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May 2019

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The Geneva Association - Virtual competition: Online platforms, consumer outcomes and competition in insurance

Source: Asia Insurance Review | Feb 2019

Online platforms are proliferating in many sectors of the economy, promising large economic and societal benefits. They bring together vast communities of buyers and sellers, consumers and advertisers, and allow interaction between them. They can create markets of enormous scale and enable collaboration between companies from different economic sectors that can result in new product and service offerings. The World Economic Forum estimates that online platforms could unlock $10tn of value for business and the wider society over the next 10 years. This report from The Geneva Association’s Ms Anna Maria D’Hulster.
 
 
In insurance, online platforms have the potential to enhance market transparency and consumer convenience, thereby contributing to reducing informational asymmetries between insurers and policyholders. By making information easily accessible, they may help to overcome known behavioural biases of insurance buyers. Moreover, through the use of big data analytics, AI and cloud computing, online platforms could enable the role of insurance to develop from one primarily concerned with loss indemnification to a broader advisory service for insureds on how to prevent, mitigate and manage risks.
 
New technologies generally, and online platforms in particular, present opportunities but also give rise to new challenges that need to be addressed by insurers and society. One challenge is related to consumer protection and market competition. Inherent features of online platforms such as network effects and data-driven economies of scope may ultimately lead to large platforms which act as gateways for consumers. Insurers could become dependent on a small number of platforms to sell their products, and competition would ultimately be reduced - to the detriment of consumers. Further, the very nature of online platforms can trigger concerns relating to privacy and trust. Consumers need to be assured that their data privacy is protected and that the information provided by online platforms is in their best interest. 
 
New business models in insurance
Online platforms play an increasingly important role in insurance. Some of these platforms, such as digital comparison tools, have existed for many years and are important for insurance distribution. Others are relatively new, such as peer-to-peer insurance, self-organisation and self-administration of one’s own insurance coverage. Moreover, insurers buy advertising services from search engines and social media platforms such as Google and Facebook.
 
The importance of platforms is likely to increase further, due to the deployment of new technologies and shifting consumer expectations. Online platforms provide an opportunity for insurers to differentiate themselves in the market. At the same time, insurers face hard choices with regards to their platform strategy. Some insurers are establishing their own platforms, while others choose to participate in existing platforms or to enter into supplier agreements. 
 
Such a strategy requires insurers to become part of a digital ecosystem and create interfaces at different stages of the insurance value chain. This comes with a risk of insurers becoming increasingly dependent on a small number of platforms that may try to exploit a data-driven competitive advantage.
 
Online platforms and consumer outcomes
Online platforms have the potential to enhance market transparency and consumer convenience, and to help overcome consumer bias regarding the purchase of insurance by making information easily accessible, facilitating the comparison of offers and efficiently matching buyers and sellers. Moreover, through the use of big data analytics, AI and cloud computing, online platforms could enable the role of insurance to develop from one primarily concerned with loss indemnification to a broader advisory service for insureds on how to prevent, mitigate and manage risks.
 
Platforms with a business model based on the collection of data may not have an incentive to provide high standards of privacy to their users. In addition, it might be difficult for consumers to defend themselves against biased search results, rankings or distorted information - provided they are even aware of such issues - because they would have to resort to cumbersome civil law procedures in many jurisdictions.
 
Competition in the digital era
There is no consensus among researchers about the possible impact of online platforms on market power. Over the last two decades, online platforms have intensified competition by reducing search, switching and transaction costs and making it easier for consumers to shop for the product that best matches their needs. However, platform markets feature particular dynamics. Large volumes and a large variety of data collected by platforms may be a source of competitive advantage over traditional firms. If new entrants are unable to collect or buy access to the same kind of data in terms of volume and/or variety, they would face a ‘de facto’ market entry barrier.
 
In the presence of market entry barriers, large platforms may act as gatekeepers for their users and assume a position of a buyer’s monopoly (monopsony), or oligopoly. Their position may enable them to capture a disproportionate share of the value provided by insurance, e.g. by charging excessive commissions.
 
Implications for public policy
The platform economy has the potential to deliver substantial economic and societal benefits. At the same time, the rise of online platforms creates new challenges for consumer protection and competition policy. To the extent that market entry barriers exist, such platforms could abuse their position by charging excessive prices to one or several user groups, or by extending their dominant position to adjacent markets. 
 
In order to ensure a thriving and competitive marketplace, policymakers should consider the role of data as a production factor and a potential barrier to entry when assessing market power and potential anti-competitive conduct. Competition authorities are advised to pay particular attention to practices that have the potential to create market entry barriers. Even so, transparency and non-discrimination requirements for online platforms may play an important role in ensuring consumer trust and a competitive insurance market place in the long term. A 
 
Ms Anna Maria D’Hulster is secretary general of The Geneva Association.
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