REG Reviews
REG Reviews – November 2022
1st November 2022
REG Reviews
1st November 2022
Last month, we saw a crackdown on money laundering and illegitimate business, experienced a move towards more advanced artificial intelligence, and prepared for growth within the cyber insurance market!
Read these articles and many more, along with our usual updates from REG and the insurance sector.
On the 11th of October, the BoE published the second of its surveys focusing of machine learning in financial services. It was stated “the largest expected increase in absolute terms is the insurance sector, followed by banking,”.
In the next 3 years, the overall median number of machine learning applications within UK financial firms is set to grow by 3.5 times.
Additionally, the insurance sector will see a 163% increase in the median number of applications over the next three years, which will make it equal with the Banking sector on machine learning adoption
The survey, which looked at 168 insurance firms, revealed that the insurance sector is leading the marketing in machine learning on the cloud, with 74% of applications with firms being run on cloud-computing platforms. This is compared to 39% of firms in the investments and capital sectors and 10% in banking
BoE reported in its survey that 100% of insurance firms have a strategy around applications for machine learning, including applications for development, deployment and monitoring. They also reported that insurance pricing and underwriting are leading the move to machine learning.
The BoE stated that it has “close interest in the safe and responsible adoption of AI in financial services”.
Another survey is being planned along with the FCA and the PRA, where insurance firms can report on AI and its potential effect on the objectives of the UK’s regulators. The deadline for the consultation is February 10th 2023.
When the Economic Crime and Corporate Transparency Bill was presented to Parliament, it was proposed that the powers currently held by the Companies House, a government agency that registers information about companies, would be increased in order to prevent illegitimate businesses.
Campaigners suggested that Companies House should be supplied with sufficient resources to tackle wrongdoing and stated this bill was “long overdue”.
The move to tackle money laundering was prompted by Russia’s invasion of Ukraine, as the Government moved forwards with plans to prevent the hiding of dirty money by wealthy individuals such as Russian oligarchs.
The Department for Business, Energy and Industrial Strategy stated that it would allow the government to “crack down on kleptocrats, criminals and terrorists who abuse our open economy”, when presenting the plans in May 2022
The bill plans to enforce anyone wanting to set up, run, own, or control a company to first have their identity verified by the Companies House. The bill will also allow them to “challenge information that looks dubious and inform security agencies of potential wrongdoing”.
Transparency International UK, an anti-corruption group, reported 89 cases of corruption and money laundering involving 929 UK companies between 2000 and October 2019. This amounts to £137bn in economic damage.
The director of policy at Transparency International UK, Duncan Hames stated that “over the years, lax controls on company incorporation has seen thousands of UK firms and partnerships being used to launder the proceeds of corruption – hundreds of billions of pounds lost all around the world.
“Verifying the identities of those that own and direct companies and the professionals providing these services will help to make it harder for criminals to use and abuse UK businesses, but the effective implementation of these measures remains critical to their eventual success.”
This bill follows another Economic Crime bill that was prompted by the invasion of Ukraine and was fast-tracked in March through Parliament.
It had been discussed for several years due to worries that the City of London was being used as a channel for dirty money. The bill enforced foreign owners of UK Companies to register and allowed the process of placing sanctions to individuals to be simpler.
Global Insurance Law Connect (GILC) has suggested that Cyber Insurance is expected to be more ubiquitous as public liability or professional indemnity coverage in their recent Cyber Insurance report. This is undoubtedly due to the rising global threat of cyber attacks.
The Cyber Insurance report, which looked at domestic cyber insurance markets across 19 countries, discussed the growth of the market due to the rise in demand. Despite this, there is also an increase in caution from insurers about what risks they are willing to insure due to the growing severity of cyber-attacks.
The Leader of GILC’s Cyber Special Interest group and a partner at BTG Legal, Giorgio Grasso stated, “The cyber market is incredibly dynamic at the moment, and what jumps out from this report is that while individual markets face similar challenges, the international response has been very diverse”.
“Globally there is much higher demand for cover, at the same time as more sophisticated, expensive attacks are becoming more common”, Grasso added. “Rules on data protection are changing all the time, vary from country to country, and have inevitably impacted insurers’ assessment of the risk of providing cover. In less mature markets, we also found that there is work to be done on educating companies about the risks they face and the steps they can take to mitigate that”.
Grasso went on to comment “The world will only continue to digitalise, and so cyber insurance will only become more prevalent and more important.”
“As we conclude in the report, it has the potential to become as ubiquitous as public liability or professional indemnity insurance,” he said.
This month the REG Technologies office underwent an “evolutionary” makeover. To portray evolution, the REG office now features an exploratory exhibition, displaying 10 events that made significant impact to mankind.
As a technology company, evolution is fundamental to continue serving the market in an innovative way, and at REG we are keen to appreciate society’s evolvement over the decades.
The 10 events chosen were:
At the annual Tesla Artificial Intelligence Day presentation, Elon Musk revealed Optimus, the latest prototype of a humanoid robot.
Although the robot was a ‘work-in-progress’, it is being developed by Musk’s Tesla electric car company and could be available to the public within three to five years. Optimus would be mass produced and cost under $20,000.
During the Silicon Valley event Optimus was wheeled on stage and proceeded to wave at the audience and move its legs.
The audience then watched a video of the robot performing tasks, including carrying boxes, picking up metal bars and watering plants.
The tech billionaire described ‘a future of abundance’ and stated, “It really is a fundamental transformation of civilisation as we know it,”
Tesla has been advised by investors and finance analysts, who are sceptical of the change in direction towards robotics, to focus on the businesses’ key products such as electric cars.
Elon Musk who once labelled artificial intelligence a threat to humanity, now aims to find a solution to making machines that can replace humans, which is considered one of the toughest barriers to artificial intelligence
Tesla has the goal of a safe and beneficial transition to the use of robots working within society and the CEO referred to the blockbuster film about killer robots when stating “We always want to be careful we don’t go down the Terminator path.”
Musk suggested that the humanoid robot would be built with safeguards, such as, a stop button that did not allow tampering. He went on to suggest that whether Tesla was socially responsible would be decided by its shareholders.
The Financial Conduct Authority set goals of responding to at least 85% of individuals wanting to work in a customer function with 5 days.
Additionally, it aimed to approve 85% of requests from individuals who want to work in significant influence functions with customers, which has significant impact on those in FCA-related activities who supervise staff behaviour.
Data that was measured from April to September was released by the FCA on the 10th of October, the data presented that within the target timeframes the FCA had only a 41.3% approval rate.
Although this rate shows improvement since the 2020/21 financial year of 10.3% approval rate, the lack of application approvals leads to the majority of people who apply being held up and unable to carry out customer work.
FCA approval for change of controls, regulatory paperwork that needs to be signed-off when new owners takeover a firm, has also suffered a decline.
Although the target for proposed changes of control is 100%, the FCA’s approval rate within 60 days is 88.3%. This is compared to a 98.9% approval rate in the 2021/2022 financial year.
To support the improvement of applications times the FCA hired additional senior directors, a finance director and 95 other employees. These hires were part of a plan to provide a more robust and efficient authorisation process for financial and business model of firms that want to operate in the regulated financial markets.
There are also some signs of improvement, the figure for approving appointed representatives within five days has almost doubled in the last year to reach 87.3, however the target is still out of reach at 95%.
The health and care software supplier Advance has released a summary of the cyber incident in August 2022, which 12 mental health trusts unable to access key patient medical records for over two months.
Advanced reported the that the attack was financially motivated and stated that “they were able to temporarily obtain a limited amount of information from our environment pertaining to approximately 16 of our Staffplan and Caresys customers”.
A variant of Malware, LockBit 3.0, was used by the perpetrators and Advanced reported the initial stage of the attack where the perpetrators “accessed the Advanced network using legitimate third-party credentials to establish a remote desktop (RDP) session to the Staffplan Citrix server.”
“During the initial logon session, the attacker moved laterally in Advanced’s Health and Care environment and escalated privileges, enabling them to conduct reconnaissance, and deploy encryption malware. Immediately prior to encrypting systems, the threat actor copied and exfiltrated a limited amount of data.”
When Advanced detected suspicious cyber activity, the “security team promptly disconnected the entire Health and Care environment to contain the threat and limit encryption to a small number of systems. However, by taking this action, our customers lost access to Health and Care platforms, as well as a limited number of non-health and care environments and services, such as eFinancials.”
In the recovery section of the summary, Advanced reported “Although we were equipped and able to completely rebuild certain health and care products by the Monday following the incident, we were required to satisfy an assurance process set forth by our partners at the NCSC [National Cyber Security Centre], NHS, and NHS Digital.”
Furthermore, Advanced stated “Our Health and Care and environments beyond Adastra and 111 will also require additional compliance checks, scanning, and going through the same assurance processes. This is time consuming and resource intensive and it continues to contribute to our recovery timeline. As we work through scanning and clearing systems, we are in parallel continuing to assess and/or develop recovery plans for remaining impacted products.”
Amazon is set to enter the home and contents insurance market with its launch of a price comparison service. It has partnered with Ageas, LV and Co-op, but aims to add more insurers to the service in early 2023.
The tech giants move to the insurance market has been discussed since 2017, when it started to advertise insurance jobs. By 2018, its was reported that Amazon had its sights set on the home insurance market and a price comparison site was being considered
The Amazon Insurance Store offers a “simple and convenient way for UK customers to shop for home insurance”.
The comparison site was launched to a select group of customers on October 19th but will be available on its website and app by the end of 2022.
The Amazon Standard of Cover “includes protection for some of the most common home insurance claims” and will come with all policies on the Amazon Insurance Store.
Amazon stated that their standard of cover “gives homeowners and renters additional confidence when purchasing a policy as it makes it easier to compare like-for-like quotes, review cover inclusions and exclusions, and then add to their policy if needed”.
Customers will be able to log onto their account and fill out a questionnaire which will allow them to compare quotes and personalise policies to suit their needs.
Amazon suggests that the quotes will update in real time as policies are added to and these can then be compared to different insurers policies.
Customers can then view their policy post purchase online or on the app and can change their payment method and view renewal information.
Amazon have also discussed features such as customers reviews, star ratings and claims acceptance rates as more customers purchase policies. This would allow customer more information while making purchasing decisions.
The general manager of of Amazon’s European Payment Products, Jonathon Feifs said “Shopping online for home insurance is a well-established experience, and our goal is to exceed customers’ expectations when it comes to the Amazon Insurance Store”.
“This initial launch is just the beginning – we’ll continue to innovate and make refinements, all with the aim of delighting customers and providing the most convenient shopping experience possible.”
“Finding the right home insurance policy can be a time-consuming and confusing task, with quotes that often leave out essential coverage in order to lead with the lowest price”, Feifs added.
“When we set out to create the Amazon Insurance Store, we wanted to improve the experience for customers shopping for home insurance so they could easily compare options and make an informed, objective decision – just like shopping on Amazon.”
With only products that are seen as ‘poor value’ being reviewed by the FCA, insurance trade bodies are seeking to reduce the number of products that are considered in the FCA’s assessment remit.
During an online meeting on October 18th between the FCA and trade bodies such as the British Brokers Association and The Managing General Agent’s Association, a request to cut down scope of products was discussed.
Mike Keating, the MGAA CEO, commented: “The question was posed: why is the market being asked to deliver these fair value assessments which are enormously time consuming, absolutely crippling for some smaller distributors?
“It’s to the extent that they may pull, or withdraw, certain products lines to customers because of the regulatory burden and the cost attached to that.”
The trade bodies plan to make recommendations in future meetings on how the FCA may reduce the number of products under review.
“The scope should be narrowed, and it should be driven by something evidence based, where there is poor value in product and product covenants”, stated Keating.
“Let’s address the real cause of these issues very forensically and not necessarily create a completely separate cottage industry on fair value assessment attestation, where evidence suggests there isn’t a problem that existed.”
Keating supported the decision to engage with all the different trade bodies made by Matt Brewis, the general insurance director at the FCA.
Graeme Trudgill, the executive director at Biba stated: “It was a constructive meeting; we were able to spell out our members’ concerns and discuss the key issues of process and scope.
“We welcome that the FCA were in listening mode and are prepared to consider our points and suggestions, which we will be following up with them over the coming weeks.”
With many brokers raising concern over not being able to get information from some manufacturers, the meeting of the 18th was very important.
Under specific circumstances, brokers had been given a three-month extension until January 2023 for product governance and fair value assessment. The original deadline was the 30th of September.
In August, one in three insurance manufacturers had left fair value assessment until the last minute, as revealed by the FCA.
A webinar hosted by the director of Implement Compliance Solutions and Resources, Kenneth Underhill, revealed 76% of co-manufacturers and distributors had not received a fair value assessment from manufacturers by the deadline.
The project will focus on raising awareness about growing issues such as cyberattacks and protection against them.
A pilot project that has a projected deadline of the end of March 2023, ahead of the local government reorganisation, has been given £237,000.
£140,000 has been committed by Scarborough Borough Council and Anglo-American Mining are providing additional funding.
The Government Communications Head Quarter (GCHQ) has been developing the idea alongside Scarborough council, Coventry University Scarborough, and Anglo-American Mining.
This project follows reports by the Local Democracy Reporting Service that the frequency of cyber-attacks is increasing and investing in offensive cyber operations can “create new opportunities”.
The aim is that the Cyber Security Cluster Strategy will help provide “new opportunities, products, services and solutions to new and existing business” and develop “new, innovative, and in-demand cyber security skills”.
The FabLab+ facility that has been proposed will have “”a pivotal role in providing a focus for activity in the medium term”.
The pilot project aims to engage 120 individuals and organisations and will raise awareness to cyber security risk and provide training to help increase understanding of career opportunities.
Additionally, it will provide support to small and medium-size business and help them protect themselves and their customers from cyber breaches.
The Government’s plans to unleash billions of pounds of investment by reforming EU Legislation on Solvency II are likely to be undermined due to the economic repercussions of the recent mini budget.
Solvency II was introduced back in 2016 by the EU to harmonise insurance regulation amongst the 28 member states, which required insurance companies to hold a certain amount of capital in order to withstand unexpected financial shocks.
Former Chancellors Kwasi Kwarteng and Rishi Sunak (now Prime Minister) had committed to reforming Solvency II in order to cut red tape and to replace retained EU financial legislation to improve the City’s growth and competitiveness.
However, it is now uncertain whether these post-Brexit changes, which were named ‘The Big Bang 2.0’ will be able to go ahead and even if they did, it is unlikely they would provide the benefits initially expected.
While these reforms originally had broad support from both the political and financial communities, rising interest rates and the blow to pensions means plans of deregulation could now bring more risks than benefits due to the fragility of the market
According to Huw van Steenis, who was an advisor to former Bank of England Governor Mark Carney, it’s possible that there may be “small tweaks” but these won’t be the Big Bang 2.0 that was hoped for, more of a “whimper”.
Two anonymous regulatory experts echoed van Steenis’ sentiments, agreeing that plans to deregulate had been foiled by the fallout of the mini-budget.
Even if the reforms did go ahead as planned, high interest rates would weaken the benefits as they would reduce the amount of funds that would be released, while also limiting the returns offered by infrastructure projects, which was where the Government originally believed the capital would flow to.
On a more positive note, according to Plenum Investments, inflation has not had as strong of an effect on the insurance industry as expected (with an exception to motor insurance) and a third of insurers reported solvency ratios above the target range , due to the hike in inflation being mostly absorbed by price adjustments.
Additionally, the Prudential Regulation Authority, an arm of the BoE responsible for the soundness of the financial system, wants reforms to Solvency II, however, it wants the rules to be stricter rather than relaxed with commitments to pay pensions to policyholders until they die.
After Jeremy Hunt was appointed as Chancellor, a Treasury source told City A.M that announcing his plans on Solvency II wasn’t “an immediate priority” given the political upheaval and economic turmoil the country was facing.
Now with a new Prime Minister and new Cabinet, it’s uncertain what lays in store for Solvency II as despite Sunak’s ambition to reforming the legislation, given the amount of economic and political turmoil, he may not view now as the best time for any major economic changes.