Operational risk models critical for insurtechs, says ORX
Risk leaders of global financial institutions must start managing risk in a far more active way to tackle their multi-billion dollar commitments to digital transformation, say, experts.
The news comes following the release of a new report conducted by ORX, the world’s largest operational risk association.
The study, which was created with senior risk leaders of ORX member global banks and insurers, urges operational and non-financial risk management (ONFR) functions to step up like never before and support their businesses as they go through digital transformation, in order to keep up with the pace of change.
The study demonstrates that risks are now faster, more complex, and more ambiguous than we’ve seen in the past. Events are more interconnected than ever, and impacts are multifarious and interlocked. As a result, risk management needs to be automated, real-time, and pre-emptive, and reputation and service resilience must be addressed side by side with financial resilience.
Cyber risk, operational risk and reputational risk
The report also gives a view on what an organisation’s critical assets are and how they are now shifting. No longer is financial loss or capital optimisation the only concern – reputational risk, data loss, customer harm, support for vulnerable customers, and institutional resilience are all becoming more important as services are available to customers 24/7. Cyber risk and a febrile social media environment can also both amplify the slightest misstep.
Digitalisation has been accelerated by the Covid-19 pandemic, but emergent, fast-moving technologies such as Cloud Computing, Artificial Intelligence, and Machine Learning and widespread adoption and availability of APIs have been driving the transformation for some time.
Simon Wills, Executive Director at ORX explains, “We know that the Covid-19 pandemic has been a wake-up call for risk leaders within global financial services and the challenge now is to recognise and embrace the acceleration of digitalisation and develop new risk management practices to keep up. Many legacy frameworks and out-of-date approaches to risk will leave banks and insurers behind, and that will happen very quickly as digitalisation changes core business practice forever.”
The report urges risk managers to consider the following:
Optimise, active, or both?
ONFR leaders must consider if they want to “Optimise” (i.e. work more efficiently, reduce the administrative burden risk management places on others, simplify frameworks, deploy innovative tools and practices)? According to the report, this will only allow them to keep pace with the risk profile. To get ahead of the rapidly changing risk profile, ONFR leaders need to consider being more active – which means being on the front foot at all times, pre-empting the risks associated with change initiatives by working with the business to mitigate them in the design and development phase. It means translating the risks into actionable processes for senior management, offering active crisis management, ensuring a sharp focus on the most material risks, and scanning the horizon for the risks that lie ahead. To be active, the risk function needs to be fast, dynamic, and innovative – both in the digital tools, it deploys but also in how it positions itself in the organisation.
- Strategic capabilities
Banks and insurers need to embed a set of strategic capabilities – technological, cultural, and organisational. The technological enablers revolve around using analytics on data that already exists to see the risks that lie ahead, to get in front of them and to introduce the appropriate control. The cultural enablers involve establishing senior-level relationships and being able to persuade and influence actions before risk events occur. Organisational enablers revolve around skills, for example specialist data science skills, skills in cyber security, and strong scenario development skills.
- Capitalising on new technology
ONFR leaders should consider using the following available technologies to enhance their risk management practices:
- Cloud Computing provides a platform to bring together disparate datasets and information to create the portfolio view of risk that is central to ONFR
- APIs break down the boundaries between functions and institutions, allowing risk to take advantage of an ecosystem of innovative providers and scale efficiently
- AI and machine learning underpin some of the most significant innovations in risk management. Activities that were once slow or even impossible, can now be done in real-time
- Being the umbrella function
ONFR needs to provide an overarching framework, bringing consistency across specialist 2nd line control functions and working with compliance teams for an integrated approach to non-financial risk management.
Wills says, “Operational and non-financial risk management functions have had to optimise quickly and it is fair to say that it is now impossible to be successful at change as a business without active risk management."
He adds, "Getting the right skills on the team, embracing innovative technologies, and inspiring a culture of change will help risk managers to see the shift they need to be more active and move the risk agenda forward for a digitalised future.”
CB Insights: US Insurtechs Are Competing In A Global Market
In the first half of the year, insurtech companies around the world have raised US$7.4bn, nearly doubling their funding in Q2. According to Digital Insurance, insurtechs have raised US$4.8bn in Q2—an 89% increase in funding from Q1. But US firms are no longer the sole beneficiaries.
What Are the Stats?
Out of the 15 Q2 mega-rounds—those that top US$100mn—only eight included American firms. Pretty good, you might say. That’s over half! But US companies only made up 38% of the deals, which marks a 10% drop from Q1 and a 12% drop from 2020. Technically, therefore, US insurtechs are less influential than they’ve been in the past. But who says this is a bad development?
Despite my American citizenship, I’d argue that a more globally diverse insurance market is only for the best. Many of the world’s citizens who could most benefit from improved insurance services live outside of the States—and deserve local, tech-savvy services.
Why Does This Matter?
You’re always going to see the typical insurtech contenders from Western countries. For instance:
- German-based wefox: US$650mn Series C
- UK-based Bought By Many: US$350mn Series D
- US-based Collective Health: US$280mn Series F
But it’s critical that we address risk across the world. American insurtechs might be some of the most technologically skilled firms in the industry, but it’s not their first goal to address floods in Southeast Asia, crop destruction in China, and COVID complications in South Africa. That’s why we should celebrate that the recent Q2 round included insurtechs from 35 different countries.
According to CB Insights’ Q2 2021 Quarterly InsurTech Briefing, this was the first time that they’d observed insurtech activity in Botswana, Mali, Romania, Saudi Arabia, and Turkey. And ‘from a product, service, distribution, and underlying risk perspective, we—as a society and as an industry—are moving at an unprecedented speed’, says Dr. Andrew Johnston, Global Head of Willis Re InsurTech.
Just ask CB Insights. InsurTech value propositions have resonated with the world.