Regulatory Sandbox Framework for Insurtech and Other Regulated Entities
Only a small sliver of the Philippine population, less than 2%, avails itself of insurance. This is one of the lowest rates in Asia. Access to mobile phones, however, is ubiquitous and, as such, insurance providers are developing mobile applications to serve, and attract, customers better. Further, because of the COVID-19 pandemic and with the institutionalisation of remote selling as a permanent mode of selling of insurance products in 2020, industry players are adopting various technological innovations to reach a wider customer base and to improve their products and services.
Insurtech – Easing the Burden of Approval
The industry regulator, the Philippine Insurance Commission (PIC), is keen to promote technological innovations in the insurance sector.
As such, in 2020, the PIC issued Circular Letter No 2020-73, which provides “Guidelines on the Adoption of a Regulatory Sandbox Framework for Insurance Technology (InsurTech) Innovations”.
A Regulatory Sandbox is defined under the circular as “a controlled environment with a system set up by a licensed insurance provider in collaboration with another person, natural or juridical, licensed or not by this Commission, that allows a small scale and live testing of technical innovations operating under special circumstance/s, allowance/s, and/or other limited and timebound supervision.”
Many insurers in the Philippines have their own websites and mobile applications. PIC regulations currently require the prior approval of the PIC for mobile applications, to ensure compliance with e-commerce guidelines on selling insurance. However, while insurance companies and insurance intermediaries licensed in the Philippines are free to launch their own websites or to adopt or implement other technological innovations without having to go through any testing period supervised by the PIC, there may be new technology or methods to sell insurance which may require the participation of a third-party entity (which may or may not be licensed by the PIC) and the regulatory framework and implications of which may not be clearly covered by existing laws and regulations.
The sandbox framework allows a small-scale testing ground that enables a licensed insurance provider and another natural or juridical entity, that may or may not be licensed by the PIC, to test their new insurance innovations under the feedback and guidance of the PIC. Such guidance may include the conclusion that the non-PIC licensed entity also requires a licence from the PIC.
As most applications are developed by insurers to make it easier for potential insureds to avail of their services, new products or services are likely to be launched in collaboration with another entity, which may have its own customer base, and which may serve as potential insureds of the insurers.
The Regulatory Sandbox framework set by the PIC will allow an insurer and its third-party collaborator (which may be the application developer) to test their new technology or project, with the comfort that the PIC will be able to advise them of any licensing requirements for their project to be fully implemented. If the collaborator needs its own licence to implement the new technology or project, it has to secure the appropriate licence before the application for the Regulatory Sandbox is filed.
As such, the approval by the PIC of applications for technological innovations under the Regulatory Sandbox framework gives the insurer and the third-party collaborator assurance (or at least comfort) that the new technology or project is compliant with PIC rules and regulations.
The insurance industry is highly regulated, and, under the Philippine Insurance Code, an insurer is prohibited from paying a fee or compensation for soliciting insurance to a person who is not licensed as an insurance agent or an insurance broker by the PIC.
The circular seeks to strike a balance between promoting innovation (greater access to insurance products and services) and consumer protection (only receiving legitimate offers to buy insurance). It gives businesses regulatory certainty and an opportunity to test innovative ideas in approaching the business of insurance in a reasonably controlled environment before it is launched to the general public.
Prior approval by the PIC is required for a Regulatory Sandbox. The insurer has to file an application – a formal proposal – which is supported by a business model and various other documents. The business model has to include the testing methodology, the potential risks, the safeguards, and the phases for experimentation.
The application will then be screened by a division of the PIC and, during this process, additional documents may be required of the applicant insurer. After screening, the division will submit a recommendation to the Insurance Commissioner, who will then make his or her own determination as to the sufficiency of the application. The form of the approval by the PIC is a letter of authority.
Once approved, the insurer can implement the project on a small scale, for the period specified in the application, which can be up to one year. An extension of the experimentation period for up to six months can be applied for.
During the testing period, the insurer has to submit monthly reports to the PIC, and a completion report.
The circular gives protection to the intellectual property rights of the participants, since “[a]ny information in the custody of or within the knowledge of [the PIC] pertaining to the Applicants' participation in a Regulatory Sandbox, including its successful launching” is considered a trade secret.
Regulatory Sandbox for Innovations and Fintech Innovations in the HMO and Pre-need Industries
In 2021, the PIC also issued Circular Letter No 2021-11, setting out the guidelines on the adoption of a Regulatory Sandbox framework for financial technology (fintech) innovations for health maintenance organisations (HMOs) and pre-need companies. In the same year, the PIC also issued Circular Letter No 2021-64, which provides similar guidelines for the Regulatory Sandbox framework for innovations that offer new insurance products and services in the insurance, HMO, and pre-need industries.
HMOs and pre-need companies are governed by their own special laws, rather than by the Philippine Insurance Code. The PIC, however, exercises regulatory and supervisory jurisdiction over the operations of these companies, for the protection of the public.
An HMO is defined under Executive Order No 192, s. of 2015 as a “juridical entity legally organized to provide or arrange for the provision of pre-agreed or designated health care services to its enrolled members for a fixed pre-paid fee or a specific period of time”. A pre-need company, on the other hand, is defined under the Pre-Need Code of the Philippines as “any corporation registered with the [PIC] and authorized/licensed to sell or offer to sell pre-need plans”. There are around 29 HMOs and seven pre-need companies operating with a Certificate of Authority from the PIC.
The Regulatory Sandbox under Circular No 2021-11 allows small-scale and live testing of technological innovations by HMOs and pre-need companies in collaboration with another person, who may be licensed, or not, by the PIC, while Circular No 2021-64 allows the small-scale and live testing by HMOs and pre-need companies (as well as licensed insurance providers, insurance or reinsurance brokers, adjusters, mutual benefit associations or other PIC-regulated entities) and their collaborators of innovative products, services, business models, and/or delivery mechanisms, other than those contemplated under Circular Letter No 2020-73 and Circular No 2021-11.
The PIC has to approve participation in a Regulatory Sandbox. Collaborators whose businesses are not regulated by the PIC but whose collaboration will require the performance of acts that require regulation, licensing, or approval by the PIC must first comply with the existing regulations of the PIC, as applicable, before submitting an application for participation in a Regulatory Sandbox. The application for participation in a Regulatory Sandbox must include an outline of the business model for the product, solution or service, a projected plan, and a clear exit strategy from the Regulatory Sandbox.
The application will be considered based on parameters such as the innovative idea, whether the proposed technological solution will provide an equal opportunity to access HMO/pre-need services and whether it will increase financial literacy, consumer benefit and protection, readiness for testing, and soundness of the exit plan. Once the PIC approves the application, the applicant may operate and proceed with live-testing or experiments for an experimental cycle, based on the duration indicated in the application, which may last up to one year. The experimental cycle may be extended for a maximum period of six months, subject to the approval of the PIC.
Applicants are required to submit monthly reports to the PIC, which commence from the date of the receipt by the applicants of the approval of the application. Applicants must also submit a completion report upon the expiry of the experimental cycle.
The PIC may revoke or suspend the approval at any phase or stage of the experimental cycle if the PIC finds that the applicants failed to comply with any of the provisions of the relevant PIC circular letter or if the experiment does not progress or fails to meet the parameters set out in the circular letter.
Agri-insurance – Encouraging the Entry of More Players
The Philippines is prone to natural disasters, such as tropical cyclones, earthquakes, and volcanic eruptions. These pose material risks to the agricultural sector. Based on statistics from the Philippine Atmospheric, Geophysical and Astronomical Services Administration, an average of 20 tropical cyclones enter the region per year with around nine tropical cyclones crossing the Philippines. Agricultural damage accounted for 62.7% of the total losses due to natural disasters from 2010 to 2019, based on information from the Office of Civil Defense. However, the PIC has observed that the insurance penetration rate among farmers is very low.
The Philippine Crop Insurance Corporation (PCIC), which is a government-owned and -controlled corporation, mostly provides agriculture insurance to small farmers. The PCIC offers insurance programmes on rice, corn, high-value crops, livestock, non-crop agricultural assets, and fisheries, to protect against natural disasters.
In 2021, recognising that private insurance companies consider the agricultural sector as a new and potential market and that technological advances may improve cost-efficiency in the delivery of agricultural insurance to farmers in remote areas, the PIC issued Circular Letter No 2021-60 providing the “Guidelines on the Adoption of a Regulatory Sandbox Framework for Piloting Agriculture Insurance”.
The circular letter defines “agricultural insurance” as “the insurance of the produce of or assets used in cultivation or crops (ie, grains, cereals and other crops as well as fruits and vegetables), livestock (ie, dairy, cattle, hog and beef), rearing animal husbandry, poultry farming, dairy farming and fisheries including all value chain activities like production, transportation, storage, processing, packaging, preservation and marketing”. If an insurance product is already classified under existing categories of insurance (such as fire insurance), that insurance product is excluded from the definition of agricultural insurance.
Notably, under the circular letter, non-life insurance companies may provide agricultural insurance independently or in collaboration with the PCIC or any national and international public and private insurers, reinsurers, or technology providers. In addition to the submission of an application by non-life insurance companies for participation in a Regulatory Sandbox for Piloting of Agricultural Insurance, a separate application for approval of the insurance product that will be offered under the proposed agricultural insurance pilot must also be submitted.
The insurance products under the pilot programme may be distributed by licensed insurance or micro-insurance agents or brokers. Micro-finance non-governmental organisations or banks engaged in agricultural finance, even if they are not licensed as insurance agents or brokers by the PIC, may also sell the agricultural insurance products, subject to the provisions of Circular Letter No 2016-64 on the adoption and implementation of a micro-insurance distribution channels' regulatory framework and other issuances by the PIC.
Non-life insurance companies participating in the pilot programme may adopt insurtech innovations with respect to underwriting, loss-assessment, claims payment, value-added services, or insurance literacy, subject to the PIC’s approval. The non-life insurance company will have to submit the proposal for adopting technological innovations in accordance with the requirements under Circular Letter No 2020-73.
The participants in the pilot programme are required to submit a quarterly report to the PIC. The PIC may also conduct a special audit of the insurance portfolio covered by the pilot, during the implementation of the pilot programme or at any time after the completion of the pilot.
The pilot programme may have a duration of five years, which may be renewed at the option of the PIC.
Originally published by Chambers and Partners via its website.