In a joint announcement last week, Governor Desantis and CFO Patronis announced they plan to pursue legislation to create a “regulatory sandbox” for FinTech companies in Florida. The press release was followed by the first meeting of the newly minted Florida Blockchain Task Force earlier this week. The taskforce has been charged with developing a master plan for fostering the expansion of Florida’s blockchain industry – purveyors of a foundational technology upon which many InsurTech products are built.
The Governor’s comments on regulatory sandboxes seemed to be limited to legislation that would provide the Office of Financial Regulation (OFR) with the statutory authority to waive certain licensing requirements for FinTech companies. This would imply that innovative products from InsurTech companies and insurance carriers regulated by the Office of Insurance Regulation (OIR) are not currently contemplated within the Executive branch’s strategic map – a deflating note for those that thought Florida might join other trailblazers in the space.
For those unaware, a regulatory sandbox is a legal framework set up to allow the safe and live testing of innovative products which are not currently offered in the market due to regulatory barriers. Companies operating within a regulatory sandbox usually do so under a special exemption, allowance, or other time-bound exception to applicable law.
The idea of a regulatory sandbox has been a hot topic within the insurance industry for several years as companies seek to invest in the very innovations that may disrupt their age-old value chain. Its reduced regulatory constraints are key to insurance carriers who find it difficult to make quick strategic maneuvers under the tight regulations their underwriting entities face. It is also important to smaller start-up companies looking to offer new solutions within an evolving industry.
For example, the availability of true parametric insurance products has been stunted by arguments that it is not insurance and instead more akin to gambling. The reason being that parametric insurance is not founded on indemnification through the reconciliation of claim payments and sustained losses. This creates the possibility of a financial gain through its basis risk.
This argument may be true at the scholarly level, but the reduced administrative cost is a core value proposition of parametric insurance. If the market begins to demand such products to diversify their risk management portfolio, policymakers will need to quickly decide how to best regulate them to ensure there are consumer protections surrounding their availability – a sandbox is a great way to test these regulations out.
Models for potential insurance sandbox legislation in Florida can be found in the United Kingdom’s regulatory sandbox administered by the Financial Conduct Authority (FCA) as well as HB 386 passed in Kentucky earlier this year.
The new Kentucky law allows applicants to the state’s sandbox regulatory relief under a temporary no-action letter as they beta-test their products. This no-action letter can be extended upon meeting certain requirements. Applicants must explain the innovative nature of the product, its need and value in the market and meet a reasonable threshold for financial stability. The Kentucky Department of Insurance will review the applications and oversee the projects.
Florida law currently allows variances and waivers to its rules under s. 120.52, F.S., but the flexibility does not extend to Florida statutes. So why is Florida not pushing to gain the flexibility of a regulatory sandbox for insurance products?
For its part, the OIR has stated that it is not pursuing a sandbox as part of its legislative agenda because companies have not approached them with real-life issues and there is no immediate need in the market.
It will be interesting to see if Florida policymakers will advocate for an insurance regulatory sandbox in the near future, but it is clear the push will have to come from companies with real use cases that are experiencing regulatory barriers for their innovative products.
You can find video of the Florida Blockchain Task Force’s first meeting on The Florida Channel.
For more information, or if you are looking to test an insurance or financial product in Florida that would benefit from an regulatory sandbox, please reach out to our partner George Feijoo.