The insurance industry is relatively more focused on developing products and serving clients than further developing its compliance framework, according to Priscilla Cournède, head of group prudential and regulatory developments at SCOR.
Digitalisation of the insurance space has been seen as a laggard compared to other areas of the FinTech space, such as payments or banking. However, last year the total funding into InsurTech startups hit $3.1bn, almost doubling the level of investing in 2017, which saw $1.3bn deployed, according to data from RegTech Analyst. While the technology has received a lot of attention, companies addressing insurance-focused regulations have not always received as much attention. There has been $6.2bn invested into the RegTech sector since 2018, of this, only $115m has been given to companies building Solvency II solutions, representing only 1.9 per cent.
Priscilla Cournède said, “Solvency 2 led to a quite positive evolution of the insurance space by spreading a risk-based approach. It let insurance companies to analyse their portfolio in depth and strengthen their governance. However, now, the industry would rather focus on developing products and serving clients than developing further its compliance framework.”
The EU regulation Solvency II came into effect back in 2016 across all 28 member states and introduced a consistent EU-wide insurance regulatory regime, replacing 14 independent directives. The main goals of the new legislation were to improve protections on consumers, modernised supervisory review processes, increased competition among EU insurers and improved market integrations.
While the regulation has been implemented for three years, there are still insurance firms falling foul of compliance. Most recently, Swedish pension provider Avanza Pension was reportedly fined around €3.3m by the country’s Financial Supervisory Authority for not meeting the necessary solvency ratio standards. This came just months after the Central Bank of Ireland allegedly fined global insurance firm Partner Re Ireland and its sister company Partner Reinsurance Europe €1.5m for breaching internal reporting and internal control rules of the regulation.
The regulation is set for a review next year and the European Insurance and Occupational Pensions Authority ha called for a review over reporting and disclosure requirements and if they allow for a risk-based and proportionate approach.
While there are still a lot ironing out to be done with the Solvency II regulation, it is IFRS17 which Priscilla Cournède sees as the biggest regulatory burden facing insurance at the moment. The reason is because it impacts all areas of the business and goes beyond just accounting, actuarial and IT. The regulation is set to establish the recognition, measurement, presentation and disclosure of insurance contracts. Some of the big changes from the legislation include the way entities recognise and measure groups of insurance contracts, how profits and losses are recognised, the separation of embedded derivatives, distinct investments, and performance obligations, and how information is disclosed to users of financial statements, among many others.
There are a handful of RegTech companies developing solutions to help insurance firms with their IFRS 17 requirements. However, compared to other regulations, such as GDPR, AML or even Solvency II, relatively little capital has been invested into the space. This lack of funding could be due to the distance left until the final deadline date, which is still three years off. One of the companies which is in the market is regulatory reporting and risk management startup AxiomSL, which recently launched a new dedicated solution for the regulation. The tool helps automate processes and offers data management, reconciliation, flexibility and traceability capabilities, as well as lowering the Total Cost of Ownership (TCO) and operational risks as well as ensuring quick time to market.
As with most of the new regulatory developments, firms are looking to new technology solutions to aid their compliance burdens.
“Technology can help for the transformation related to data, process and systems: to enhance data quality, to adjust our systems to new data flows, increased granularity and new reporting requirements, to adapt our internal control framework.”
IFRS 17 is set to go into effect for annual reporting periods beginning on 1 January 2022, after the implementation date was moved back a year to ensure enough time is given and necessary changes were made. Following this setback, Cournède believes that the industry will be ready for the final deadline day.
“The delay was necessary because of the lack of maturity and inadequacy of the standard, as evidenced on the ground by some authorities like EFRAG, on many topics such as acquisition costs for costs incurred in expectation of contract renewals, reinsurance, transition in applying fairer value approach, balance sheet presentation.”
SCOR, which is a French tier 1 reinsurance company, overcomes the regulatory hurdle by monitoring the space and any changes in legislation as early as possible. She said that the firm has a focus on the ‘alignment of sound regulatory requirements across jurisdictions.’ In order to achieve this, SCOR actively engages with various regulators, typically though its active participation in insurance and reinsurance federations across all jurisdictions it has significant business. Through this, the reinsurance firm is able to have its say on the main operations, she said.
“When a regulation is enacted, SCOR ensures there is a constant dialogue with its supervisors. This was the case for example with the implementation of Solvency 2. The process for the approval of SCOR’s internal model started a few years before the entry into force of Solvency 2, with an in-depth review of all parts of the model by our relevant supervisors until they become familiar enough with it that they can approve it. It was really key that they gain and maintain a proper understanding or our model as it is a central piece in our decision-making and risk management. Thanks to this on-going dialogue, they are in a better position to understand our business and our way to run it, and therefore to supervise us most appropriately.”
There is an unprecedented wave of regulations hitting the entire financial market, with many regulators looking at how to best address new technologies like blockchain, AI and cryptos, among many others. Cournède does see this as a potential challenge for insurance companies which are looking at utilising these technologies. Tools based on new technology for easing underwriting, improving client experiences, accelerating claims processes, the development of new products and the sales management could be hindered by emerging regulations like those around connected devices in France.
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