KYC for Insurance Companies & How to Achieve Transparency

In 2024, financial institutions, including insurance companies, are forced to regulate a complex regulatory landscape and deal with potential fraud and money laundering, with fraudulent activities enhanced by AI, like deepfakes.

KYC is crucial for insurance companies to prevent fraud and ensure compliance. This article explains the meaning and importance of KYC in insurance, the use cases in different insurance branches, the technologies and regulations involved in KYC, and what to expect in the future.

KYC in insurance explained: its purpose & how it works

Know Your Customer (KYC) is the process of verifying the identity, address, and other relevant customer data to detect and prevent fraud before offering insurance coverage.

Aside from the primary goal of preventing fraud, KYC for insurance companies also helps to:

• Comply with regulations
• Prevent anti-money laundering and terrorism financing.
• Manage risks
• Build trust
• Enhance security

This is how KYC for insurance companies works in the most general sense:

• Step 1. Customer identification: When new clients apply for an insurance policy, they must provide valid identification documents. These may include government-issued IDs such as a passport, driver's license, or national ID card.
• Step 2. Customer Due Diligence (CDD): Insurers assess the risk level of potential clients based on the information provided. This includes checking their financial history, the nature of employment, and the origin of funds. For higher-risk customers, enhanced due diligence (EDD) is conducted.
• Step 3. Continuous monitoring: KYC is not a one-time verification process but a continuous activity. Insurance companies monitor their clients' transactions and behavior patterns to ensure no deviation from the norm that might suggest illicit activities.
• Step 4. Keeping information up-to-date: Insurance providers periodically update customer information. Customers may be asked to update their KYC details following significant changes in their life circumstances or regulatory requirements.

9 use cases of KYC in insurance

Know Your Customer (KYC) penetrates all aspects of the insurance business and is helpful for almost everything. Let's look at what KYC brings to the table in general and for specific branches of the insurance industry, like health insurance, car insurance, etc.

1. Fraud prevention and detection

KYC helps insurance companies prevent and detect fraudulent activities by verifying the identity of new and existing customers. Insurers can deter impersonation and other identity-related fraud by requiring documentary proof of identity and address. The information about customers is checked using references and behavior-based data. This reduces the risk of paying out claims based on deceptive practices.

Preventing fraud is the key aspect of KYC for insurance companies because fraudulent activities result in billions of dollars of losses for insurance companies every year.

2. Anti-money laundering (AML) compliance

Insurance companies are often used as a medium for money laundering activities. While money laundering is related to fraud, it is essentially its own beast with a separate regulatory landscape. AML compliance is a big factor for life insurance, where fraudulent activities happen very often.

KYC enables insurers to identify potentially risky customers, understand their financial dealing patterns, and monitor transactions for unusual or suspicious activities in compliance with AML regulations.

3. Tailored product offerings

Through KYC, insurers gain valuable insights into customers' backgrounds, financial status, and risk profiles. This information allows companies to tailor their insurance products and offerings to meet their clients' needs and capacities.

4. Enhanced customer service

Effective KYC processes equip insurers with a comprehensive profile of their customers, which can be used to enhance service delivery. Knowing the customer better enables more personalized communication, faster dispute resolution, and more targeted product recommendations.

The KYC apps for insurance companies have user-friendly UX, which makes interacting with these services much more comfortable. Plus, all checks are performed fast, which is a key to customer satisfaction.

5. Regulatory compliance

Regulators worldwide impose strict KYC requirements to ensure transparency in financial transactions and to combat financial crimes. Insurance companies must adhere to these regulations to avoid legal penalties, including heavy fines and sanctions. KYC processes help ensure that companies remain compliant with these regulatory mandates.

6. Risk management

By conducting thorough KYC checks, insurers can better assess and manage the risks associated with underwriting policies. Understanding the customer's financial health and history helps set premiums more accurately and mitigate potential losses.

As a part of Know Your Customer for insurance, companies establish a scoring system that determines the risks for each customer based on their behavior patterns. The score puts the clients into different AML-risk classes. As a result of this system, high-risk customers undergo enhanced due diligence processes. For example, they may go through more frequent KYC checks.

7. Operational efficiency

Digitized KYC processes help streamline customer onboarding and policy renewal procedures, making them faster and more efficient. Automated KYC solutions reduce the workforce needed for manual checks and minimize the likelihood of human error. Professionals performing manual checks may instead focus on more comprehensive tasks.

8. Reputation management

Insurance companies that effectively implement KYC processes can protect themselves from being inadvertently involved in criminal activities. This safeguards their reputation and ensures trust in their brand and practices from customers, regulators, and other stakeholders.

9. Reducing policy cancellations

By ensuring that customer profiles are thoroughly vetted and accurate, KYC in insurance can help reduce the rate of policy cancellations. This is due to proper alignment between customer expectations and the insurance services, resulting in higher customer satisfaction and loyalty.

Health insurance

False claims and misuse of services are widespread in health insurance, and KYC in insurance is beneficial in this regard:

• Fraud prevention: Health insurance fraud can involve false claims, such as billing for services not provided. KYC in insurance helps verify the identities of service providers (e.g., doctors, clinics) and policyholders to ensure claims are legitimate. It is effective against all types of fraud common in insurance, such as fake illnesses, identity theft, forgery, and false claims.
• Eligibility verification: KYC processes verify that applicants or claimants meet the eligibility requirements for age, residency, or other criteria that could affect their premiums or coverage scope.
• Ensuring policy accuracy: Accurate personal information is crucial for underwriting policies; KYC checks ensure that health conditions and risk factors are correctly reported and assessed.

Car insurance

With car insurance, knowing your client is all about calculating the risks of incidents. Here's what it can do:

• Ownership verification: KYC helps confirm the identity of the vehicle's legal owner, which is essential for issuing policy. This prevents insuring stolen cars.
• Risk assessment: Insurers use KYC to assess the risk profile of the car owner by checking their driving history, credit score, and past insurance claims, which influence premium calculations.
• Claim authentication: KYC is crucial at the time of a claim to authenticate the claimant's identity and ensure that the claim is legitimate.

Life insurance

KYC's purpose in life insurance is to prevent money laundering and fraud. Here's how it is achieved:

• Financial background checks: KYC in life insurance includes verifying the policyholder's financial status to prevent money laundering activities, which is especially important in high-value policies.
• Beneficiary verification: KYC helps ensure that beneficiaries listed on the policy are legitimate and accurately identified to prevent fraud upon the policyholder’s death.

Property insurance

KYC helps insurance companies assess property risks and damage accurately.

• Property verification: KYC processes help verify the legal status of the insured property, including ownership and property details.
• Risk management: Accurate data via KYC in insurance assists in assessing the property's environmental and other physical risks, which impacts coverage terms and premium settings.
• Claims management: KYC ensures that property damage or loss claims are valid and that compensation is only paid to rightful claimants.

Travel insurance

Uncovering travel details is very important for covering specific risks associated with travel destinations.

• Identity verification: Travel insurance often requires immediate and clear verification of the traveler’s identity to facilitate swift medical or logistical support abroad.
• Risk compliance: KYC in insurance helps assess travel destinations that might be high risk and, therefore, require different insurance terms or additional premiums.
• Emergency services: In emergencies, verified KYC information allows insurers to quickly confirm the identity and details of an insured person to provide necessary assistance.

Commercial insurance

For commercial entities, KYC is critical for compliance, maintaining business continuity, and protecting the business’s reputation by avoiding association with fraudulent activities or money laundering.

• Business legitimacy: KYC for commercial entities ensures the business is legally registered and compliant with local regulations.
• Risk profiling: Detailed KYC assessments help understand the business operations, financial stability, and risk exposures.
• Claim verification: KYC helps in the accurate and prompt processing of claims made by businesses, ensuring that payments are made to the correct entities for legitimate reasons.

Understanding the difference: Perpetual KYC (pKYC) vs. traditional KYC

There is traditional and perpetual KYC, depending on how often the information is verified and risk profiles are updated. Let's examine the differences between the two.

Traditional KYC

Traditional Know Your Customer (KYC) is a process where customer identity verification is done at specific points in time, typically at the beginning of a customer relationship (onboarding) and at periodic intervals (e.g., every 1-5 years). This approach can be described as "point-in-time" KYC.

Key characteristics:

• Initial verification: Carried out when a new account is opened or a new client relationship is established.
• Periodic reviews: Regularly scheduled reviews occur, often based on regulatory requirements or internal policies. The shortest interval for a periodic review is 1-2 years.
• Static checks: Once verification is completed, further action is taken only after the next scheduled review unless a significant event triggers a reassessment.

Limitations:

• Outdated information: Due to the infrequent updates, information may become outdated.
• Resource intensive: Scheduled deep dives into customer data can be resource-intensive and disrupt customer relations. The reviews are not fully automated and require a lot of manual effort.
• Reactive approach: Primarily reactive; problems are often identified after they have become significant.
  

Perpetual KYC (pKYC)

Perpetual KYC is a more dynamic and continuous approach to customer due diligence. It is based on the principle of Customer Due Diligence (CDD). Instead of relying on periodic updates, pKYC involves continuous monitoring and real-time data updates. This approach aims to maintain always-current customer profiles and risk assessments. In this way, pKYC is known to reduce fraud.

Key Characteristics:

• Continuous monitoring: Ongoing surveillance of customer activities and data to immediately identify any changes or suspicious patterns.
• Real-time data updates: The system integrates new information as it becomes available, including changes in financial status, public records (such as criminal records), and transaction behaviors. It also gives alerts when changes are detected.
• Dynamic risk profiling: Risk profiles are dynamically updated.
• Automatic identity verification: All verification processes are automated using AI and ML , and procedures like manual reviews are minimal.

Advantages:

• Timeliness: Information is continually refreshed, which means the data is more likely to be current and reflective of any changes.
• Proactive risk management: Allows companies to respond proactively to potential risks as they arise rather than during scheduled reviews.
• Efficiency: Reduces the need for large-scale, periodic KYC updates, which can be costly and inefficient.

Technologies behind KYC in insurance

KYC for insurance companies effectively incorporates all the newest technologies used in business. Read on to know how.

AI and ML

• Automated document verification: AI-driven optical character recognition (OCR) technology can quickly and accurately extract data from documents such as passports and driver's licenses.
• Risk profiling and predictive analytics: ML algorithms analyze vast amounts of data to identify patterns that might indicate risk, such as potential fraud or money laundering.
• Fraud detection: Advanced ML models detect unusual patterns that deviate from normal behavior.
• Chatbots and virtual assistants: AI-powered chatbots provide 24/7 customer service .

Blockchain technology

• Decentralized identity verification: Blockchain allows for the secure and immutable storage of KYC data.
• Smart contracts: Based on verified KYC data, smart contracts automate many insurance processes, such as claim processing and premium calculations.
• Enhanced data security: With blockchain, the encryption and decentralization of data reduce the risks of data breaches.

Big data analytics

• Customer insights and behavior analysis: Big data analytics help understand customer behaviors and preferences by analyzing large data sets from various sources, including social media, transaction records, etc.
• Enhanced underwriting processes: With big data , insurers can process numerous data points about individuals, including financial history, lifestyle, health records, etc., to assess risks more accurately and set premiums.
• Regulatory compliance monitoring: Big data tools can monitor and analyze transactions across vast data points to ensure compliance with regulatory requirements and standards.

Biometric technology

• Biometric verification includes fingerprint scanning, facial recognition, and iris scanning to authenticate identities during the KYC process. Biometrics provide high security and convenience and reduce the possibility of identity fraud.
• Continuous authentication: In some advanced systems, biometric checkpoints are used for constant identity verification over the policy's lifecycle. This way, access to sensitive personal and financial information is continuously secured.

Cloud computing

• Data storage and accessibility: Cloud platforms offer scalable and flexible data storage solutions for KYC data. They enable seamless data integration and real-time access, which is crucial for the dynamic nature of KYC in insurance.
• Cost-effective infrastructure: Cloud computing provides a cost-effective alternative to traditional IT infrastructure, reducing the overhead costs associated with data storage and processing.
• Collaborative platforms: Cloud services facilitate collaboration among stakeholders (insurers, regulators, third-party service providers) to streamline the KYC process.

RegTech (Regulatory Technology)

• Compliance automation: RegTech solutions use AI, ML, and big data together to automate and streamline compliance processes. This includes tracking changes in regulatory frameworks and ensuring that KYC procedures are always up to date.
• Reporting and auditing: These solutions enhance the ability to generate real-time reports and conduct audits efficiently, facilitating better oversight and adherence to regulatory requirements.

Benefits and challenges of utilizing technology in KYC

Embracing cutting-edge technologies in insurance is inevitable in today's digital landscape. However, this integration comes with risks that businesses should carefully consider before investing in KYC. Let's explore both the pros and cons of integrating technologies with KYC for insurance companies:

Benefits of utilizing technology in KYC

• Enhanced efficiency: Automation and AI reduce the time required for data processing and verification. This accelerates customer onboarding and policy issuance.

• Improved accuracy: AI, machine learning, and optical character recognition (OCR) improve document data extraction accuracy, reducing human errors and enhancing overall data integrity.

• Cost reduction: Technology can significantly lower operational costs associated with manual KYC processes by automating routine tasks. These include labor costs and expenses related to errors and rework.

• Better compliance: Advanced analytics and continuous monitoring help companies comply with regulatory changes. RegTech can automate compliance updates and audits, reducing the risk of non-compliance penalties.

• Enhanced security: Blockchain technology offers a secure platform for data management with its decentralized and tamper-proof ledger. This helps enhance the security of personal and financial data.

• Scalability: Cloud computing provides scalable data storage and processing solutions, which can grow with the business without significant upfront investment in physical infrastructure.

• Proactive risk management: Continuous monitoring and real-time data analytics help detect potential risks or fraudulent activities early, allowing for more proactive risk management.

Challenges of utilizing technology in KYC

• High false positive rates: Advanced screening tools, especially AI ones, often flag legitimate activities as suspicious (false positives), leading to unnecessary investigations and customer inconvenience. This requires a delicate balance between sensitivity and specificity in algorithm design. Human oversights and tuning in algorithms are essential.

• Deepfakes and synthetic identity fraud: The rise of AI-generated deepfakes poses a new challenge in identity verification. These sophisticated forgeries can be used to create fake ID documents or manipulate facial recognition systems, complicating the verification process. Deepfakes that hinder KYC from achieving transparency in insurance can potentially be addressed by new, improved technologies, such as advanced biometric identification.

• Dependency on technology: Heavy reliance on technology could lead to vulnerabilities, especially if there are outages or cyber-attacks. Continuous technical support and robust cybersecurity measures are essential to mitigate these risks.

• Integration issues: Integrating new technologies with existing systems can be complex and costly. There can be compatibility issues, and significant resources might be required for system upgrades and staff training.

• Regulatory challenges: Ensuring all technological innovations comply with existing and new regulatory requirements can be challenging. Regulatory landscapes vary by jurisdiction and can change frequently, requiring constant monitoring and adjustments.

• Cost of implementation: While technology can reduce costs in the long term, the initial investment in advanced technologies like AI, blockchain, and cloud computing can be significant, particularly for small to medium-sized enterprises.

• Bias in algorithms: AI and ML models may inadvertently learn biases in the training data, leading to skewed risk profiling and decision-making outcomes.

KYC regulations for insurance

In the most general sense, KYC regulations for insurance involve the provision of specific documents required for KYC in insurance, such as:

1. Proof of identity

• Passport: Universally accepted as proof of identity and nationality.
• Driver's license: Includes a photograph and can also serve as proof of address if it includes the current address.
• National identity card: Used in many countries as an official document that certifies an individual's identity.
• Birth certificate: Often required for minors or in situations where other photo IDs are unavailable.
• Other government-issued ID cards: Voter IDs, which include a photograph and other identifying information.

2. Proof of address

• Utility bills: These are electricity, water, or gas bills, usually not older than 3-6 months.
• Bank statements: Reflecting the account holder's address, typically within a recent period.
• Lease agreement or property tax receipt: Official documents that prove residence at a given address.
• Government correspondence: Any official government documentation that includes the individual's address.

3. Proof of occupation

• Employment contract: A signed agreement between the employee and employer detailing the terms of employment.
• Recent pay slips: Pay slips from the last three months are usually required to confirm current employment and income level.
• Employment verification letter: A letter from the employer that confirms the employment status, job title, salary, and duration of employment.
• Tax returns: This is especially relevant in countries where income tax is filed annually, showing income from employment.
• Company ID card: Issued by the employer, showing the employee's name and sometimes the position.
• Bank statements: To demonstrate financial history and capability.
• Business registration documents, including certificates of incorporation, business licenses, or registration with government bodies.
• Tax returns: Business tax returns can confirm the existence and operations of a business.
• Partnership agreements: For businesses owned by more than one individual, documents showing the terms of the partnership.
• Articles of incorporation: For corporations, these documents detail the business structure, ownership, and compliance with local business laws.
• Company bank statements: Reflecting business transactions that can also serve as proof of active business operations.

Legal regulations for KYC in insurance

Know Your Customer requirements for insurance companies involve a complex regulatory landscape. KYC is mandatory for all financial institutions, but other industries also adopt it. Here are the elements of the regulatory landscape in different countries:

• In the USA, The USA PATRIOT Act and requirements set by the Financial Crimes Enforcement Network (FinCEN) include specific mandates for insurance companies, especially those offering life insurance and other investment-related insurance products, to implement anti-money laundering (AML) programs. Other noteworthy acts of legislation are the Bank Secrecy Act (BSA) and Customer Identification Program (CIP) rules.
• In the European Union, The EU’s Fourth and Fifth Anti-Money Laundering Directives (AMLD 4 & 5) have expanded the scope of KYC checks to encompass a broader range of offenses and require more detailed records and transparency. The 6th EU Money Laundering Directive (6AMLD) expands the scope of money laundering crimes and violations that qualify as money laundering.
• Following Brexit, the UK continues to enforce stringent AML regulations influenced by previous EU directives and adaptations to suit its policies. The Financial Conduct Authority (FCA) plays a significant role in monitoring and enforcement. Know Your Customer (KYC) regulations must also correspond with the UK Bribery Act and the UK Modern Slavery Act. And Money Laundering Regulations (MLR) and the Proceeds of Crime Act (POCA) require financial institutions to conduct CDD and establish risk-based KYC policies and procedures.
• Countries like Singapore and Hong Kong enforce strict KYC requirements governed by their monetary authorities, which are critical financial hubs with extensive regulatory frameworks.
• Global regulations include adhering to the policies of The Financial Action Task Force (FATF), an intergovernmental organization tasked with combating money laundering.

Things to consider in 2024

All in all, the importance of KYC in insurance is unparalleled. Knowing your customer for insurance is crucial for preventing fraud and money laundering, maintaining the financial institution's reputation, and ensuring compliance.

The landscape of KYC practices and regulations is very dynamic. In 2024, the business working with KYC for transparency in insurance should watch out for current trends , including:

• Advancements in ML/AI algorithms
• Know Your Customer (KYC) is emerging as a competitive advantage in the insurance business
• New regulations affecting KYC practices. Some of the things to expect are new deepfake regulations, the EU AI Act, and upcoming regulations of the crypto industry across countries.
• Document-free verification adoption
• Growing mainstream use of technologies like biometrics and blockchain

Binariks: Tailored insurance solutions for your business needs

Adopting Know Your Customer for insurance requires specific software development and regulatory compliance expertise. At Binariks, we have extensive experience in developing KYC solutions. Here's what we can help you with:

• Custom software development
• Integrating technologies like blockchain and AI/ML
• Ensuring data reliability and security
• Ensuring regulatory compliance
• Customer onboarding
• Monitoring and support

Contact us now to explore how partnering with Binariks can elevate your KYC processes and enhance your customer onboarding experience.