In a summary of our recent article for Insurance Day, we outline why growing regulatory demands and an increasingly complicated operating environment require an automated solution to keep pace with counterparty risk management.

Insurance, at its core connects capital with customers, but it is a fragmented marketplace, with many intermediaries and counterparties playing a host of roles. The one thing that unifies all entities is that they are all regulated, with a responsibility to manage the risks related to trading with each other.

We know that counterparty risks are manifesting in an increasing number of ways, including regulatory, legal, credit, commercial, sanctions checking, proceeds of crime and anti-money laundering.

Manual checks simply don’t cut it any longer.

Not too long ago, most firms were satisfied with a straightforward registry check with the regulator as sufficient due diligence. Any due diligence work would be carried out at the beginning of a relationship and maybe revisited on an annual or periodic basis. Often it wouldn’t be revisited at all.

We know that Insurance businesses are becoming aware that counterparty risks are continually changing. The increasingly complex insurance distribution structures, make it almost impossible for traditional due diligence and counterparty management processes to keep up with developing and emerging risks.

Oversight of international counterparties brings further complexity to the challenge. Firms trading overseas are likely to interact with tens or even hundreds of jurisdictions and keeping abreast of local regulators and how they report changing requirements is an onerous task which is impossible to manage manually.

When counterparties fail

Throughout the world, insurance regulation focusses on the protection of policyholders. The failure of an insurance business can have devastating effects to policyholders and therefore we recommend all market participants must have suitable governance of their trading relationships.

In May 2019, Gibraltar’s supreme court placed Lamp Insurance Company into liquidation leaving thousands of policyholders without insurance. In the year prior to this, its credit rating began to deteriorate. The company then missed key reporting filing dates, following which there was a migration of directors. Finally, Lamp was put into liquidation.

Manual due diligence might have spotted some of the problems the insurer was facing in isolation, but the volume of changing data points and risk development make manually flagging and identifying these kinds of problems in advance an almost impossible task.

We believe, the keys to successful risk management is picking up on things in context, and quickly. The Lamp failure demonstrated the importance of spotting issues and acting to protect policyholders and ultimately investors, before problems become terminal.

SMCR focus

Avoiding failure is likely to be of increasing concern going into 2020, where attention in the UK intermediary market is increasingly focusing on the now implemented FCA Senior Managers & Certification Regime (SMCR). The regime requires regulated businesses to certify their senior managers for their responsibilities.

SMCR goes much further than the previous Approved Persons Regime, holding senior managers personally liable for their management decisions. The event of a major failure can result in significant regulatory intervention, which might restrict trading, or in the extreme, can result in a business losing its licence to trade.

Stronger personal responsibility is likely to result in a greater focus amongst senior management on ensuring they are as aware as possible of regulatory and legal risks, both internally and with third parties.

Technology is offering a helping hand.

Automating due diligence, compliance and regulatory processes enables insurance businesses to tackle the two main challenges that existing control systems face.

  1. The need for ongoing and real time data production.
  2. The ability to aggregate the broad sweep of data points into useful information that allows preventative action to be considered, effected and recorded.

At REG UK we automate a feed from the Financial Conduct Authority (FCA), any changes to licensing to the entire registered community are immediately picked up by our software. These checks are done daily, which means if a counterparty is no longer authorised an immediate notification is issued, allowing necessary action to be taken to avoid trading illegitimately with them.

These tech innovations deliver not just the ability for real time or comprehensive monitoring but tailored monitoring to the needs of our clients.

Our users are able to define their own risk parameters, unique to their own needs. Each insurance business has a different approach to their risks, it’s important that tech solutions are configurable to each user’s risk appetite. Our on demand software can meet the needs of firms seeking to manage risk and achieve complete governance.

Paul Tasker is CEO at REG (UK) Limited. An insurance market veteran Paul is passionate about disruptive technologies and innovations that can drive growth, reduce risk and enable businesses to thrive.

Find out more about how REG can help you, or call 0203 946 2885.