After facing credit risks and compliance risks, financial institutions are now entering a challenging new era – the era of operational risks. This is an issue, in my opinion, that the insurance industry needs to get to grips with, by taking an objective look at the way our relationships with customers are changing and at the opportunities for innovation that the current pandemic offers.
In terms of consumer confidence, insurance companies have coped well with the coronavirus emergency, with customers expressing appreciation of the rapid and incisive way the industry responded to the situation. According to a recent SWG survey for Kearney, 60% of respondents said they are satisfied with the services that they have been offered, like the Motor TPL policy offered by UnipolSai, Generali’s 100 million euro fund, Allianz’s Stop & Drive, and the many health, damage and life cover products launched by Reale Mutua. Customers also appreciated the extensions of coverage and default periods, as well as the industry’s rapid adoption of working from home which has allowed business to carry on more or less as normal.
But these uncertain times are forcing us to focus more than ever on risk management. First recognised as a major risk class in the mid-’90s, operational risk is defined by the International Association of Insurance Supervisors (IAIS) as risk arising from inadequate or failed internal processes, systems or personnel, or from external events. Operational risks cover a wide panorama of threats, ranging from cybersecurity – meaning things like data breaches, identity theft and denial of service events – to environmental risks like environmental pollution and natural catastrophes. And, as recent events have made us all too well aware, health. The pandemic has highlighted insurance’s social vocation, and shown the public that an insurance policy can possess a social, as opposed to a purely financial, value. In fact, in what may be the first example of interest in insurance rising against market trends, the SWG survey shows that interest in policies is actually growing, (just reporting some results, with interest in health products up 25%, in pensions up 17%, in life insurance up 16% and in non self-sufficiency policies up 13% – unsurprisingly, all products related to the wellbeing of self and family).
This is why the current situation offers the industry such a unique opportunity to develop and launch a huge range of possible new solutions and services. Insurers and bank- insurers are already hard at work developing new ways to tackle these kind of risks: AXA, for example, has developed a Cybersecurity coverage policy, which includes protections for third party data breach security, first party business interruption, regulatory defence costs and data restoration.
As we have seen, the most prominent of the risks to tackle in the New Normal is increasingly health and financial coverage, but developments in insurtech are also making many new digital models possible. This is the ideal moment to engage with the many innovative solutions and services the insurance sector can offer right now. First of all, the increase in pay-per-use can lead to more opportunities for increasing insurance-per-use models, for example. Secondly, companies can work on offering more adaptable cover which is suited to the increasingly technological world we inhabit, taking advantage, for example, of the more detailed and exact understanding of risk drivers provided through the use of the Internet of Things as regards vehicle or home insurance. Thirdly, one thing that is certain is that besides the various digital solutions on offer, companies must evolve and start investing in providing an enriched customer experience. Post-Covid, customers will move around less and will avoid crowded spaces and physical interaction, and this is something insurers will need to adapt to. As the SWG survey showed, during the lockdown, almost three out of 10 people wanted sites and apps which allowed them to perform some operations in total autonomy, 27% wanted kinds of assistance which did not require them to physically go to the insurer’s offices, and 22% asked to be able to receive assistance from their consultant online. The report’s conclusion is that simplicity and flexibility will be fundamental elements for responding to the customers of tomorrow.
These opportunities are prompting the emergence of new models, and as an industry we need to begin focusing on speed and on the scaling up of investment. Increasing speed will require partnering with digital specialists who can provide the necessary technical know-how and entering into Software as a Service (Saas) agreements with software vendors. These new models will also necessitate the curation of an ecosystem of Fintechs providing specialized services (for example companies like Quantexa which provide anti-money laundering services), along with the development of an API layer capable of facilitating communication between core systems and the outside world. Regarding scaling up, we see the emergence of new models apart from traditional mergers : consortia of players pooling their back-office resources, a renewed growth of Business Process Management around areas such as closed-book management, as well as a move over to Cloud providers so as to benefit from third party scale.
It’s clear that operational risk presents challenges for the insurance industry. But it also offers many opportunities. And making sure we immediately start adopting the latest developments in insurtech and adapting to the social changes that the Covid-19 pandemic has brought with it are key to making the most of them.