US Insurance RegTech: Deloitte Insights (PDF)

InFocus Insurance regulation and technology: Adding business value to compliance  Top takeaways Rapid technology advancements Drivers for modernizing the By using RegTech to automate Within the next three to five ar...

InFocus Insurance regulation and technology: Adding business value to compliance  Top takeaways Rapid technology advancements Drivers for modernizing the By using RegTech to automate Within the next three to five are transforming the insurance insurance compliance function more costly human functions years, we expect that insurance industry. Insurers’ regulatory are coming from three directions: and do routine processes RegTech solutions using compliance organizations are emerging RegTech technologies, more intelligently and cost- sophisticated analytics, data being challenged by the risks internal cost challenges, and effectively, compliance integration, robotic process associated with insurance continual regulatory changes. professionals can respond to automation, natural language technology (InsurTech) changing regulatory demands generation/processing, artificial advancements, as well as and focus on higher-order intelligence, and other emerging the opportunities to harness activities to become more technologies will be positioned new regulatory technology valuable business partners to produce a sea change in how (RegTech) capabilities. and advisers. insurance company compliance organizations operate. InFocus | Insurance regulation and technology: Adding business value to compliance 1 Rapid advancements in technology are transforming the US What’s driving insurance RegTech’s growth? insurance industry. Companies are embracing the use of advanced and predictive analytics, robotic process automation “RegTech is designed to help firms automate the more routine (RPA), artificial intelligence (AI), and cognitive technologies in their compliance tasks and reduce operational risks associated quest to improve business operations. with meeting compliance and reporting obligations. In the Insurers’ regulatory compliance organizations are being longer term, it should empower compliance functions to make challenged by the risks associated with InsurTech advancements, informed risk choices based on data and provide insight about as well as opportunities to harness new RegTech capabilities—to the compliance risks it faces and how it mitigates and manages change their focus from hindsight to foresight and better align those risks.” with business strategy in a drive toward greater efficiency —Sean Smith, Risk Advisory partner at Deloitte Ireland and effectiveness.1 By using RegTech to automate routine processes—thereby Drivers for modernizing the insurance compliance function are potentially improving quality and reducing costs—compliance coming from multiple directions (see figure 1). Increasing regulatory professionals can better respond to changing regulatory demands mandates, perpetual talent squeezes, mounting demand for and apply analytics to advise business functions and determine increased cost reductions, and a growing need for additional areas of heightened regulatory risks, such as agent sales capacity for new and emerging risks and regulations are practices, rate and form filings, customer and third-party fraud, challenging insurance companies’ ability to respond in a timely and business operations. and cost-effective manner.2 InFocus | Insurance regulation and technology: Adding business value to compliance 2 Figure 1. Drivers for modernizing compliance Emerging technologies Pressure for change is coming from many directions Regulatory technology (RegTech) -- Cognitive compliance Internal challenges -- Risk sensing Lack of executive leadership buy-in -- Automation/Robotics-integrated governance, risk, Fragmented regulatory/compliance and compliance (GRC) change management Big data and analytics Lack of compliance strategic vision -- Increased use of unstructured, high-volume data to Lack of clarity and engagement with first line of drive risk identification and process enhancement defense groups -- Predictive analytics Resource/staffing challenges Emerging technologies Weak governance and oversight Regulatory pressures Ineffective coordination across multiple Heightened standards and expectations jurisdictions Increased regulatory examination and inspections Disparate risk methodologies Increased enforcement actions, fines, and penalties Ineffective interaction/leverage of technology New regulatory requirements Inefficient operating models Multiple regulator oversight Internal Regulatory Lines of defense confusion challenges pressures Multiple jurisdictions with complex or conflicting laws/regulations Source: “Modernizing compliance: Enabling and moving with the speed of business,” Deloitte, 2017. InFocus | Insurance regulation and technology: Adding business value to compliance 3 Insurance companies want to be more predictive and analytical in RegTech allows insurance company compliance professionals their compliance efforts—to be able to proactively evaluate risks to work over and around legacy infrastructure impediments and address issues before they become problems. This capability to connect and analyze information more smartly in order to is important because many companies’ business functions are understand where the organization may have risks and exposures using InsurTech to gain competitive advantages and want their based on a larger data population than was previously accessible. compliance organizations to assist them in understanding where For example, insurers traditionally have used small sample file they might be subject to consumer and regulatory risks. Similarly, audits to identify potential distribution/sales channel issues or insurance regulators reportedly plan to innovate and incorporate policy rating accuracy; this method consumed significant resources newly available technology tools into their expanding regulatory and addressed only a limited portion of the population. RegTech arsenal.3 According to results from Deloitte’s Insurance Regulator and analytics may help make the process more efficient because Technology Adoption Survey 4 (see page five), state regulators insurers can monitor an entire population and pinpoint areas that expect their use of technology to grow in coming years, both may be problematic. to help improve oversight and to respond to changes in an increasingly digital, tech-driven industry. In addition, the National Association of Insurance Commissioners (NAIC), as part of its State Ahead plan,5 is building an infrastructure to provide its members with new analytics, technology, and tools by 2020 to more effectively regulate their markets. InFocus | Insurance regulation and technology: Adding business value to compliance 4 Key insights: Insurance Regulator Technology reducing costs of operations (54 percent); responding to Adoption Survey insurers’ increased use of technology (54 percent); and increasing speed and quality of oversight (42 percent). The Deloitte Center for Financial Services sent its online Insurance Regulator Technology Adoption Survey 6 to all 56 jurisdictions in the Regulators today use technology primarily to monitor National Association of Insurance Commissioners in late August/ insurer solvency and audit insurer financials, areas that early September 2017; 28 jurisdictions responded. The survey’s require analyzing quantifiable and mostly formatted financial intent was to see what insurance regulators thought about data. Going forward, regulators expect to ramp up technology regulatory technology, how they might use it, and how they saw use in market conduct-related areas such as investigating insurers using it. Findings show: noncompliance and data manipulation, and in consumer education and response. State insurance regulators expect their use of technology to increase, both to improve oversight of the market and to More than one-half of the regulators surveyed felt that insurers’ respond to market changes in an increasingly digital, use of technology could be a motivation for using the same tech-driven industry. technology to regulate them. Drivers include automating manual processes (77 percent); replacing and/or integrating legacy systems (69 percent); responding to changing regulatory demands (58 percent); InFocus | Insurance regulation and technology: Adding business value to compliance 5 How quickly and effectively insurers put RegTech solutions to work may be crucial to their future success as they seek to reduce costs, enhance efficiency and, ultimately, establish more robust compliance programs that withstand regulators’ evolving expectations. What should insurers know and do as they move forward with their RegTech plans? Looking across the typical components of an insurance compliance function reveals numerous, high-value opportunities for applying RegTech (see figure 2). Companies may want to begin with lower-cost, high-impact projects that can help bolster the business case for more expensive, long-term investments. InFocus | Insurance regulation and technology: Adding business value to compliance 6 Figure 2. RegTech solutions: Adding value to a compliance function Where are the high-value opportunities for RegTech? Criteria Typical examples Code of Policies and conduct/ procedures High transaction Candidates for RPA need not necessarily be limited to high-value transactional ethics volume/value processes. Any process that is labor intensive, has high throughput time, or transaction could result in high-cost impact errors is a good candidate. New laws and Regulatory filings regulations High number of A process that typically requires employees to access multiple independent systems used systems to complete. Manual activities in the process can result in a substantial number of errors due Components Prone to errors Advertising Fraud or rework to human operator mistakes (e.g., flexibility of workforce, complexity of work, or and sales of an insurance detection and infrequency of activity). materials compliance reporting unit Limited exception Simpler processes with few exceptions in delivery are strong candidates for function RPA in the beginning. After initial RPA work, the organization can expand to handling processes that are more complex or error prone. Regulatory interactions/ Anti-money A process with litte automation support and large chunks of manual work laundering/ Significant market conduct involved often benefit more from robotics, although the process does not need OFAC manual work to be completely “straight-through processed.” exams Monitoring Complaint High The process needs to be defined by a set of unambiguous business rules that and testing handling predictability describe it. No need for full documentation, but it certainly helps! Source: “Insurance regulation and technology: A rapid transformation underway?,” Deloitte, 2018. InFocus | Insurance regulation and technology: Adding business value to compliance 7  Potential insurance RegTech solutions Audio monitoring solutions—Audio monitoring can be enhanced using audio processing, analytics engines, and dashboard reporting to gain greater insights Sea change in insurance compliance operations into audio data (e.g., call center operations, outbound sales calls, transactions with seniors). Within the next three to five years, we expect that insurance Regulatory reporting—RPA can be used to prepare regulatory reports (e.g., market conduct annual statements, data calls, etc.). RegTech solutions using predictive analytics, data integration, RPA, Sales surveillance—RPA can be used to automate surveillance and identify natural language generation/processing, artificial intelligence, and noncompliance instances (e.g., insurance replacement transactions, anti–money other emerging technologies may produce a sea change in how laundering, etc.). insurance compliance organizations operate (see sidebar). Regulatory extraction—Natural Language Processing (NLP) can be used to extract regulations and identify regulatory and control requirements. In addition to enabling improved compliance, insurance RegTech Compliance testing aggregation—RPA, analytics, and integrated data repositories can be combined to provide an enterprise-level view of compliance risk and testing. solutions can work in concert with other back-office systems to Anti–money laundering (AML)—Natural Language Generation (NLG) can be positively impact insurers’ broader business operations by helping used to automate the generation of regulatory AML reports (e.g., suspicious to streamline the input, handling, processing, and completion of activity reports). operational tasks supporting policyholders. Policy and procedure mapping—NLP can be used to perform mapping between policies and procedures and regulatory requirements. Even regulators think that insurers will benefit from RegTech Advanced analytics—Predictive models and data visualization can be used technology. Seventy-six percent of respondents to Deloitte’s survey to analyze rate and forms, sales practices, compliance and ethics culture, and occurrences of fraud (internal and external). cite increased operational effectiveness and 71 percent expect GRC solutions—Shared risk and compliance language can help enhance risk increased efficiency for the overall market as likely results. portfolio and risk treatments. Blab*—Social intelligence platform can use statistical analysis to forecast volume and velocity of social conversations to sense emerging and reputational risks. State rate accuracy tool*—Rating engine technology combined with advanced analytics can determine if your charged rates equal your filed and approved rates. *Deloitte proprietary solution. InFocus | Insurance regulation and technology: Adding business value to compliance 8 How and where to invest? How do we create the RegTech business case to drive greater executive and organizational buy-in? Most insurance companies planning to use technology to modernize their compliance process are proceeding with caution How do we stay abreast of the ways that regulators and peer as they consider how and where to invest to attain maximum value. companies are deploying advanced technologies and data Among important questions insurers should ask when preparing analytics so we don’t fall behind? their RegTech strategy: Which compliance functions are candidates for automation, as What’s next? ranked by value measures (time savings, capacity enhancements, Insurance companies’ regulatory compliance functions have an error resolution, efficiency gains) and complexity measures opportunity to better align with business strategy in a drive toward (scope, size, variability)? efficiency and effectiveness. Organizations should consider the Does our company have the right operating model to move to a numerous, high-value opportunities RegTech provides to improve more analytics-driven and predictive focus with our compliance and support broader operational efficiencies. compliance effort? If you want to learn about how and where your organization can Do we have the right people to develop and lead a technology- employ RegTech solutions, we should talk. driven approach to compliance? Do we need external assistance? Should we develop or acquire the capabilities we need? InFocus | Insurance regulation and technology: Adding business value to compliance 9 Contacts Endnotes Timothy Cercelle 1. “Modernizing compliance: Enabling and moving with the speed of business,” Managing Director | Deloitte Risk and Financial Advisory Deloitte, 2017. Deloitte & Touche LLP 2. Ibid. [email protected] 3. “Insurance regulators in an era of advanced technologies: Challenges and opportunities George Hanley in oversight,” Deloitte Center for Financial Services, 2018, https://www2.deloitte.com/in- Managing Director | Deloitte Risk and Financial Advisory sights/us/en/industry/insurance/advanced-technologies-insurance-regulators-challeng- es-opportunities.html?icid=dcom_promo_standard|us;en. Deloitte & Touche LLP [email protected] 4. https://www2.deloitte.com/insights/us/en/industry/insurance/advanced-technolo- gies-insurance-regulators-challenges-opportunities.html. Andrew N. Mais Senior Manager | Deloitte Center for Financial Services 5. https://www.naic.org/state_ahead.htm. Deloitte Services LP 6. https://www2.deloitte.com/insights/us/en/industry/insurance/advanced-technolo- [email protected] gies-insurance-regulators-challenges-opportunities.html. InFocus | Insurance regulation and technology: Adding business value to compliance 10 About Deloitte Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee (“DTTL”), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as “Deloitte Global”) does not provide services to clients. In the United States, Deloitte refers to one or more of the US member firms of DTTL, their related entities that operate using the “Deloitte” name in the United States, and their respective affiliates. Certain services may not be available to attest clients under the rules and regulations of public accounting. 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