Insurance Companies Beyond Compliance

FACED WITH INCREASINGLY DEMANDING STAKEHOLDERS, WATCHFUL REGULATORS, AND AGGRESSIVE COMPETITORS, THE INSURANCE INDUSTRY MUST RETHINK PRODUCTS, TECHNOLOGIES, AND ABOVE ALL STRATEGIES

by Paola Castelli and Paola Schwizer, SDA Bocconi School of Management
Translated by Alex Foti


It’s not just about compliance. Major big financial groups are striving to improve performance of their business models without renouncing to invest in innovation and sustainability. Increasingly sharp-eyed stakeholders, aggressive competitors often coming from outside the financial sector, pervasive regulation and watchful supervisors, newly emerging risks and highly volatile financial markets are putting to the test the strategies of banks and insurance companies.

Faced with revenue growth in premiums, (+5% in 2018, according to the latest IVASS data), Italian insurance companies are rapidly progressing in innovating their range of products and services. Money has poured into the insurtech segment, with billions of dollars invested globally in 2018. Fintech for the insurance industry is thus the emerging competitive battle that companies fight around the digital effectiveness and convenience of insurance products. However, it is not only a question of offering clients new customized products, but also of having to face the new competitive pressure brought by an easier comparison of prices and insurance packages offered by various companies and banks.

In addition to striving for greater efficiency and productivity, higher skills and better talents, companies must respond to these developments by making significant investments in digital technology, in order to address the insurance needs caused by climate change and cyber-risk, for instance. However, everything needs to be built around strong values and a robust culture of risk management and compliance.

How can the challenge be won by insurance firms? First, competitive pressures, either internal or external to the industry, must be dealt with by an innovative strategic approach, based on the analysis of long-term scenarios, integrated with ESG (Environmental, Social, Governance) impact assessment. The strategic capabilities of individual companies, i.e. the decisions taken by their boards and management teams, will be key factor in the competitive race. This approach presupposes a growing interdependence between strategy, governance and risk control, which must qualify and guide corporate choices in an integrated manner. This can warrant a better sustainability of existing business models, guaranteeing medium and long-term results, while enabling the rapid adaptation of insurance companies to emerging changes in the economy and society.

Secondly, the key functions of insurance companies, as defined by Solvency II, i.e. internal auditing, compliance, risk management and actuarial function, must progress toward stronger internal governance in two directions. First, these functions must themselves become factors of innovation, by making use of data analytics, but also robotics and artificial intelligence, which all offer the potential of a better reading of the insured clients’ data and models of behavior, while improving the efficiency of control processes. Also, they need to develop an much better knowledge of their business, in order to seize and anticipate emerging trends, so to create sustainable value over time.

Key functions have a privileged position in the corporate structure, covering all processes and resources of the company. They can therefore support management by providing an integrated view of the impact of emerging risks and opportunities on the insurance business, associated with the growing demand for sustainability.

In a complex and shifting scenario, managing current and emerging risks requires solid and reliable control systems, as well as high flexibility in both organizational and management terms. These functions, if appropriately enhanced through dedicated and wide-ranging training programs, will be key players in promoting the dissemination of a healthy corporate culture, one that guarantees transparency of conduct and alignment with the expectations held by various stakeholders.