A green light has been given to shake the insurance sector. In the UK, the Financial Conduct Authority (FCA) has indicated that the regulatory framework should accommodate innovation in financial services and Lloyd’s Vision 2025 states as one of its goals: “Lloyd’s will build on its leading edge capability and reputation for innovation in the global insurance industry”. We discuss several welcome initiatives that aim to deliver change in 2016 and how this will benefit the insurance sector.
In the UK, the Financial Conduct Authority (FCA) has indicated that the regulatory framework should accommodate innovation in financial services. We discuss several welcome initiatives that aim to deliver change in 2016 and how this will benefit the insurance sector.
Green lights from the regulator
The FCA is, with increasing frequency, delivering initiatives to better enable innovation, and the net effect of these is an encouraging green light to the international Fintech sector. In some cases the initiative itself represents an innovative way in which the FCA uses its own resources (for example, its idea of a “regulatory sandbox” – see below), while other initiatives invite the industry to provide input as to which rules and polices they think apply a disproportionate brake to innovation. In some cases the FCA provides its own thought leadership, as with its recent draft guidance on cloud-related outsourcing (GC 15/6). The FCAhas published a number of useful papers and statements on innovation, see, for example,Tracey McDermott’s recent speech to the Association of British Insurers (3 November 2015), that highlight how close co-operation and collaboration between the regulator and the regulated can yield innovation dividends.
From spring 2016, the FCA’s Project Innovate will expand, using the concept of a regulatory sandbox as “a ‘safe space’ in which businesses can test innovative products, services, business models and delivery mechanisms without immediately incurring all the normal regulatory consequences of pilot activities” (read more detail in our recent blog: The FCA’s regulatory sandbox).
As part of this, the FCA envisages a process of enabling innovators to apply to the FCA to use the sandbox regime. If allowed to use it, firms will agree a basis of testing and reporting to theFCA, within a tailored rule-based regime and with benefits that may include a ‘no enforcement’ promise.
This approach to the regulation of innovative products and delivery methods may well be a feature of future initiatives aimed at the insurance industry, as it looks to respond to and comply with the next wave of measures, such as the Insurance Distribution Directive (IDD, updating and recasting the IMD). Firms have an opportunity to look now at the Sandbox to see whether it offers a useful testing ground for the insurance sector.
See also our commentary on key themes in the Insurance Distribution Directive.
The FCA’s draft Guidance Consultation 15/6 on firms outsourcing to the ‘cloud’ and other third-party IT services gives a clear steer as to the regulator’s view on whether firms should be using the cloud, “We see no fundamental reason why cloud services (including public cloud services) cannot be implemented, with appropriate consideration, in a manner that complies with our rules”.
While this certainly hits a positive note, the FCA’s draft sets out a number of steps it expects firms to takes as part of the necessary outsourcing decision process. Some of the steps are of a practical nature, such as the need for operational and security risk assessments and due diligence on issues such as the supply chain, concentration risk and jurisdictional control. Others are of a governance/legal nature, such as the requirement for a data residence policy, documented business case and contract addressing a range of issues. The menu of steps to go through is extensive but perhaps not unmanageable; the finalised guidance is expected in Q2 2016.
As insurance firms continue to deal with the FCA’s Thematic Review 15/7 on delegated authority the proposed guidance in GC 15/6 gives some further details on the regulator’s expectations around how firms can approach outsourcing decisions. Understanding what arrangements are considered to be outsourcing and carrying out appropriate levels of due diligence and management on these, including oversight of the performance of products and delivery of services, are the foundations of this process. Ensuring that the interests of customers are considered and mitigated when outsourcing is a less obvious finding highlighted in the TR. The TR guidance for service providers is straightforward: if carrying on business under an outsourcing arrangement, ensure you understand the scope of your liabilities and responsibilities.
Competition and efficiency in the insurance sector
Many of the FCA’s initiatives relate to whether or not the market is working efficiently. This can be seen in the FCA’s Call for Input papers: “Big Data in retail general insurance”, the general insurance add-ons thematic review and “Supporting the development and adoption of RegTech”. These papers recognise emerging or necessary trends in terms of market change and seek input with a view to enhancing the regulator’s decision-making on the way ahead.
Consequently, it will be of interest across financial services to see how the FCA approaches its findings on Big Data. Firms need to highlight untapped potential as the FCA explores how Big Data influences decision-making in firms, and whether this has a knock-on for consumers; if Big Data promotes or constrains competition; and whether the regulatory framework shapes the way Big Data is used. Follow-on developments will emerge in 2016. The insurance sector has a chance to set the agenda on this front.
Technological innovation is still transforming the way firms interact with clients and customer expectations of those services as well as back office operations. Technology can illuminate poor value and incentivise competition. The use of data presents opportunities to develop more targeted, more effective products. Of course, these present cyber and data security issues, both as insurer and as potential target. The industry is developing products and services that reflect and address risk from these changes. We also expect to see the Target Operating Model for the London market to realign itself to factor in efficient use of technology, wherever possible.
2016 – The year ahead
Regulatory change will doubtless follow these initiatives and it will be interesting to see how these opportunities develop. Firms in the insurance sector will be playing a key role in accelerating and making use of openings for transformation. As the aims of regulators and firms are aligned (both want industry to contribute to long-term economic growth) hopefully, these regulatory initiatives are designed with that in mind.