Unraveling RegTech's role within Insurtech

RegTech's success in the financial services industry has, ironically, also been one of the factors limiting its growth. Many understand RegTech to be a branch of FinTech, or solely applicable to financial services, however, this greatly underestimates the true potential of RegTech.

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This common association has been born out of RegTech's successful deployment in helping financial institutions remain compliant. This has manifested due to the perfect storm of increased regulation post-2008, increased regulatory scrutiny and the increased cost of remaining compliant (and the penalties for non-compliance) which greatly increased the return on investment for deploying automated compliance solutions in the form of regulatory technology.

RegTech's definition, according to CBInsights, includes any technology and/or software created to address regulatory challenges and help companies understand regulatory requirements and stay compliant. Hence, regulatory technology can be applied in any industry that is regulated, not just financial services.

Once this mindset - one that only associates RegTech with financial services - switches to all regulated industries, RegTech's potential increases exponentially.

RegTech can therefore aid compliance solutions in industries from pharmaceuticals to oil and gas, cannabis to food and beverage. However, our focus today is RegTech's potential within insurance.

The insurance industry is facing a similar revolution as the financial services industry had with financial technology. Like FinTech disruption, “Insurtechs” are technology-led companies that enter the insurance sector, taking advantage of new technologies to provide coverage to a more digitally savvy customer base. Customer expectations of instant digital transactions sustained seamlessly across digital channels are increasingly the norm. While insurtechs have not yet made deep inroads into the sector, they are growing fast and stand to capture a meaningful share of value pools within a few years.

Indeed, investment into insurance technology has grown dramatically. Total new worldwide funding commitments to the InsurTech sector in 2019 were US$6.37 billion, 33.9% of the historical total, following a record-breaking $1.99 billion of investment in 75 projects during Q4 2019, according to the new Quarterly InsurTech Briefing from Willis Towers Watson.

This investment has proliferated innovative market entries such as targeted product concepts such as Kasko and Simplensurance that offer insurance coverage as an add-on purchase within e-commerce websites, fully automated solutions including SnapSheet that offer end-to-end automated claims management and data-driven insights, like FitSense, that allows life and health insurers to use data from wearable technology in underwriting, pricing and claims handling.

You may at this point be wondering where RegTech enters the Insurance/InsurTech equation. However the developments highlighted above in the insurance industry challenges insurer's regulatory compliance functions. As many companies' business operations are looking to Insurtech to find a competitive advantage, compliance departments are tasked with assisting them in understanding the associated consumer and regulatory risks.

By automating routine processes through the use of regulatory technology, compliance departments can better respond to changing regulatory demands, better support strategic business functions through analytics, and use data-driven insights to better mitigate risk. Therefore, regulatory technology's role within the Insurtech revolution is to support the use of technology by changing the compliance function to be proactive in business strategy. Hence the more Insurers become predictive and analytical in their compliance efforts, they better they are able to address risks before they properly materialise.

The drivers for the application of RegTech in insurance is therefore not dissimilar to the drivers for RegTech in the financial services industry. It is a combination of internal challenges, regulatory pressures and emerging technologies. Internal challenges include, et alia, fragmented regulatory/compliance change management, lack of compliance strategic vision, staffing/(legacy) resource challenges and ineffective coordination across jurisdictions.

Regulatory pressures regard the heightened standards and expectations, increased regulatory examination and increased enforcement actions, fines, and penalties. Further, regulators are expecting the use of technology to improve market oversight with use in market conduct-related areas such as investigating noncompliance and data manipulation, and in consumer education and response.

Then of course, we have the emerging technologies themselves. This includes the use of advanced and predictive analytics, robotic process automation (RPA), artificial intelligence (AI), and cognitive technologies which not only relinquish much of the manual burden on compliance officers but also remove the element of human error to improve accuracy and effectiveness.

Insurer success may boil down to how efficient and effective their compliance process is. Once that is efficient and effective by leveraging RegTech, this helps to facilitate the overall business strategy. This is especially true if that strategy involves the deployment of innovative solutions which digitally transform the insurance business model and products on offer. Without a robust compliance structure and framework, there is no foundation upon which Insurtech can be built onto.

When breaking down the compliance obligation of insurance companies you see how diverse the function really is. You have policies and procedures, new laws and regulation, fraud detection and reporting, anti-money laundering, complaint handling, monitoring and testing, market conduct exams, advertising materials, regulatory filings and a code of ethics. Within this melee, it may be hard to isolate where best to direct RegTech investment however some criteria are key.

If a compliance function requires significant manual work then it is ripe for robotic process automation (RPA). This is especially true if the manual work can be broken into unambiguous rules e.g. if X then Y. Furthermore, if work is prone to error (often a result of its manual nature), and errors are particularly costly, then RegTech can also help to alleviate these ills. If tasks require access to multiple systems, RPA can work across systems using the presentation layer. This set of criteria allows you to best determine a) how easy a RegTech solution can be implemented and b) which compliance process would see the greatest return on investment through automation.

The coming years will see a seismic shift in the deployment of RegTech solutions within the insurance industry. RegTech solutions including RPA, AI, Natural Language Processing (NLP), Big Data, Blockchain and other technologies will drastically change how insurers operate and how the compliance function is perceived not as an statutory obligation, but as a source of competitive advantage. The list of potential RegTech solutions in insurance is endless but can include automated regulatory reporting, NLP to identify new regulatory requirements and even social intelligence to highlight emerging reputational risk.

But with any emerging technology or solution, insurers are initially cautious as they consider where investment would deliver greatest return. The two most important factors being value measures such as time savings and error removal versus complexity measures such as scope and variability. Other factors are also important including the operating model of the business, the internal capabilities of the company to lead a digital transformation and the internal development versus outsource dichotomy.

Compliance functions have the chance to be at the heart of the business' strategic vision - not just an obligation - and regulatory technology opens the doors to facilitate this in any regulated industry.

If you're thinking of digitally transforming your compliance function, email us at info@regpac.com