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Don’t fall into the trap of complacency

27 February 2019 Jonathan Faurie

2018 was a year where a few new trends started to emerge within the financial services industry. These trends would exert such an influence on the industry that many businesses were forced to relook at business and distribution models to establish whether they were still appropriate. These changes will continue to occur in 2019. However, insurers and brokers now know what they are dealing with and can anticipate some of the effects of this change.

According to a report by global auditing firm Deloitte, there are a few mega trends which will still exert a lot of pressure on some insurers in key markets. 

The regulatory bulldozer

The Deloitte report points out that insurance regulators globally are broadening their focus from solvency to include market conduct oversight as regulation (developed in the wake of the last financial crisis and aimed at reducing systemic risk) nears final adoption. 

In the United Kingdom, the Financial Conduct Authority (FCA) is researching consumer needs, attitudes and behaviour to set out an overarching strategy: Our Future

Approach to Consumers. In addition, the International Association of Insurance Supervisors (IAIS) has said market conduct will be a focus of its upcoming five-year strategic plan. 

Regulatory reform in the UK has set the tone for similar changes in other markets. Following the implementation of Treating Customers Fairly (TCF) in the UK, the Financial Sector Conduct Authority (FSCA) implemented the same legislation in the South African industry. Other key regulatory changes were the beginning of the phased implementation of the Retail Distribution Review (RDR) changes to the Policyholder Protection Rules (PPR) as well as the impending Default Regulations. 

Arguably the biggest change to the South African financial services industry is the split of powers between the newly formed Prudential Authority and the FSCA. 

The Deloitte report points out that in the United States, the Department of Labour’s fiduciary rule for investment products fell under the market conduct umbrella. While a court’s vacating of that rule has provided some breathing room for those offering annuities in the United States for retirement security, the likelihood of state attention makes stricter sales standards seem inevitable. 

Just when South African insurers feel uncomfortable that they may be victimised by RDR, they need to look at what’s happening globally. The Deloitte report shows that there seems little doubt that there will be a rule governing sales of US annuity products. 

However, insurers don’t yet know whether regulation will come at the federal or state level (or both), let alone how strong or limited the rule will be. 

The biggest enemy is waiting

The world is increasingly moving towards being part of a shared economy. This means that the effects of a business transaction or a status update in Tokyo Japan can have an impact on Wall Street in the US. 

This opens the door for cyber criminals who are becoming emboldened to carry on their business with little to no impunity on the horizon. Cybercrime, and the business interruption that is associated with it, is the biggest risk facing insurers in 2019. 

The Deloitte report points out that in early 2018, a think tank estimated that cybercrime costs the global economy the equivalent of 0,8 percent of global GDP, or $600 billion annually. The financial services sector – where funds are invested – may be particularly vulnerable. 

South Africa is particularly vulnerable when it comes to cybercrime. A recent report points to the fact that South Africa has the third highest instance of cybercrime in the world. Further reports also suggest that South Africa is a hotbed for cyber criminals. 

Behind closed doors

The dichotomy of the world today is that we live in a shared economy where people live their lives via social media. However, these same people want to be ensured of a certain level of privacy when it comes to interactions with companies; particularly insurers. 

Here is a strange situation. A broker has a young dynamic client who wants to interact over social media. This way, they can be free to go about their daily life with minimal interruption. The broker must accommodate for this and assure the client that the information given in the interaction will not be disseminated to other parties without the client’s consent. 

This is normal and the bond of trust that existed between a broker and their client has long been an integral pillar of the industry. However, with the impending implementation of the Protection of Private Information Act (POPIA), loose lips will incur heavy fines. 

The Deloitte report points out that consumer privacy is an emerging global issue for which insurers need to be prepared or risk suffering serious consequences. 

One of the biggest risks when it comes to data leakage is disgruntled employees. There is an urban legend within the financial services industry of an IT technician who was fired, he wrote a code which prompted the leakage of key data onto the dark web on a specific day in December when most of the insurers staff was on leave. The CEO apparently found a junior IT technician frantically unplugging servers from their power sources to stop the leak. 

Companies cannot become complacent when it comes to this because no company is immune from data leakage/theft. This needs to find its way to the top of the agenda at board meetings.

Editor’s Thoughts:
Drop a pebble in the ocean and you will not know how far the ripples will go. Current industry trends suggest that there will be an increased focus on how the actions of insurers will impact the lives of policyholders and the public. It will be interesting to see how this develops over the year.  Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.

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