Ontario regulatory sandbox helps fintechs develop digital insurance products

For children, the sandbox is a place to build, and experiment without facing the risks and dangers of the real world.

But sandboxes of a different type allow start-ups to develop innovative products, services and business models without immediately facing restrictive regulatory controls.

Of particular interest to the insurance industry in Ontario is a regulatory sandbox aimed at the fintech industry. It lets start-ups test strategies, secure financing and make a wide arrange of products — including insurance coverage — more accessible to the masses.

The Ontario model follows a concept pioneered by the U.K. Financial Conduct Authority in 2016, when 89 firms were given latitude to test innovative products and services in a regulatory sandbox.

In 2020, the Financial Services Regulatory Authority of Ontario (FSRA) announced an innovation strategy that included a shift away from rules-based regulations. Instead of hard-and-fast rules that may not be practical or effective, the regulator introduced a principles-based approach.

As part of that, FSRA announced a new digital regulatory sandbox with promised benefits for fintechs and consumers alike.

Private-equity firms continue to invest in fintechs around the world. But these companies participate in regulatory sandboxes because these test-and-learn environments can help fintechs gain better access to financing and insurance coverage.

Once a fintech company has access to financing, acquiring insurance becomes a priority. In some cases, having appropriate coverage is a requirement in financing agreements. Large enterprises that integrate a fintech company into their IT stacks will often require a complete assessment of insurance policies that have been put in place during a merger and acquisition.

Regulatory sandboxes can also facilitate the purchase of insurance — especially auto liability coverage — by consumers and other end-users, including truck drivers. A number of fintech companies are focused specifically on delivering auto insurance products to buyers who want more choice as well as a digitized, streamlined insurance-purchasing process.

Fintech is becoming so ubiquitous in Canada that it’s set to become a ‘fourth platform,’ alongside the internet, mobile and cloud computing. Like each of them, it will be an intrinsic part of almost every digital experience.

And smart regulation has paved the way for this transformation.

Still, while it’s important to make appropriate regulatory allowances that clear the way for innovation, the proximity of the regulator to entrepreneurs may stifle some of that innovation. These concerns may see blockchain and digital asset companies shy away from sanctioned sandboxes until there is more clarity about the way the sandboxes will operate, the regulator’s involvement and the advantages of participation.

Others, however, may find these sandboxes offer a period of light-touch regulatory oversight, allowing them to build out proofs of concept without incurring impractical compliance costs at the start-up stage. Those savings can be invested in building out a better minimum-viable product.

With support from FSRA’s new innovation team, fintech start-ups can be confident that auto policy decisions will inform future policy decisions at a critical stage during the insurance process.

Clinton d’Souza is senior vice-president, sharing economy, for Marsh Canada.

This article is adapted from one that appeared in the November issue of Canadian Underwriter.

Feature image by iStock.com/Sergii Kateryniuk