Deloitte has urged insurance companies to prepare for further reporting requirements on big data and cybersecurity. They should also expect more work on their Solvency II models, keep pace with technology, and they will face new requirements for their use of derivatives, according to the consulting group's Top 10 for 2016 report, which predicts the key strategic regulatory issues that the financial services industry will face in the coming year.
1. Culture
In the UK, a focus on accountability will come from the Senior Insurance Managers Regime and from Solvency II, which asks insurers to establish remuneration policies that promote a strong risk culture. Deloitte expects the Prudential Regulation Authority (PRA) to set out its expectations on remuneration for insurers early this year.
The International Association of Insurance Supervisors (IAIS) will also play a role; its work on conduct of business risk says insurers should have appropriate remuneration and incentive policies and the board and senior management should be involved in promoting good culture.
2. Conduct risk
The UK's Financial Conduct Authority (FCA) will continue its focus on sales of annuities. Though the Markets in Financial Instruments Directive II (Mifid II) is delayed by another year, the authority will seek to ensure consistency between MiFID II investment products and insurance investment products, and look to apply the Insurance Distribution Directive (IDD).
Lloyd's insurers will continue work on implementing the Lloyd's conduct risk minimum standards, with management information rules for conduct risk coming into effect in 2016.
3. Competition
The European Commission's green paper on retail financial services and insurance may touch on many of the issues the FCA has been trying to address with its competition studies. This includes improving customer choice, increasing shopping around and enhancing disclosure to improve comparability of products.
4. Structural reform
The Financial Stability Board (FSB) recently consulted on draft guidance for developing effective recovery and resolution plans for global systemically important insurers (G-SIIs). But it is unlikely, for now, that an insurer would be asked to overhaul its structure.
5. Measuring risk exposures
While Solvency II takes effect at the start of 2016, some insurers will have to wait until the end of the year to receive their regulator's decisions on their internal models. There will be fine tuning of existing models and new models to approve. More work ahead, but no great surprises are expected.
Some risk weightings are also being reviewed under Solvency II, including the weighting of exposures to infrastructure investments and securitisation.
6. Capital calibration
Starting 2016, the FSB's list of G-SIIs begins confidential reporting to supervisors on the higher loss absorbency requirements. The latest list identifies nine G-SIIs: Aegon, Allianz, AIG, Aviva, Axa, MetLife, Ping An, Prudential Financial and Prudential plc.
The IAIS will continue testing the development of the new insurance capital standards, and consults on the revised definition of non-tradition and non-insurance activities and changes to the G-SII assessment methodology.
7. Data and regulatory reporting
The foremost practical challenge this year is the regulatory requirements under Solvency II, although firms are prepared.
"Insurers too will need to start working towards the implementation of the requirements that will be introduced by Priips (packaged retail and insurance-based investment products) and Mifid II, and by the IDD from the end of 2016 and through to the end of 2017," Deloitte notes.
8. Technology and innovation
"Insurers with the best analytics capabilities will use the information gathered through telematics and other connected devices to develop increasingly accurate actuarial and individualised pricing models," the report says. "Those which do not keep pace risk being left well behind."
They should expect more regulatory pressure for transparency. The FCA has already put a call for inputs on the use of "big data" in the retail general insurance sector, and this could be followed by a full market study later in the year.
9. Operational resilience
Insurers are vulnerable to cyber-attack and operational disruptions, just like all financial market participants. This is recognised at the EU level (by the Joint Committee of the European Supervisory Authorities), and in the UK by the PRA, which has asked insurers to complete a cyber risk questionnaire. Deloitte expects a follow-up from this.
10. Market participants adjusting to the new order
Insurers, as other financial institutions, will feel the changes transpiring in trading. Those that use derivatives as hedging instruments will have to meet clearing obligation and margin requirements under the European Market Infrastructure Regulation (EMIR). They will also face the challenges of sourcing and managing collateral.
EMIR introduces new requirements to improve transparency and reduce the risks associated with the derivatives market.
Channels:Regulation