Do you do Digital?

We recently came across an interesting paper from the McKinsey Institute entitled “Digital Risk: Transforming risk management for the 2020s”, in which the firm explored the potential scope and benefits of using “digitization” to improve processes, controls and risk management.

While written with the banking industry in mind, many of its points should apply equally to the (re)insurance industry, where senior managements make increasingly frequent references to “digital transformation” and “innovation”, without necessarily clearly laying out what they mean by that. As a result, “InsureTech” seems still a shadow of its increasingly boisterous banking and NBFI cousins.

Of course, as with the banking industry, many (re)insurers have until recently had to focus on meeting new and more onerous regulatory requirements- particularly Solvency II; undertakings that have left little time or resources available to look at business processes in terms of efficiency and optimization. While Solvency II is still being bedded down, the Bermudan industry is also faced with new reporting and disclosure requirements from the BMA as part of its achievement and maintenance of the all-important “equivalency”. Such efforts place further constraints on resources.

Another issue that digital transformation faces is the fact that its generally “test-and-learn” approach is seen as problematic in a risk environment where the cost of errors in compliance or operational risk can be severe, both in reputational and regulatory terms. This should not deter managements from making the attempt, but clearly managing and controlling the process, and ensuring that the appropriate talent is nurtured are critical to successful implementation.

As with banks, many (re)insurers’ current processes have grown organically and without the application of logic and process engineering. As a result, issues such as “manuscripting” remain far too prevalent, with the unpleasant consequences that can result when a “surprise” occurs in terms of what exactly the risk being covered is (and rarely in a positive sense!), while organizational structures have not been adapted to make effective use of the streamlining that a fully digital end-to-end process can permit. Checks and balances are all very well, but layers of decision-making are often counter-productive, and create serious bottlenecks. Not for nothing does the “race go to the swiftest”.

A key skill for (re)insurer CROs will, therefore, be being able to ask the right questions, so that an institution can target areas that will provide the most effective returns in terms of productivity, risk selection and management, and process enhancement. However, to be able to do so, an individual has first to have some understanding of the “art of the possible”, carefully balance abstract nirvana promised by the army of consultants, with the gritty reality of ensuring that a business is not derailed by an overly-ambitious and ill-conceived “master plan”.

Naturally, given the fact that much of what the industry does is, in reality, commoditized, one would think that there would be recognition that the creation of common platforms and processes would be beneficial. However, as numerous failed attempts in, for example, the London Market have shown, achieving “transformation” and commonality is much easier said than done, because market participants find it very difficult to agree on much, and orchestrating change to long-customary behaviours and processes can be an excruciating exercise in “herding cats”.

At Awbury we, therefore, expect that, for all the anticipation and public rhetoric, the rate of change for existing businesses will be incremental and modular, rather than all-encompassing; which, of course, increases the risk of being targeted by non-legacy “disrupters”.

The Awbury Team

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