Speech As Prepared For Delivery In Abu Dhabi, UAE
Good afternoon, ladies and gentlemen. I want to start by thanking you, the International Association of Insurance Supervisors (IAIS), industry representatives, key stakeholders, and most importantly Secretary General Dixon and Dr. Saporta for the invitation to offer some scene-setting remarks as you embark on a new chapter in the history of the IAIS.
Like the broader financial services industry, the insurance industry and its regulators are beginning to shift focus from prudential regulation to the implementation of that regulation, while also scanning the horizon for new risks and vulnerabilities.
This is a topic and exercise that we at the IIF are intensifying as well, and mirrors the institutional transition at the Financial Stability Board (FSB), under the leadership of Fed Vice Chairman Randy Quarles, who we heard from earlier today. Vice Chair Quarles has done a remarkable job shifting the FSB’s workplan to focus on “implementation and assessment,” with an eye toward efficiency and, where possible, greater simplicity.
These meetings – here in Abu Dhabi and the UAE – mark the beginning of a similar transition under the IAIS’s new Strategic Plan.
Given that we are here in Abu Dhabi, UAE, allow me to thank Sultan Al Mansouri, for his gracious and world-renowned hospitality. The work that the UAE Insurance Authority is doing through your innovation strategy is remarkable, and the associated training and support initiatives will surely pay dividends.
Some of you may not realize how fitting it is to be in the Middle East for a meeting of this importance on the topic of insurance. In fact, the origins of insurance date back to ancient Babylonian traders and to Mesopotamia and the Code of Hammurabi, which was written around 1750 B.C.E. – where a merchant receiving a loan would pay the lender an extra amount in exchange for a guarantee that the loan would be cancelled if the shipment was stolen.
Over the centuries, the pricing of risk, the making of a risk market and the development of risk products has evolved, often lurching ahead in response to a crisis. Take the great London Fire of 1666 and the associated loss of 30,000 homes, or Hurricane Andrew in 1992 that changed the Reinsurance market as examples. Whether driven by crisis or a changing landscape, the industry is always innovating and expanding into new products and services, such as today’s provision of comprehensive cyber risk prevention or parametric products.
This innovative spirit and importance of the industry as a critical financial intermediary, is why we at the IIF have built such a robust insurance practice, which is currently under the competent and able leadership of my colleague Mary Frances Monroe.
As President and CEO of the IIF, I’ve spent my year like most years travelling around the globe meeting with hundreds of our member firms to discuss their most pressing concerns. This includes conversations with our more than 30 insurance members, like Allianz, Swiss Re, and MetLife, who serve as chair and vice chairs of our Insurance Regulatory Committee.
No matter where I go, or which aspect or branch of the financial services industry I meet, the conversation always seems to come back to a constellation of concerns: cyber threats; embracing disruptive technology, and the need to modernize legacy systems; the challenges of operating in a volatile macroeconomic environment and low interest rates; the impacts of trade pressures, supply chains and geopolitical uncertainties; and managing exposure to risks from climate change.
Several of these concerns are perennial and represent risks that are largely out of our control. For example, our capacity to reduce political uncertainty is limited. Today I would like to focus most of my attention on just one of these concerns, which is also the overarching theme of this Annual Conference, the need to embrace emerging technology.
This is a trend where the financial services industry as a whole, and the insurance sector in particular, face significant and unprecedented challenges - but also great opportunities. There is no question that financial services firms know they need to adopt new, cutting-edge technologies and accompanying new business practices to serve clients, manage risk, control costs and evolve the business model. It is the topic of every conversation, each of our board meetings, and it dominates the stage at industry conferences.
The challenge is figuring out how much to invest, where to invest and ensuring that you invest enough to stay at the leading edge. We are in a technology arms race.
In this environment, where new, disruptive market participants are making their way into the mainstream, current incumbent firms need to act boldly to deploy the latest technology to embrace new clients, develop new markets and identify and manage new risks – and to become more efficient, nimble and smarter.
One such technology is Machine Learning. Our very capable IIF digital finance team has found that the adoption of Machine Learning has increased significantly in the past year, with a sharp increase in the number of financial institutions running pilot projects. The sophistication of machine learning models and the breadth of application across customer segments has grown considerably. The adoption of machine learning techniques continues to deliver tangible benefits to financial institutions, including improved model accuracy, the ability to overcome data deficiencies and inconsistencies, and the discovery of new risk segments or patterns.
In addition to the adoption of machine learning and AI, financial services firms are increasingly migrating services to the Cloud, one of many “future of finance” developments that is being studied by both the UK PRA and EIOPA. We welcome the discussions among supervisors of both the risks and benefits of cloud migration and outsourcing, including the important risk of not migrating to the cloud. We appreciate the need for robust governance, due diligence, contingency plans and exit strategies when adopting cloud solutions.
We likewise welcome supervisors themselves adopting new technologies, including cloud solutions. As Huw van Steenis of the Bank of England noted in the Future of Finance report published over the summer, the Bank should be a world leader in the use of digital regulation for identifying macroeconomic trends, financial surveillance and supervision.
Across the financial services sectors, we are seeing a decided shift away from viewing the modernization of legacy systems and the adoption of new technologies as sunk costs, and towards exploring how the adoption of new technologies can both benefit the bottom line and advance important societal interests.
In the insurance sector, there are seemingly endless ways for insurers to invest in and harness technology in their businesses. Machine learning and AI are transforming the entire insurance value chain. For instance, technology can help life and health insurers better understand and price risks through the use of wearable devices. Life and health coverage can be expanded to underserved markets through digital platforms that allow customers to access insurance through their mobile phones and “smart” devices.
Elsewhere, AI solutions can help screen patients and detect disease, which can prove lifesaving in regions with limited trained medical staff, and Machine Learning and AI can be deployed to detect and combat fraudulent insurance claims, benefitting insurers’ bottom lines and managing costs for consumers.
To be sure, data privacy and data ownership considerations are an important part of this discussion, and these concerns are growing more pronounced by the day and are part of the political discourse in almost all political jurisdictions globally – and will prove one of the most, if not the defining, topic for the next generation. But, with the proper transparency, safeguards, balanced privacy regimes and customer consents, we think there’s a way forward to respect privacy and broaden the range of products that individuals can access.
There are also concerns about inherent bias in Machine Learning and AI tools. Most data collected by human processes will have a risk of bias. However, this risk can be mitigated as financial institutions improve model accuracy and address data deficiencies through concerted efforts by key technical, business and control functions. Our work on the ethical implications of machine learning solutions conducted earlier this year highlighted how one global insurer has developed a comprehensive digital governance framework in order to mitigate bias risk.
On the P&C side of the business, technology can advance better modeling for catastrophic events that are expected to increase in frequency and severity due to climate change, which I will come to in a moment. CAT risk modeling has become increasingly sophisticated since the days of Hurricane Andrew and modeling techniques are being leveraged to address climate change challenges, recognizing, of course, the inherent limitations of historical data when it comes to attempting to model the impacts of climate change.
As modeling techniques continue to be refined, insurers can better price risk and determine optimal levels of risk transfer. Reinsurers can also better price reinsurance coverage. With better information and modeling, insurers can enter higher-risk, underserved markets with a greater degree of confidence.
Technology can also help insurers offer access to agricultural and crop protection products in remote or poorer regions through parametric insurance offerings that facilitate the prompt identification and payment of claims for farmers who cannot afford a lengthy claims process and, as a result, often forego coverage and thus suffer devastating losses.
Technology also opens the door to new forms of insurance and expanded coverage options – for example, the cyber risk insurance market has surged over the last several years and will prove an exciting, innovative and rapidly growing product line for years to come.
I understand that cyber risk insurance is the subject of IAIS attention and a new IAIS working group. We look forward to presenting our work on cyber risk underwriting to this group in Washington, DC next week. Cyber risk prevention and preparation services are becoming an integral part of cyber insurers’ value proposition and a development that benefits not just insurers and their customers, but society as a whole, if the incidence and severity of cyber-attacks can be lessened.
Technology has also helped on the cyber resilience side by providing insurers with new tools to protect themselves from cyberattacks. I see that cyber resilience is on the agenda for tomorrow. We have been active in the cyber resilience space, including a partnership with McKinsey, and I urge all of you to look at our very good work in this area.
Allow me now to shift briefly to the Climate agenda, and Sustainable or Green Finance, which is the fastest-growing workstream for us at the IIF. We, in fact, launched our Sustainable Finance Working Group just 18 months ago, and the group has rapidly expanded to more than 150 members – including the world’s biggest insurers.
For insurers, sustainability extends beyond the asset side, to the liability side of the balance sheet, through the development of new insurance products that support the transition to a greener environment and help calculate, price and manage the potential risks from more frequent and violent weather events, to rising sea levels, to the potential for new population migration patterns.
Recently, Bank of England Governor Mark Carney, in an address during the UN Climate Summit, called on insurers to help close the protection gap that affects many emerging market countries most at risk from Climate Change and to help fund sustainable energy and resilient infrastructure projects by utilizing their considerable investment portfolios.
Insurers have a unique ability to respond to Governor Carney’s calls for action in a way that also provides new business opportunities across the full spectrum of insurance firms. For example, our IIF insurance members have committed to green investments and green bonds, green infrastructure projects and impact funds. But there is much work to do. This thorny and complicated taxonomy challenge is just one of many that we must resolve.
In closing, and with these many opportunities in mind, I want to highlight how you—the IAIS—and the IIF can work together.
Looking back on the past several years, it goes without saying that the post-crisis, reform-crafting era has been challenging and daunting and the journey was not easy for you or for us. We recognize and appreciate your many achievements, the hard work and the earnest and professional manner that all of you exhibited, all in an effort to protect policy holders and to ensure the financial stability of the insurance industry – a key component in the global financial architecture.
Your expertise and unique insights were a critical input into the G20 and FSB’s broader regulatory initiatives. Accordingly, we commend your adoption of a holistic framework for the supervision of systemic risk in the insurance sector, the comprehensive Common Framework for the Supervision of Insurance Group, a robust Insurance Core Principles, and version 2.0 of the Insurance Capital Standard for the Monitoring Period. We look forward to working with you on further refinements to the ICS during the Monitoring Period.
Looking to the future, it is important that regulation and supervision adapt along with the industry to these new challenges and opportunities. Regulations and supervisory standards should not be sclerotic – certainly not in such a dynamic environment. Like the industry, regulators and supervisors should be nimble and open to understanding and embracing the next innovation or technological change.
In particular, as the IAIS looks at the challenges of supervision in a digital era, we would encourage you to: assess the current regulatory framework in a way that identifies gaps and considers how other relevant regulations – for example, data privacy regimes – interact with insurance supervision; Use a “risk-based approach” that is proportionate and based on the materiality; Adopt a dynamic, technology-neutral approach to new technologies; Create incentives for firms to adopt guardrails and controls for the use of new technology as part of their robust governance and risk management framework; Pursue an “activities-based” approach that supports a level playing field among all firms engaged in insurance activities; and, support global and cross-sectoral harmonization of standards, but of course recognizing that there will be situations where a bespoke approach is needed.
Finally, I think it’s axiomatic that a Principles-based approach to regulation is particularly well suited to a dynamic environment and can be complemented by active supervision and guidance that evolves over time and can be readily updated without the need for lengthy legislative or rulemaking processes.
One example from the IIF’s extensive work on the application of Machine Learning within financial services is the importance of stable, near-timeless regulatory principles, complemented by examples of good practices that can be updated periodically. Best practices recognize that there is not one singular way or pathway towards “good” or “right.”
The IIF looks forward to continuing to engage with the IAIS, especially with the launching of a new five-year Strategic Plan that focuses on new risks, new challenges, and new opportunities for insurers.
I look forward to your comments and questions and thank you again for the opportunity to offer these remarks. Thank you.