How To Manage Risks And Be Innovative—At The Same Time

Meital Raviv, Director and Head of Fintech and Innovation at KPMG Israel, has written the following article about how to recognize and minimize risks while—as businesses today must do—flying forward with innovation.

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

In 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 to20,000,000 or 4% of total annual global turnover).1 Other jurisdictions, meanwhile, have their own...