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Mitigating risk as digital platforms converge

Cyber Risk Management
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By Lay See Ong | October 21, 2020

Digital platform convergence is expanding in media, healthcare and financial services, potentially creating new risks.

With digital platform convergence trends accelerating, business enterprises and the insurance industry have become increasingly proficient at identifying, mitigating and transferring related digital risks, including those involving data protection and privacy issues. However, technology, media and telecommunication (TMT) industries, in particular, must remain alert to new risks that will continue to emerge with the growth of digital technology and e-commerce.

Insurance covering property, professional liability, errors and omissions (E&O) and other conventional exposures have proven flexible enough in some situations or scenarios to accommodate certain digital risks. As new risks surface, coverages have also developed to include some non-damage business interruption and cyber incidents. But insurance coverage gaps remain, and these gaps may grow as digital platforms become more intertwined and complex.

How the convergence of digital platforms is redefining risks

Entertainment

TMT companies were early adopters of digital platform convergence. A popular example is Netflix, the subscription-based media services and production company. Netflix started in 1997 selling or renting digital video disks (DVDs) by mail, then moved in subsequent years to online streaming and eventually added film and television production and distribution capabilities.

Digital platform convergence also is happening behind the scenes at Netflix. The use of artificial intelligence (AI), big data and machine learning1 permits Netflix to identify films that fit the interest of each customer, find optimal locations for film production and even influence film editing. In addition, 75% to 80% of its viewer activity is influenced by algorithms based off personalized recommendations for the subscriber being analyzed, according to Medium. Conventional data collections and analysis could not offer such instantaneous profiling.

As a result, Netflix can claim an impressive customer retention rate compared with its peers such as YouTube TV and HBO Now in the U.S., according to Second Measure.

Netflix is far from the only TMT company collecting and storing data. The same is true of any large company today, particularly consumer-facing companies that rely heavily on consumer data to inform or to influence buying decisions. There is a corresponding rise in risks involving cyber security and privacy concerns2, something that may not have been high on the list of risk exposures a decade ago.

Medical and healthcare

Digital platform convergence is also revolutionizing global health. The real leap in recent years is in clinical diagnostics for healthcare institutions and measurement devices available to remote patients, including smartphones, digital stethoscopes, vital sign monitoring devices and wearable biosensors, among other things. A different and more topical example of digital platform convergence is the growth of telemedicine since the 1950s. With the arrival of the Internet and 4G/5G networks, advances in telemedicine were made with additional features including audio and video consultation, real-time accessibility to medical records and so on.

The current COVID-19 crisis has accelerated the growth of telemedicine, according to Bain & Co. It is gaining further interest among beleaguered physicians and other medical professionals as a way to discourage patients and others from further crowding medical facilities during the pandemic. In some Asian countries where full coverage of essential health services reach every community, telemedicine can help bring basic healthcare to rural communities and low resource regions.

Telemedicine is a game-changer, but the promise is not without risk. Cybersecurity is a huge concern in healthcare, and telemedicine is no exception. For example, U. S. insurer Liberty Mutual Group has pointed to misdiagnosis as one of the more significant risks, opening the door to liability claims. Another exposure familiar to any technology company surrounds patient privacy. Liberty Mutual identified medical licensure as another risk, with regulatory requirements that will vary among countries and even within countries.

Disruption to financial services

Digital platform convergence is showing up in other industries, ranging from banking to driverless cars. Potential disruption to the financial system seems highly likely as consumers in many countries, particularly in Africa and Asia, turn to their smartphones instead of walking into bank branches or drawing cash from an automated teller.

In Singapore, digital payments are rapidly growing in popularity, including use of e-wallet, as safe and efficient ways to pay for products and services or to transfer funds. Statista research projects mobile point-of-sale payments in Singapore at nearly $1 billion in 2019 with a projected annual growth rate of 30.7%. Mobile payments throughout Asia are many multiples higher, with China leading the usage of mobile payments and e-wallets.

PPRO, a London-based company specializing in cross-border payments, estimates online shopping in Asia at more than $760 billion by e-wallet. This is more than the value of all European ecommerce. The company concludes that e-wallets are used in more than half of transactions in the region.

The e-wallet isn’t just simply a way of transferring cash. It combines digital, biological and technological innovations with its dependency on touch- or voice-enabled smartphones and the internet. The best examples of e-wallets are Apple Pay and Samsung Pay.

As a platform, the e-wallet and smartphone will store enormous amounts of personal data – bank and credit records, addresses and contact information, and so on. It is highly secure in point-of-sale transactions, generally regarded as safer than credit cards thanks to encryption, tokenization and other security features. However, e-wallets are not without risks. Some of the mobile payment security concerns include security and privacy issues involving the device (usually a smartphone) and so-called app “clones.”3

Managing a complex risk landscape

The dynamic nature of digital transformation is forcing risk managers and their advisors to move quickly as new digital risks arise. Digital platform convergence will complicate their jobs even more with the wider introduction of AI and machine learning, the internet of things (IoT) and other innovations that will introduce new exposures.

In some coverage areas, insurance capacity is available for now, but pricing is an issue, varying among insurers and by the business profiles of their clients. As pricing tightens, insurers are more closely reviewing exposure details, including aggregation risks. The COVID-19 pandemic has also forced companies to change their business models and operations.

Although digital platform convergence has great growth potential for many businesses as they harness more data and as they adopt, diversify and innovate constantly, companies still need to do a cost-and-benefit analysis to test whether continuous effort to implementing or augmenting digital platforms will deliver real value, especially in terms of business efficiency, customer satisfaction and revenue generation. Insurance brokers and risk advisors need to weigh in with the best possible analytics and modeling to support risk identification, quantification and mitigation efforts, and determine the optimal points for transferring the risk to insurers.

Risk managers also need to work closely with their finance counterparts and senior management to identify the risks that are most likely to impact revenue and the company’s ability to meet its strategic objectives. Mitigation should be a heightened priority, especially in areas where insurance pricing tightens, including cyber, business interruption and professional indemnity. Above all, it is important to remember that a digital platform is simply a tool of your business, but not the actual business.

Footnotes

1 Allen Yu, “How Netflix Uses AI, Data Science, and Machine Learning — From A Product Perspective,” Becoming Human, Feb. 27, 2019, https://becominghuman.ai/how-netflix-uses-ai-and-machine-learning-a087614630fe

2 Brett Tingley, “Netflix User Data Begins to Raise Security and Privacy Concerns,” Soda, April 22, 2019, https://www.soda.com/news/netflix-user-data-security-and-privacy-concerns/

3 Nirav Shastri, “5 Mobile Payment Security Concerns to Consider,” PaymentsJournal, August 19, 2019, https://www.paymentsjournal.com/5-mobile-payment-security-concerns-to-consider/

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