Senior managers must prepare for individual accountability
The Prudential Regulation Authority and the Financial Conduct Authority (FCA) will implement the Senior Managers and Certification Regime (SM&CR) for insurers on 10 December 2018 and all FCA-authorised firms will be subject to the SM&CR from 9 December 2019. Key to the SM&CR is individual accountability – the principle that any failing on the part of a firm should lead back to an individual who can be held to account by the regulator.
The SM&CR also puts the onus on the firm to identify and certify those people whose roles might involve a risk of significant harm to the firm or any of its customers, and to provide training to virtually all staff on the application of the conduct rules.
While insurers have already had to implement the Senior Insurance Managers Regime, brokers will find the SM&CR requires a significant step-change in the regulator’s approach to governance and accountability.
The regulators will inevitably want to demonstrate that the SM&CR can hold individuals to account in a way that the current approved persons regime conspicuously failed to do after the financial crisis. It is therefore only a matter of time before a senior manager at an insurer or broker is held personally accountable for a failure on their watch.
Data protection developments will increase ongoing compliance costs and subject access requests
The General Data Protection Regulation (GDPR) came into effect in all EU member states on 25 May 2018 and in the UK the Data Protection Act 1998 has been replaced by the 2018 Act. While many insurers and brokers will have spent considerable time and effort in ensuring they comply with the new regime, they should also have in mind the enhanced ongoing costs that the new regime will bring. This is partly a result of the regime itself (which brings, for example, a right of erasure, compulsory notification of breaches and the potential for significantly higher fines), but also reflects a heightened public awareness of a data subject’s rights and the risks that come with poor data security.
As a result, we expect all businesses, including insurers and brokers, to experience more subject access requests and challenges to the way they collect and process personal data. As well as ensuring that they comply with the law, insurers and brokers also need to think about trust: are they using personal data in a way that data subjects would expect and that has been clearly explained to them?
The use of blockchain will gather pace
InsurTech is a label that covers a diverse range of technologies, but among those with the greatest potential to drive greater efficiencies and reduce cost is the use of distributed ledger technologies (blockchain) in insurance. A key benefit of blockchain is the removal of duplicative and inefficient data gathering and processing, leading to both faster and more accurate outputs.
One initiative that is leading the way in developing common standards and approaches in the insurance sector is B3i. In March 2018, B3i started work on a property catastrophe excess of loss smart contract, by way of a proof of concept of the common standards that it is developing. The application both allows a risk to be placed and claims to be settled through the B3i platform, and is able to reduce to a matter of days processes that currently take weeks.
Given that B3i has the backing of leading insurers and reinsurers, we expect that it will provide a platform to demonstrate the efficiencies that blockchain can bring and accelerate their adoption into mainstream insurance underwriting and settlement.
Sector shake-up brings regulatory and reputational challenges
The current wave of consolidation is set to continue, both among risk carriers and intermediaries. There are many drivers at work: brand globalisation; a focus on core activities; capital efficiency; innovation; and, sometimes, opportunism pure and simple. Private equity will remain an active player and, among intermediaries, its ‘buy and build’ strategy, along with regulatory pressures and the ability to drive synergies through merger, will remain a powerful force.
As the industry continues its march into the digital space, expect more InsurTech M&A deals, both offensive and defensive. New entrants, some based outside the UK, will also be a significant factor as the market re-structures and some will bring challenges, both regulatory and reputational. The collapse of an un-rated Danish insurer – Alpha – leaving over 11,000 private hire drivers without cover provided a sharp reminder of the potential dangers that can lurk in such a fluid market.