in India. Personally, I believe, this is a very good opportunity for InsurTechs and re/insurance companies to demonstrate the usefulness of their innovation, gain the confidence of the regulator and the customers while carrying out live testing

PS: In case this is the first time you read about the IRDAI Sandbox and not ready to apply by the 14-Oct-2019 deadline, there would be more opportunities in future as the regulator has decided to follow the “cohort” approach wherein the applications would be invited in batches. Also, feel free to thank me!

[Edit 1 ] Potential gaps and recommendations

Now that you have a flavour for the Regulatory Sandbox. Here is a Twitter thread on potential gaps and recommendations that might interest you.

[Edit 2] Some answers from IRDAI NASSCOM event in Bangalore on 9-Oct-2019

I had a great fortune of being part of the event organized as part of the outstanding initiative by IRDAI to reach out to InsurTechs and technology companies in general. The very engaging presentation and the enlightening panel discussion did touch upon some of the key questions and I thought it might be a good idea to have them here for the benefit of the readers. What follows is my interpretation of the regulator’s take on these key challenges

1. A permanent change in the “relaxed” regulation? The regulator seems to be open to the idea of making a permanent change if the innovative solution demonstrates the benefit. However, the regulator also appears to be clear in highlighting that the solutions should have a clear “exit strategy” which by default shouldn’t be a permanent change in the “relaxed” regulation. More importantly, the change in regulation, if happens, could take time and during the window when the testing is over and regulations are modified, the product in question will have to be shelved
2. Downside risk for customers when the innovation fails? The regulator advises that customers taking part in the experiment should be disclosed about the down-side risk and should be made aware of the downside risk, which in most cases would translate to a loss in premiums. In my opinion, based on the discussion, insurers would be happy to make good the loss of customers ensuring they don’t end up losing!

Look forward to your views and feedback.

Disclaimer: The article has been written with an aim to broadly explain an otherwise complicated and technical topic for readers with little or no insurance background. Hence, it doesn’t have finer details but is still broadly correct. In particular, this is not a crash course or substitute for the Insurance Regulatory and Development Authority of India (Regulatory Sandbox) Regulations, 2019