The insurance industry faces increasing compliance burdens, making it critical that we stay ahead of the game. Fortunately, there are vast opportunities for using ever-evolving technology to meet these compliance requirements.
Besides ever more demanding regulations, the focus on data and reporting is increasing. The African industry has been significantly disrupted, with the implementation of solvency assessment and management (SAM) in South Africa, and the adoption of the Twin Peaks model of financial regulation.
This is a global phenomenon, though, as new laws and regulatory changes informed by the global financial crisis focus on transparency and fairness, putting new pressure on governance structures.
Until recently, the solution to this compliance burden has been a recruitment approach. A 2016 survey1 of 15 top global insurance companies by Accenture found that 90% of firms polled had appointed a Chief Compliance Officer to manage their compliance function.
This was a sign of the industry responding to a growing number of curveballs from regulators. However, forward to 2019 and it seems Chief Compliance Officers are already becoming dispensable.
Regulatory Technology (RegTech) has evolved to asisist insurers with their compliance, risk management and regulatory needs. RegTech uses technology to monitor, comply and report in terms of prevailing regulations. It’s accurate, often easy to use, transparent and consistent.
The current regulatory climate amplifies the potential for RegTech. The Financial Sector Regulations Act of 2017 provides for the Twin Peaks approach, a comprehensive system for regulating the financial sector. It represents a shift away from a fragmented regulatory environment and will reduce regulatory arbitrage or forum shopping by closing gaps in the system.
Twin Peaks involved the introduction of two new regulators. The Prudential Authority (PA), a subsidiary of the South African Reserve Bank, is charged with maintaining the financial stability of the financial system. The FSCA (Financial Services Conduct Authority), formerly the Financial Services Board, is responsible for market conduct and consumer protection.
To give effect to the new insurance prudential requirements, the Insurance Act of 2017 was introduced. It replaced both the Short-term Insurance Act and Long-term Insurance Act. During the transition period, the old Acts will govern market conduct while the new Act will apply from a prudential point of view, to all insurers.
The new Act effects changes in the Long Term Insurance Act, Short Term Insurance Act and the Policyholder Protection Rules, which create new opportunities for existing insurers, and provide for licensed micro-insurance products (both life and non-life). This presents an opportunity for innovation, although the compliance might be costly for micro-insurers.
The new regulations give regulatory effect to the Solvency II equivalent risk-based prudential requirements adopted in South Africa – the SAM regulations. The SAM framework aims to improve policyholder protection. It contributes to financial stability through aligning insurers’ regulatory capital requirements with the underlying risks in order to meet customer needs.
SAM has proven to be a challenge based on the need to fully understand or define the risks inherent in the business in order to have sufficient capital to survive catastrophic events. In addition, the framework has guidelines for measuring the market value of assets and the formulae for capital requirements which might differ from how it is reported under the business financial reporting framework.
These complex considerations show the need for dedicated compliance functions, which is a costly exercise. A Thomson Reuters report2 found that 66% of financial services firms expect the cost of senior compliance staff to increase, up from 60% in 2017.
Non-compliance can cost even more. The fines levied on financial services companies that contravened regulations during the sub-prime crisis ran into hundreds of millions of dollars.
RegTech is the kind of solution that can prevent such ethical lapses. It’s also a far less costly solution than building in-house staff capabilities, and can be enabled through service providers or partners.
RegTech uses machine learning to automate intuitive tasks such as compliance investigations processing, data extraction, and quality control. The technology can also analyse entity data and behaviour to predict regulatory and compliance risk, so that organisations can mitigate risks proactively and address their compliance requirements.
In a nutshell, RegTech can be customised for any business, predicting risk areas and investigating compliance issues while addressing them. RegTech can also do this more accurately and cost-effectively than the entire departments that are currently dedicated to compliance matters.
Where there is no room for error, there is a strong case for technology.
1. Compliance Excellence in the Insurance Industry
2. Cost of Compliance 2018 Report.