The insurance industry is in the midst of unprecedented change. Changing customer dynamics, rapidly evolving technologies, and the growing ability to distinguish customers at granular levels are shifting the foundation of how insurance services are developed, priced, and offered.
As innovation opportunities proliferate, however, insurance companies cannot forget their regulatory and compliance responsibilities. For instance, AI and machine learning applications in insurance markets could reduce the degree of moral hazard and adverse selection - but could also undermine the risk pooling function of insurance. In order to help avoid compliance challenges and financial penalties, insurers need to consider their regulatory risks upfront and incorporate that knowledge into their innovation programs.
Innovation: A top priority
During 2018, investment in insurtech grew significantly. According to KPMG's H2'18 Pulse of Fintech, there were 13 insurtech deals over $100 million during the year, including $375 million raised by Oscar Health Insurance in the US and $200 million raised by PolicyBazaar in India.
These deals highlight the increasing importance of innovation and insurtech to the long-term growth and sustainability of insurance companies. Too often, however, companies approach innovation in a vacuum - investing in new technology without considering the full ramifications associated with such investments. Under pressure to provide more personalized offerings or more efficient services, it can be easy for insurers to overlook the corresponding risks.
An evolving regulatory environment
There is no doubt that insurtech is making it easier than ever before for insurers to digitally authenticate customers, assess historic trends, and conduct in-depth customer analytics. Yet, these activities do not come without risks - risks insurers must manage if they want to be successful long-term.
For example, the General Data and Privacy Regulation (GDPR) came into force in May 2018 which introduced new requirements around the use of personal data by companies operating in the EU and significant financial penalties for non-compliance (i.e. fines of up to €20,000,000 or 4% of total annual global turnover)1. Other jurisdictions, meanwhile, have their own regulatory requirements for insurers - such as restrictions on the ability to discriminate based on specific customer characteristics (e.g. location, gender) when developing insurance policies.
Adding complexity to the regulatory risks that companies face is the fact that regulations are only expected to evolve over time as more jurisdictions focus on increasing protections for customers in an increasingly connected world.
Managing regulatory risks from the start
In order to drive the most value from insurtech solutions, insurance companies need to consider and manage their regulatory risks from the get-go. Anything less could open them up to significant reputational risks and financial penalties in the future.
To better manage their regulatory risks while embracing insurtech opportunities, insurers should consider the following activities:
- Understand the current and future regulatory environment: Work to fully understand existing regulatory requirements and any change processes that might affect compliance obligations in the future. This understanding is critical for developing innovation programs that can be adjusted as regulations evolve and for evaluating the potential fit of different insurtech solutions.
- Start small before going big: While it is important to develop a longer-term strategic vision for insurtech, when moving forward it can be useful to start small before going big in order to gain the expertise required to be successful. By focusing on well-defined use cases for insurtech as a starting point, insurers can make mistakes and adjust course without the significant costs associated with larger transformation initiatives.
- Create or leverage structures that enable innovation: Identify and develop mechanisms that support innovation and experimentation while reducing or mitigating potential risks. For example, creating separate digital labs or working with incubator or accelerator programs can be one way to encourage innovation while working to foster a more innovative internal culture. When designing such programs, it is important to focus not only on how to support innovation but also on how to embed such solutions within a company once they have been developed and tested.
- Focus on value: When it comes to getting the most out of innovation, it is imperative that insurers remain focused on value - whether to the customer or to their company. Before making any investments, identify how proposed insurtech solutions will contribute to achieving ROI, whether through cost savings, operational efficiencies, or by improving the customer experience. This can help ensure that potential investments align with the overarching strategic objectives of a company.
The opportunities presented by insurtech solutions today are almost endless. But to achieve the most value long-term, insurers must consider their regulatory risks from the get-go so that they can develop solutions and processes that are agile enough to succeed even as the regulatory environment continues to evolve.
Meital Raviv – Director, Head of Fintch and Innovation, Financial Services, KPMG in Israel
Meital is the Head of Fintech and Innovation of the Financial Services practice in Israel, and she is responsible for promoting and expanding the local Fintech industry while driving business growth and creating a value proposition for the financial ecosystem.
Meital has more than 17 years of experience in the Hi-Tech, Fintech and Financial Services industries, and most recently headed the digital channels and digital strategy for Bank Leumi, the largest bank in Israel, where she was involved with some of the most innovative projects and campaigns around digital banking management.
Meital holds both business and technology experience, while driving business innovation forward, promoting digital transformations, and aligning customers need to innovation processes.
1. The GDPR and key challenges faced by the Insurance Industry, KPMG Ireland, 2018
Article originally published in The Digital Insurer's February Newsletter.