Welcome to the June edition of REG Reviews! This months we discover the importance of climate change in the insurance world, The FCA in ‘deep crisis’, AI’s use in tackling wildfires and Allianz’s guilty plea. Read these articles and many more, along with our usual updates from REG and the REG Tech sector.
FCA confirms significant delays in M&A process
The insurance industry’s regulator has confirmed that it is experiencing delays of “approximately two months” in assigning case officers to acquisition notifications. The FCA told a broker that “high volumes” of M&A notifications had caused “delays in allocating FCA-led notifications to case officers”. The regulator reminded the broker that it was a criminal offence to proceed with an M&A transaction before it had been approved.
The email to FCA-regulated firms follows the regulator being hit with strike action for the first time in its existence at the beginning of May. Striking employees, who are members of the Unite trade union, have demanded that planned changes to pay and employment terms and conditions be halted. The regulator added in its message that it was attempting to recruit additional case officers and was “making improvements” as part of its transformation plan.
However, Branko Bjelobaba, principal at compliance consultancy Branko, stated “[The FCA] said it was going to ramp up the authorisations department ages ago, so I’m surprised it’s not faster now.” Bjelobaba explained that firms could bypass the need to seek FCA approval for M&A activity by simply acquiring the client book of a business it wished to purchase.
He added: “Timing is of the essence and businesses need to carry on with their business. The fact that the regulator isn’t as responsive as it ought to be – and this has been the case for months and months – is beyond a great shame.
“This is shambolic. The irony is that if this was an insurance broker taking two months to respond to something urgent, the FCA would be over them like a rash. They are totally oblivious to any pressure for time. “I find it obnoxious that the public sector – funded by you, me and all other taxpayers – is so commercially unresponsive.”
FCA in 'deep crisis' as second wave of strike action approaches
The union accused the FCA of failing to address concerns around pay, terms and conditions and lack of trade union recognition. The first strike took place on 4th May and further industrial action in London and Edinburgh is planned for 5-6th July. Freedom of Information (FoI) requests lodged by Unite has revealed that 1,000 employees have left the Financial Conduct Authority (FCA) since CEO, Nikhil Rathi took office in October 2020, prompting the union to warn of a deep crisis at the regulator.
The news comes as Unite members prepare to stage a second wave of strike action in London and Edinburgh for two days beginning on Thursday (9th June). Unite says the FCA is in crisis and is haemorrhaging staff. It can no longer claim to be an effective or reliable regulator.
Sharon Graham, Unite General Secretary said: “The FCA is in a deep crisis but it’s a crisis of its own making. Unite is determined that this workforce does not pay the price for appalling management decisions, which is why our members are taking strike action because they want to be represented by their union.”
Unite is clear that both the industrial action and the work to rule have had a significant impact on the ability of the FCA to conduct its regulatory responsibilities and is damaging the standing of the organisation. Unite continues to urge the FCA to sit down with Unite workplace representatives and ensure the issues facing the employees are fairly resolved.
This latest round of strike action will last for two days because of management’s continued refusal to have meaningful discussions with their workforce about their concerns. Staff across the regulator have been ‘working to rule’ since May. Therefore, the workforce have withdrawn the regular overtime and additional work they currently do outside of their contractual duties.
To mark the start of the strike, FCA staff will be outside the FCA head office to express their anger at the failure of their employer to address their concerns around pay, terms and conditions and lack of trade union recognition.
There will be a media photo call where FCA strikers will be holding placards, flags and leafletting visitors to the FCA office and members of the public. The message from the workforce will be: “FCA, listen to your staff.” A similar event will be at the FCA’s smaller site in Edinburgh.
Allianz investment arm pleads guilty to securities fraud
Allianz SE has confirmed that its indirect subsidiary, Allianz Global Investors US LLC (AGI US), will plead guilty to criminal securities fraud and pay $5.8 billion after misrepresenting the risk posed by a group of its hedge funds that were rocked by pandemic market conditions.
Allianz SE said in a statement that AGI US has settled with the US Department of Justice (DOJ) and the US Securities and Exchange Commission (SEC or commission) over the Structured Alpha Funds issue after the SEC determined that it had broken relevant US securities laws. According to a Bloomberg article, the whole payout, which includes a $1 billion fine to the Securities and Exchange Commission, is covered by measures the business has previously taken.
Prosecutors said Tournant and two portfolio managers overstated the level of independent oversight AGI US was providing, misrepresented hedging and other risk mitigation strategies, and altered documents to hide the riskiness of the funds.
“As a result of this scheme to defraud, investors’ funds were exposed to higher risk than promised, and investors were deprived of information about the true risks to which their investments were exposed,” according to Tournant’s indictment, as reported by Bloomberg.
Using 'Big Data' for power growth
Insurance, perhaps more than any other industry, relies on data, with the difference between success and failure turning on a firm’s ability to accurately analyse information, evaluate risks and make appropriate decisions. Put simply, big data is larger, more complex data sets, especially from new data sources. These data sets are so voluminous that traditional data processing software just can’t manage them. But these massive volumes of data can be used to address business problems you wouldn’t have been able to tackle before.
At REG Technologies, we understand the importance of big data to insurance carriers. We are, ourselves, a data-driven enterprise dedicated to developing products and services for our customers using an evidence-based approach. We also understand the importance of high- quality data to our customers.
Want to leverage ‘big data’ within your company? Find how you can do so by clicking here.
Artificial Intelligence being used to battle Western wildfires
Becoming more destructive and disastrous as the climate continues to dry out and heat up the West, wildfires are becoming increasingly worrying. Agencies and officials are being challenged with preventing and battling the catastrophic blazes. Soon, a new tool in the form of AI may become the saviour.
By generating more timely information about on-the-ground conditions and running computer programs to process massive amounts of data, Lockheed Martin Space representatives say they can map fire perimeters in minutes rather than the hours it can take now. They say the artificial intelligence, or AI, and machine learning the company has applied to military use can enhance predictions about a fire’s direction and speed.
Lockheed Martin aims to use its technology developed over years in other areas to reduce the time it takes to gather information and make decisions about wildfires, said Rich Carter, business development director for Lockheed Martin Space’s Mission Solutions. “The quicker you can react, hopefully then you can contain the fire faster and protect people’s properties and lives,” Carter said.
Something like the 2020 Cameron Peak fire, which at 208,663 acres is Colorado’s largest wildfire, could take hours to map, Dikken admitted. Lordan said Lockheed Martin engineers who have flown with the state crews, using the video and images gathered on the flights, have been able to produce fire maps in as little as 15 minutes.
Applying AI to fighting wildfires isn’t about taking people out of the loop, Lockheed Martin spokesman Chip Eschenfelder said. “Somebody will always be in the loop, but people currently in the loop are besieged by so much data they can’t sort through it fast enough. That’s where this is coming from.”
The EU to impose an insurance ban on ships carrying Russian oil
According to Andriy Yermak, the Head of Ukraine’s President’s Office, the European Union may impose an insurance embargo on ships carrying Russian oil.
This ban is one of the most dangerous financial instruments of EU influence available to the bloc to harm Russia’s economy. According to Andriy Yermak, the Ukraine President’s Chief of Staff, “According to the data from Wall Street Journal, this will be part of the sixth sanctions package. This ban is one of the most serious financial instruments of the EU’s influence that the bloc has at its disposal to harm the Russian economy. Now it will be difficult for Russia to sell its oil to Asia, as European companies insure most of the world’s oil trade”, Yermak wrote on Telegram.
He further claimed that the EU and the UK are planning a coordinated ban on insuring ships carrying Russian oil.
Livestream Tech Firms tied to mass killings
These days individuals who commit heinous acts such as the recent mass shooting in Buffalo wish to do so while arranging to livestream their massacre on social media platforms. Sites like Twitter, Facebook and now the game-streaming platform Twitch have learned painful lessons from dealing with the violent videos that often accompany such shootings. But experts are calling for a broader discussion around livestreams, including whether they should exist at all, since once such videos go online, they’re almost impossible to erase completely.
The self-described white supremacist gunman who police say killed 10 people, at a Buffalo supermarket on May 14th, had mounted a GoPro camera to his helmet to stream his assault live on Twitch. The same video game streaming platform used by another shooter in 2019, who killed two people at a synagogue in Halle, Germany. He had previously outlined his plan in a detailed but rambling set of online diary entries that were apparently posted publicly ahead of the attack, although it’s not clear how many people might have seen them. His goal: to inspire copycats and spread his racist beliefs. After all, he was a copycat himself.
A Twitch spokesperson said the company shared the livestream with the Global Internet Forum to Counter Terrorism, a nonprofit group set up by tech companies to help others monitor their own platforms for rebroadcasts. But clips from the video still made their way to other platforms, including the site Streamable, where it was available for millions to view. A spokesperson for Hopin, the company that owns Streamable, said Monday that it’s working to remove the videos and terminate the accounts of those who uploaded them.
Experts suggest that sites such as Twitch could exercise more control over who can livestream and when — for instance, by building in delays or whitelisting valid users, while banning rules violators. More broadly, Koenig said, “there’s also a general societal conversation that needs to happen around the utility of livestreaming and when it’s valuable, when it’s not, and how we put safe norms around how it’s used and what happens if you use it.”
REG has successfully regulated Spain!
We are pleased to announce that our in house technology team have completed their work to automate our due diligence data of regulated businesses in Spain. The Directorate-General for Insurance and Pension Fund (Dirección General de Seguros y Fondos de Pensiones) (DGSFP) is the Spanish government’s financial regulatory department that supervises and controls Spain’s insurance and pension sector. Users of the REG Network are now able to receive instant alerts on new/lost authorisation and changes on over 70,000 firms in Spain.
The team at REG continues to connect our customers with instant, reliable data direct from source, enabling them to meet their legal and regulatory requirements without hampering trade.
Insurers must adapt to attain climate resiliency
According to a new analysis from Capgemini and Efma, insurers must fundamentally rethink their business models to achieve climate resiliency. Climate change is having a detrimental influence on the insurance sector, according to the World Property and Casualty Report, which was released on Tuesday. According to the analysis, insurers who focus on developing climate-resilient business models will be better positioned to gain deeper client trust, whilst also increasing their relevance and profitability. The report found that:
- Global economic losses driven by climate change have spiked by 250% in the last three decades
- 73% of policyholders rank climate change among their top concerns
- Insurers are also concerned, with about 40% ranking climate change as a top priority, with insurability and profitability as leading climate-related issues
Natural catastrophes have led to a 3.6 x increase in insured losses and a 2 x increase in non-insured losses over the last 30 years, according to the report. While concerning, this fact presents an opportunity for insurers to recalibrate to better serve customers in a changing environment.
The report stated that fundamental changes are required for the sector to build customer-focused, resilient business models. Over 80% of individual and small commercial clients in the insurance industry are aware of climate influences and have made at least one important sustainable action in the recent year. However, more work is needed, as only 8% of insurers surveyed were “Resilience Champions,” defined as those with strong governance, advanced data analysis capabilities, a strong focus on risk prevention, and who promote resilience through their underwriting and investment strategies, according to the report. The report found that among those deemed “Resilience Champions”:
- 82% have a Chief of Sustainability or equivalent
- Nearly 77% have embedded climate-risk data in their products and services
- Nearly 60% are in advanced stages of deploying machine learning-based pricing models
- About 53% are accessing new data sources, including satellite data, remote sensors, weather stations, and more to provide accurate, granular and real-time risk information
FCA introduce “New Powers”
This new power is available following a change in the law allowing the FCA to streamline and shorten the removals process. At its discretion, the FCA will be able to provide a firm with two warnings if it believes it is not using (or, where relevant, that its Appointed Representatives are not using) its regulatory permission, and it will then be able to cancel the permission without the firm’s consent, or change it, no less than 28 days after the first warning if the firm has not taken appropriate action. A right of appeal against this process may be made available to firms.
This change is intended to strengthen consumer protection by reducing the risk of consumers misunderstanding or being misled about their exposure to financial risk and how much consumer protection they have. The focus of the FCA’s attention will be on firms having retail clients. Where a firm fails to pay its regulatory fees, submit returns, or complete annual declarations, the FCA may view this as an indicator of a lack of regulated activity, which may lead to permissions being removed through the use of this new power.
The new power supports the FCA’s existing ‘use it or lose it’ initiative, which has seen the FCA carry out 1,090 assessments since May 2021, to see whether firms are undertaking the activity for which they have permission. This has resulted in 264 firms applying to voluntarily cancel, and a further 47 to modify their permission to carry out FCA regulated activities.
Mark Steward, Executive Director of enforcement and market oversight at the FCA, said: “Businesses with permissions they don’t need or use, risk misleading consumers. These new powers will enable us to take quicker action to cancel permissions that are not used or needed. Firms should regularly review their permissions, ensure they are correct, and they are acting in accordance with them. If they are not needed or used, they should seek to cancel them.”
A revised Policy Statement outlines all of the changes on the FCA website.
Howden reveals Cyber insurance costs doubled in a year
Howden’s newest annual report on cyber reveals that higher loss frequency and severity from ransomware have caused such an extreme supply-demand imbalance that the average cost of cover is more than double what it was last year.
The report, A Hard Reset 2.0, looks at developments that have shaped the market in the past year – including ransomware trends (and vulnerabilities), risk aggregation, the Ukraine war, economic sanctions and the spectre of cyber warfare – and assesses how the insurance market has performed through this period of flux.
According to the report, the annualised number of global ransomware incidents was up 235% in 2021 compared to 2019, with average US ransom payments rising by 370% over the same timeframe. Shay Simkin, Global Head of Cyber at Howden, said: “Market conditions remain difficult, but two potential tailwinds may help companies and insurance carriers as this year progresses. The first is off the back of more favourable ransomware trends following underwriting and risk management actions taken in response to increased ransomware frequency and severity. Companies are more resilient to ransomware attacks today than they were this time last year.” He added: “The second, the war in Ukraine, is a lot more unpredictable, but it appears the conflict has so far dampened cyber frequency further as both warring sides focus their efforts on conventional warfare. This could of course change in an instant – for example, a ceasefire, a large-scale cyber attack, pressure on Russia’s government to find new revenue streams as economic sanctions bite – but for now insurance claims are down compared to last year. All of which raise important questions around the prioritisation and efficacy of cyber operations during wartime.”
Howden said that these dynamics will play out over the rest of the year and will be instrumental in shaping the pricing environment. The most extreme rate increases across the entire market, the firm said, has been in cyber, when it saw average annualised increases of more than 120% in Q4 2021 and Q1 2022.
Hug Hub to launch broker extranet service
The online cloud-based application, Extranet Hub, will cut rekeying times and support placement strategies, the firm claimed.
According to the business, brokers use on average four extranets in addition to their software house for each SME risk seen. As such, the service is not a tech solution searching for a problem that does not exist, Hug Hub CEO Jonathan Davey stated, “The problem is simple: brokers continue to use insurer extranets outside of their core software house”. The following are just some of the benefits Hug Hub will offer:
- Help brokers write more business by offering related insurance products
- Eliminate duplication of data by storing customer information for use across multiple products
- Direct agents to the most appropriate product when customer data is entered
- Control discounting, underwriting and referral management at partner level, giving flexibility to your key partners
FCA confirms 33 broker investigations
On 16th May 2022, the FCA provided their response to a Freedom of Information request which made enquires as to the number of Enforcement Actions the FCA is undertaking into those firms who have general insurance broking permissions. In their response, the FCA confirmed:
- There are 33 open investigations of firms with permission to trade as a general insurance broker. 8 firms have an individual as the subject and 25 have the firm itself as the subject.
- There are 4 open investigations into individuals who held a Senior Manager Function (SMF) at the time of the response, at firms with permission to trade as a general insurance broker.
- There are 384 open investigations across all firms authorised by the FCA. 248 are investigations into individuals and 136 into firms.
- Since 9th December 2019, there have been 14 investigations launched into firms with permissions to trade as a general insurance broker. 3 are investigations into individuals and 11 into firms. This means that at least 19 of the current 33 open investigations were started before the 9th December 2019 – so are more than two years old.
- Since 9th December 2019, there have been 2 investigations launched into individuals who held an SMF at the time of the investigation. Both individuals held multiple SMFs (SMF3, SMF16, and SMF27).
- Since 9th December 2019, there have been 192 investigations opened into firms authorised by the FCA. 124 investigations are into individuals and 68 into firms.
Whilst the above figures are a small proportion of the overall number of investigations it is important that firms do not become complacent when it comes to complying with regulation. It may take a while, but the regulator will catch up.