Emerging Opportunities, Risks and Challenges in the Financial and Insurance Sector

1. Emerging Opportunities, Risks and Challenges in theFinancial and Insurance Sector By Dr Rakesh AgarwalSecretary General, Risk Management Association of India, India

2. Risk Management - HR • Human Capital are your greatest asset • “A survey report by Price Waterhouse Coopers finds that businesses worldwide seek sustainable growth while their targets become more demanding than ever. With this increase in consumer power, PWC notes that organisations must rethink their talent pipeline and transform their HR function to cope with these priorities and risks.” • HR Managers must be aware of the risks they face in HR operations.

3. Few areas of HR Risks • Talent Acquisition and Management • “Improper resource planning may lead to overstaffing or understaffing; a mistake in the recruitment processes could lead to hiring the wrong people for your company; and complex onboarding resources are inefficient, which can reduce the organisation’s overall productivity.” - Enterprise Risk Management Association (ERMA) Managing these risks: • Build a recruitment program to hire the right people at the right time for the right roles. • Develop efficient processes for onboarding talent to ensure new starters become productive quickly • Cut losses quickly in case of poor hiring choices

4. Few areas of HR Risks • Ethics and Leadership • Professional ethics and leadership skills are critical to maintain employee productivity • HR managers must take the responsibility to educate all employees of the company’s culture, beliefs and values • Managing these risks: • Ensure business leaders display necessary leadership skills while being approachable • Educate leaders and managers of the business’ values and ensure they pass these values down to their teams • Create the right culture and set the tone with new recruits from the outset

5. Few areas of HR Risks • Retention of Employees • One of the biggest risk and challenge • Frequent Turnover affects performance of company and long term goals • Managing these risks: • Keeping compensation and benefits packages as simple as possible • Build reward programs that link performance to pay • Make sure employment contacts for employees and contractors are up to date and legally sound • Avoid any discrimination – ensure all rewards are awarded based on performance and contribution to the business’ goals

6. Emerging Scenario • Significant Potential in the insurance sector • Extreme Competition • Expansion of Distribution channels • Increasing awareness among the consumers • Product Innovation • Increasing Compliance • Online Selling picking up • Thrust on Social Security Schemes

7. Significant Potential in the insurance sector • Penetration of Insurance in Nepal below 1.5% of GDP • In 2015 Earthquake the insured damage was only 3% •  80 percent of the adult population of Nepal do not have any type of insurance coverage- Financial Inclusion Roadmap 2017-2022 • A total of 17,782 non-life insurance claims worth Rs 16.85 billion were lodged by the policy buyers after the earthquake out of which 5,896 claims have been declared as invalid. • The claims for life insurance was only Rs 3.47 billion.  • Access to insurance in the country currently stands at 12 percent combining both life and non-life insurance coverage.  • Insurance sector contribution to the country’s GDP only 2.5 percent.  (2017 figures Approx – figures quoted from Website)

8. Extreme Competition • Indian Scenario • Extreme rate cut after detariffing • Moving from Risk Based • Underwriting to Competition • based underwriting • Underwriting Losses • Motor and health fastest • growing and most bleeding • portfolio

9. Existing Distribution Channel Point of Sales Insurance Marketing Firm Common service centers (CSC) or Jan Seva Kendras

10. New Distribution Channels • Insurance Marketing Firm • Registration of Insurance Marketing Firm by engaging ISP for the purpose of soliciting and procuring Insurance Products of two Life, two General and two Health Insurance companies at any point of time, under intimation to the Authority. • Provided that in respect of general insurance, the Insurance Marketing Firm shall be allowed to solicit or procure only retail lines of insurance products as given in the file & use guidelines namely motor, health, personal accident, householders, shopkeepers and such other insurance products approved by the Authority from time to time. • Point of Sales • “Point of Sales Person – Life Insurance” means an individual who possesses the minimum qualifications, has undergone training and passed the examination as specified in these Guidelines and solicits and markets only such products as specified by the Authority. • An Insurer or an insurance intermediary authorized to solicit and market life insurance business can engage a “Point of Sales Person”. • A “Point of Sales Person- Life Insurance ” engaged by an insurance intermediary can sell the POS – Life Products  of all such Insurers whose life insurance products the respective intermediary is authorized to sell.

11. Point of Sales – Case Study • Fast growing • Huge Potentials • Will help penetration in rural and un tapped area • Simple process of training and enrollment of agent • Instant issue of Policy through Mobile App • Policy serving through app itself

12. Education and Awareness • Increasing education and awareness is key to increase penetration • Customer Awareness Programmes • Industry initiative needed • Regular Training of Employees • Government and Regulator role is important • Thrust on educating Intermediaries • Insurers – Top Down Approach

13. Online Insurance Companies and Web Aggregators Product Innovation

14. Social Security Schemes • Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY) • The life cover of Rs. 2 lakh is for the one year period stretching from 1st June to 31st May and is renewable. Risk coverage under this scheme is for Rs. 2 lakh in case of death of the insured, due to any reason. The premium is Rs. 330 per annum  • Pradhan Mantri Suraksha Bima Yojana (PMSBY) • The risk coverage under the scheme is Rs. 2 lakh for accidental death and full disability and Rs. 1 lakh for partial disability. The premium of Rs.12 per annum • Atal Pension Yojana (APY) • Subscribers would receive the guaranteed minimum monthly pension of Rs. 1,000 or Rs. 2,000 or Rs. 3,000 or Rs. 4,000 or Rs. 5,000 at the age of 60 years. • Pradhan Mantri Fasal Bima Yojana • There will be a uniform premium of only 2% to be paid by farmers for all Kharif crops and 1.5% for all Rabi crops. In case of annual commercial and horticultural crops, the premium to be paid by farmers will be only 5%. The premium rates to be paid by farmers are very low and balance premium will be paid by the Government to provide full insured amount to the farmers against crop loss on account of natural calamities.

15. Ayushman Bharat - National Health Protection Mission • The scheme will have a defined benefit cover of Rs. 5 lakh per family per year. • Increased benefit cover to nearly 40% of the population, (the poorest & the vulnerable) • Covering almost all secondary and many tertiary hospitalizations. (except a negative list) • Benefits of the scheme are portable across the country and a beneficiary covered under the scheme will be allowed to take cashless benefits from any public/private empanelled hospitals across the country. • To control costs, the payments for treatment will be done on package rate (to be defined by the Government in advance) basis.

16. Ayushman Bharat - National Health Protection Mission- Challenges • Lack of Infrastructure • Coordination of state and centre • Profitability of PSU insurers • Allocation of timely funds • Issues in Claim settlement • Deciding upon feasible package prices and tieup with hospitals • Quality of Services • Prevent frauds

17. Emerging Risks & Enterprise Risks What is Emerging Risks? Emerging Risks is perceived to be potentially significant but may not be fully understood or allowed for in insurance terms and conditions, pricing, reserving or capital setting. Lloyds Large scale events or circumstances beyond one’s direct capacity to control, that impact in ways difficult to imagine today. PWC

18. Emerging Risks – Characteristics • New & Known:- Exp. AIDS virus; • Evolving in unexpected ways- U.S. Home Loan Crisis, NPA in India, • Concept “VUCA “: Volatility, Uncertainty, Complexity, Ambiguity • Significance & Severity: Not well understood. • Infinite &Immeasurable: Due to lack of data & volatility. • Immense Consequences – Cyber Risks, Global Warming • Complex Interactions: With other risks (Enterprise &insurable) • Systemic Risks – Beyond organizational / human control Major Emerging Risks: Economic, Geopolitical, Social, Technological

19. Emerging Risks – Categories & Examples • Geopolitical: Alarming Population growth, Global Warming, Rising Catastrophes, Increased terrorism, World War threats etc • Societal: Infectious diseases, Rising Frauds,Crimes & Corruptions • Economic: Financial Volatility, Global Economic instability etc. • Technological: Disruptions in technology and business systems, Cyber Wars, Risks from new technologies- AI, Drones etc. • Environmental: Climate change & extreme weather, Depletion of oil reserves, Industrial pollution

20.  Operational Risk - IT disruption • Operational risk is "the risk of a change in value caused by the fact that actual losses, incurred for inadequate or failed internal processes, people and systems, or from external events (including legal risk), differ from the expected losses • This means that as long as people, systems, and processes remain imperfect, operational risk cannot be fully eliminated. • IT disruptions – whether from a • disabling cyber attack, human error or • failure of aging hardware – are considered the top threat to financial services firms for 2018 by senior operational risk practitioners.

21.  Operational Risk - Data compromise • Cyber theft, • Unauthorised access, • Accidental disclosure and • Employee negligence • Can lead to huge security concern • The data breach of 2017 was the cyber attack on credit reporting agency Equifax, which compromised personal information including names, social security numbers, driving licence numbers, credit card numbers and personal documents, relating to an estimated 145 million individuals.

22.  Operational Risk - Regulatory risk • US Federal Reserve cease-and-desist order to Wells Fargo • Maggi – the most popular noodles brand in India was banned for violation of the regulations for adding lead and MSG into the product. On June 5, 2015, a nationwide ban was imposed on Maggi by FSSAI (Food Safety and Standards Authority of India). • Prior to the ban, Maggi owned nearly 80% of the market share in the instant noodles segment. In the blink of an eye, its share plummeted to zero.

23.  Operational Risk - Theft and fraud • Insurance Fraud • In India Insurance Industry looses 40000 crore to fraud every year • 8.5% revenue is lost due to fraud • In 2018 49% of the fraud were carried out by Insurance Intermediaries • 28% fraud were carried by policyholders • Nepal - Tourists hiking in Nepal’s Himalayan mountains are being pressured into costly helicopter evacuations at the first sight of trouble by guides linked to powerful brokers who are making a fortune on “unnecessary rescues” • Dodgy operators are scamming tens of thousands of dollars from insurance companies by making multiple claims for a single chopper ride or pushing trekkers to accept airlifts for minor illnesses, an investigation by AFP has revealed.(livemint.com)

24.  Operational Risk - Outsourcing • Outsourcing remains a top operational risk

25. Reputation risk - Volkswagen • On September 18 2015, the US Environmental Protection Agency (EPA) announced that Volkswagen, the company that coined the term “clean diesel,” has been installing sophisticated software to cheat diesel emission tests. As a result, its cars produced up to 40 times more pollution than allowed by US standards - Volkswagen’s cars were environmentally friendly no more. • Volkswagen deployed this programming software in about eleven million cars worldwide, including 500,000 in the United States, in model years 2009 through 2015 • Its stock price fell in value by a third in the days immediately after the news • Volkswagen Group Top officials resigned/removed • Reputation Institute’s research shows that with the EPA announcement, the general public’s trust in the automaker was highly damaged in the US as well as globally.

26. Insurance Regulatory And Development Authority GUIDELINES ON INFORMATION AND CYBER SECURITY FOR INSURERS • Enterprise Security • Information Asset Management • Physical and environmental security • Human resource security • System acquisition, development and maintenance • Information Security Risk Management • Data Security/ Cyber Security • Application Security • Incident Management • Cloud Security • Information System Audit

27. GUIDELINES ON INFORMATION AND CYBER SECURITY FOR INSURERS • Ensure that adequate systems and procedures are in place for ensuing that there is no leakage of information and information is shared only on need-to-know basis. • Maintain confidentiality of information. • For insurers, cyber security incidents can harm the ability to • conduct business, • compromise the protection of personal and proprietary data, and • undermine confidence in the sector. • Information obtained from regulated entities through cyber-crime may be used for financial gain through extortion, identity theft, misappropriation of intellectual property, or other criminal activities. • Exposure of personal data can potentially result in severe harm for the affected policyholders, as well as reputational damage to insurance sector participants. • Malicious cyber-attacks against an insurer’s and Insurance Intermediaries’ critical systems may impede its ability to conduct business.

28. Artificial intelligence (AI) in Insurance • Artificial intelligence (AI) is leading a technology revolution across various business verticals and sectors. Insurance is one sector which is also using artificial intelligence to change the way companies carry their businesses and provide better customer services in return. • AI Innovations In Insurance SectorThe role of AI in insurance sector is of paramount significance as the insurance sector has a huge volume of data, which means sometimes insurers are unable to offer customised solutions to each policyholder. Insurers have a host of agents, brokers, claim investigators etc. to accomplish their goals of faster customer support and easier claims. With the introduction of AI in the insurance ecosystem all such areas are likely to receive an immense boost helping both insurers and policyholders.

29. Artificial intelligence (AI) in Insurance • Data • Insurance is driven by data, and it has a huge effect on the company’s bottom line and the satisfaction of the customer. • Telematics • Telematics, or wireless communication of data back to an organization, is expected to be a huge area of growth for insurance. Many insurance companies already offer discounts to customers who transmit their driving data back to the company. Telematics and artificial intelligence can take this one step further by recognizing GPS patterns with the data, inferring road and traffic conditions, and even predicting and helping avoid accidents, which could potentially lead to fewer claims to process and safer and more satisfied customers.

30. Artificial intelligence (AI) in Insurance • Coverage personalizationAI ensures that insurers offer dynamic underwriting leading to offering of personalized covers. The use of fitness trackers for health insurance and vehicle trackers in automobiles are allowing insurers to understand personal trends and then offer personalized covers based on their individual risks and protection parameters.  • Faster Claim SettlementThe use of image recognition to access damage to an automobile in the event of a Car Insurance or the use of technology to assess first claim investigation is possible thanks to technology based on technology. Reducing the need of human workforce for claim settlementlooks viable as insurers can make better use of the workforce in other essential areas. For the policyholders, a faster claim settlement process ensures a higher insurance penetration in the long run.

31. Artificial intelligence (AI) in Insurance • Policy Price Based On AI With AI based technology, users can reap benefits of a price based policy that would take into account the behaviour patterns of the individual, making policies more personalised and better priced. AI offers use of predictive analytics where insurers can trace behavior patterns and use them to assess the risk for each individual policyholder.  • For example, you are looking for Health Insurance and have always had a healthy and active lifestyle. Compared to someone of the same age with a not so healthy lifestyle the difference in insurance premiums may be marginal,if at all.  Leading a healthy lifestyle means you offer a lower chance of insurance usability compared to someone leading an unhealthy lifestyle. This reduces the risk factor of the insurer but you are still paying almost the same premium amount. 

32. AI-powered Chatbot • In the insurance industry, artificial intelligence powered chatbots are replacing human assistants to deliver always available, fast and efficient customer service. • To be effective, chatbots must have natural language processing and sentiment analysis capabilities to accurately understand what customers are saying in their own Language. • Chabot applications based on artificial intelligence allow users to interact directly with your business using their own words, through natural, human-like conversations. Chatbots can be used to automatically provide information, facilitate a purchase and help connect customers to the services or information they need, 24×7. • AI based chatbots are helping consumers pick and choose the right Insurance plan as per their need without worrying about any likely mis-selling. 

33. Blockchain technology • Blockchain technology is heralded as the biggest symbol of the fourth industrial revolution and the next big disruptor for many industries, including insurance.  • Blockchain technology, a cryptographically secured form of shared record-keeping. • It has the capability to be a transformative force for industries like insurance, which requires the coordination and cooperation of many different intermediaries with different incentives.

34. What is Blockchain technology • Think of a blockchain as a sales ledger – a comprehensive, always up-to-date accounting record of who holds what or who transferred what to whom. This sales ledger is a secure decentralised database that’s publicly available. • When a digital transaction is carried out, it is grouped together in a cryptographically protected block with other transactions that have occurred, and sent out to an entire network. Based on their role, members in the network are able to verify the transaction. • After their verification, the validated block of transactions is then time-stamped and added to the chain in a linear, chronological order. New blocks of validated transactions are linked to older blocks, making a chain of blocks that show every transaction made in the history of that blockchain. The entire chain is continually updated so that every database in the network is the same, giving each member the ability to establish securely who has changed what at any given time.  

35. How blockchain will benefit the insurance industry • Alleviating paperwork • Developing a system where some claims can be verified and handled very quickly • Minimising fraud • Improving the quality of data used during underwriting • Generally improve efficiency across the insurance value chain, e.g. creating processes where claims can be paid out automatically.

36. Advantages of Blockchain • Fraud detection and risk prevention: By moving insurance claims onto an immutable ledger, blockchain can help eliminate common sources of fraud in the insurance industry. · • Property & casualty (P&C) insurance: A shared ledger and insurance policies executed through smart contracts can bring an order of magnitude improvement in efficiency to property and casualty insurance. · • Health insurance: Through the blockchain, medical records can be cryptographically secured and shared between health providers, increasing interoperability in the health insurance ecosystem. · • Reinsurance: By securing reinsurance contracts on the blockchain through smart contracts, the blockchain can simplify the flow of information and payments between insurers and reinsurers.

38. Diamond Jeweller • Say that a diamond jeweler fakes a report that diamonds have been stolen from her store, and files an insurance claim. She counterfeits certificates for the diamonds, and tries to sell the stones as new ones. Since the unique characteristics of each stone have been stored on the Everledger blockchain, when they resurface, the insurance company is notified and can repossess the diamonds. • Insurance fraud is one of the bugbears of the industry, leading to higher premiums and worse coverage for consumers. Combating fraud is one of the most compelling use-cases of the blockchain, which can provide insurers and insurees a permanent audit trail that can be used to evaluate claims.

39. Insurance Claim process through Blockchain

40. Insurance Claim • Smart contracts on the blockchain can turn paper contracts into programmable code that helps automate claims processing and calculates liabilities in insurance for all players involved. • A contract is a paper agreement between two or more parties that is enforceable by law; a smart contract is an agreement between two or more parties that lives on a blockchain and is enforceable by code. • For example, when a claim is submitted with an insurer, a smart contract could automatically confirm coverage, and trigger a request for manual review for losses that meet a specific criteria. For flight insurance, a smart contract could be linked to an air traffic control database, and automatically trigger compensation when delays or cancellations occur

41. Emerging concerns about AI, algorithms, and machine-driven decisions • Data security is a long-standing risk, but there are new risks as well. Some experts worry that algorithms and machine-based decisions could actually perpetuate bias due to flaws in the underlying data or the algorithm itself. Understanding the potential for this type of risk is critical to preventing a new source of bias from seeping into an organization’s hiring or promotion processes. • The people data and algorithm-based artificial intelligence (AI) raises such concerns to a new level. • Business leaders are beginning to realize that “data-driven decisions” are not guaranteed to be understandable, accurate, or good.

42. Emerging concerns about AI, algorithms, and machine-driven decisions • Even advanced technology companies like Facebook and Twitter have discovered that AI without humans can be “stupid.”In response, they are hiring thousands of people to monitor their AI-based social networking and advertising algorithms. • HR organizations must be rigorous in monitoring “machine-related” decisions to make sure they are reasonable and unbiased. • Tech leaders are beginning to invest more resources in solving these problems. A consortium of data experts recently formed the Partnership on AI to Benefit People and Society, a group funded by Amazon, Apple, Facebook, Google, IBM, and Microsoft.

43. Thank YouDR Rakesh AgarwalMCom(BIM), PGJMC,LLB,FIII,MBA,FRMAI, FCA,Phd9830171022Secretary GeneralRisk Management Association of India25/1,Baranashi Ghosh Street, Near Girish Park, Kolkata - 700007. IndiaPhone: 033 4007-8428/40078429/2218-4184/2269-6035Email: info@rmaindia.orgWebsite: www.rmaindia.org