Source: Fianance Derivative
Authored by John Bowers, Actuarial Product Director, RNA Analytics
In a very short time, the re/insurance industry will reach the implementation deadline for one of the most significant changes in accountancy practice in decades. Whilst we consider that the majority of carriers will be ready for the new rules, and that the considerable modifications required will ultimately benefit the industry, the market will not cross the finish line without considerable effort and investment; and in some cases an existential shift in strategy along the way.
With less than four months to go before the effective date of 1st January 2023 for SEC filers among re/insurers operating in the US, accountancy standard ASU 2018-12, or LDTI (Long Duration Targeted Improvements), radically alters the way affected companies value their obligations.
LDTI sets out significantly different regulatory requirements for certain long-duration insurance products – necessitating a far greater integration of finance and actuarial teams’ processes and systems; and introducing additional complexity in reporting among carriers that write life insurance or annuity contracts.
Unlike current GAAP accounting rules, the new standard requires assumptions around liability to be reviewed – and potentially updated – annually. Discount rates requirements are different, as are the requirements around disclosures. In short, LDTI requires a radical rethink of the end-to-end modelling process. All these changes create – and demand – a great deal more complexity, data, and a much closer integration between the actuarial, IT and accounting function; successful implementation simply cannot be achieved without that high degree of collaboration.
Whilst it’s true that re/insurers that fall under the standard’s scope have been given some reprieve in the timetable for LDTI due to the pandemic – and we consider that most carriers will meet the extended deadline, a successful implementation will depend on the right use of a number of tools, to manage all this extra complexity and data; not to mention the costs.
Companies falling under the scope of the new rules have largely spent the last two years creating and implementing their LDTI gameplan, with varying approaches being taken, according to the degree to which the exercise is considered to be about box ticking at one end of the spectrum, or at the other, a once in a lifetime opportunity to digitise and improve. Key to efforts, in either case, are technology and collaboration – the two playing a symbiotic role in successful implementation.
Actuarial models are a central element of the end-to-end LDTI reporting process, with the underlying technology and systems pivotal to its performance. By extension, actuaries are placed at the very heart of the company’s success – from ‘go live’ onwards.
Our own work with re/insurers tells us that the path of implementation has not been a linear one – with a high degree of reprioritisation along the way, as interpretation of the rules has evolved, and as the changes reveal new – and sometimes perhaps unwelcome – information about operating models. Because of the breadth of change involved in the new standard, implementation has already resulted in shifts in the insurer landscape. Beyond the investment needed for compliance itself, the standard has raised concerns around the prospect of increased earnings volatility, and is already driving up consolidation activity in the market. On the upside, LDTI lays the foundations for some players to reposition themselves through M&A, or other strategic opportunities that emerge as market players respond, and carriers opt to spin off operations that deemed no longer central to strategy.
For all these reasons, we believe an agile approach will continue to garner the most successful outcome – regardless of whether the exercise is considered one of compliance, or of digital, and, ultimately, business improvement.
Either way, the LDTI implementation exercise is exceptionally difficult without the right tools, skills and knowledge.
Like many other industries, the insurance industry has also been impacted by the Great Resignation – the latest in a series of pandemic-related events that threaten the continuity of business. We see this lack of staff – and knowledge – retention as one of the key issues for carriers in the final furlong before they reach the finish LDTI line.
As the January implementation deadline draws near, it is worth pausing to consider the original goal of the new standard, when it was released by the Financial Accounting Standards Board (FASB) in 2018: to increase transparency for analysts and investors in the industry. In most cases, the sweeping changes brought about by LDTI present the opportunity for previously siloed actuarial, finance and IT functions to achieve a transparency, and harmony, that can be leveraged by carriers, and the market alike, in an era of seemingly increasing uncertainty.
How VRPs can improve the open banking experiences of consumers
Source: Finance Derivative
Attributed to: Luke Ladyman, COO and Co-founder of Cheddar
Variable Recurring Payments (VRPs) are a new technology within Open Finance. Despite being relatively unknown outside of the financial marketplace, VRPs are at the centre of an exciting conversation around frictionless payments.
This technology enables consumers to set up specific payment instructions with regulated finance apps that are used to make a series of recurring payments. VRPs have been designed to make life easier for consumers and small to medium-sized enterprises (SMEs). However, there is still room for improvement.
Limits to VRP technology
VRPs have the potential to do far more than just simplify recurring payments but unfortunately, the efficacy of VRPs is severely limited. As they stand, VRPs are only mandated for ‘sweeping’, which is a word to describe moving money automatically between an individual’s current or saving accounts.
According to the OBIE, five million people now use Open Banking in the UK. We can expect consumers to demand greater scope in VRP services, but the infrastructure to support VRP technology is just simply lacking.
The next major step in expanding the scope of this technology will be when legacy financial institutions collectively adopt and build out VRP infrastructure. At present, only a small handful of legacy banks offer VRP services to their customers which has severely limited its reach.
Unlocking the potential of VRPs
VRPs promise to unlock countless opportunities for consumers to better manage their finances, whilst simultaneously supporting companies to build out mechanisms that allow for open banking adoption. This technology has the potential to completely transform how consumers interact with financial services and SMEs.
If mandated for more than just the sweeping use case, VRPs can give consumers complete control over their monthly subscription payments for things such as mobile top-ups or gym memberships. Consumers may even set up VRPs with taxi services to automatically charge them whenever they arrive at a destination up to a certain amount.
By expanding the scope of VRPs, consumers can enjoy hyper-personalised Open Banking experiences. And as Gen Z enters the workforce, this tailored approach will be more important than ever before. Setting payment parameters which are as easy to enforce as clicking a button will keep Gen Z happy and will give businesses access to an entirely new demographic.
Cost of living crisis
With living expenses reaching record highs for young people and working families, paying for basic utilities has become a lot more painful. At their full potential, VRPs could enable the most vulnerable in society to authorise utility providers to automatically take payments, only up to a certain amount. This would help consumers budget better for emergencies and keep up with payments.
To further cushion the effects of the crisis, consumers could also specify payment parameters to avoid any shocks to their bank accounts. This will generally lead to less errors as data is processed digitally and won’t require manual entry.
Lastly, those struggling financially will be able to automatically withdraw their consent to payments service providers (PISPs) who make the payments on their behalf. This is in contrast to credit or debit cards where consumers do not have the flexibility to automatically opt-out of transactions and cannot set specific parameters for payments.
How does this affect banks?
On the surface, the value proposition of VRPs looks to threaten certain aspects of banks’ business models. However, once you look deeper, we can see this isn’t the case – it’s actually quite the opposite.
If adopted for all use cases, VRPs can help banks significantly combat fraud as no sensitive payment information is exchanged with businesses. VRPs can act as a frontline defence with its enhanced transparency and tight controls for the consumer. PISPs can create the same experiences you get by using your debit or credit card but with the additional benefits.
By effectively addressing security concerns, banks will greatly improve customer experiences and reduce customer drop-off rates.
The future of VRP technology
We must take into consideration the current limitations of this technology as we press closer towards a completely frictionless way of banking. As things stand, the future of VRPs will rely heavily on further licensing approval from the Financial Conduct Authority (FCA) and increased approval from the Competition and Markets Authority (CMA).
If utilised effectively, VRPs can be applied across a plethora of uses to give consumers greater control over their finances as initially promised. There’s no doubt that expanding the scope of VRPs will give consumers hyper-personalised Open Banking experiences that will decrease customer drop-off rates. So, definitely watch this space!
Chained to the system – why building another pillar of wealth is key to having the freedom of choice
Source: Finance Derivative
By Marcus de Maria, Founder of Investment Mastery.
For many of us, our lives are already mapped out from the get-go. Go to school, college, then potentially university, get a job and mortgage, whilst spending the rest of our lives paying it off to enable us to have a comfortable retirement.
This is the pathway we have been led to believe we should follow, and many do blindly follow, chained to their desks to pay their mortgage or bills, spending their disposable income to get a better car, bigger house, or enjoy a couple of weeks in the sun.
But for me, I wasn’t happy with this pathway. I didn’t want to be forever paying off a mortgage and saving for a few precious weeks of holiday each year. I wanted more.
So, I took the plunge and started investing – but fell hard and lost a lot of money. Why? The reason was I didn’t educate myself first. I didn’t have a strategy and I didn’t seek advice from others who had done it before me. Why do people go to university for 3-4 years, study to become a doctor or dentist for 5-7 years or an accountant for 4 years? Because training and education are essential, and the same can be said for the stock markets.
Once I had learned this (the hard way), I worked hard to educate myself and started building my own new pillars of wealth.
Investing isn’t a get-quick-rich scheme. For most, it is not an alternative to working or a reason to quit a lucrative career. It is quite simply another pillar of wealth that gives you the freedom to live a life of more choice. Investments will ripen over the years, and we advise starting as early as possible to ensure you have maximum funds for later in life, when children, ageing parents and retirement can all affect finances.
The other thing to remember when investing is the level of risk. We say you should never invest any more than you can afford to lose and to keep perspective, as markets are likely to go down as well as up. Investing alongside working in a secure job role is the best option, as you can then funnel small chunks of money into your portfolio each month.
Here are some tips to build a new pillar of wealth:
Where to invest – are you interested in stocks, precious metals, commodities or Cryptocurrencies? If stocks, which Stock are you entering and why? If Crypto, do you know enough in such an unregulated or volatile asset class? Is it on a technical basis where you like the chart pattern or a fundamental basis where you think the company has long-term growth potential?
What price to get in at – I prefer buying low, so I set an order in advance and allow the price of the Stock or Crypto to fall to my entry point. Sometimes I will wait weeks, even months, for this to happen. But I wait because those are the rules.
When to exit with a profit – I know in advance when I am exiting the trade or when to exit with a small loss. So, in order to ensure I am doing the right thing when the Stock is falling, I enter with an automatic order below my entry point, called a ‘Stop Loss’ or ‘Limit Sell Order’ in some cases, to minimise my losses.
How much to invest – this is part and parcel of keeping risk low. I ensure that by the time the stock price falls to my predetermined stop loss, I will only be risking 1% of my portfolio. So, if I have £10,000 to invest, I would only risk 1% or £100 on any one trade. It’s a mathematical equation EVERYONE should know before they start trading. Unfortunately, very few people know this equation, and even fewer utilise it.
For anyone wanting to secure their financial future, increase their pension pot or simply live a life of more choice, building another pillar of wealth is key. Get educated, keep the risk low and be prepared to be in it for the long term – you may be surprised at the results!
Resilient technology is the most important factor for successful online banking services
Source: Finance Derivative
By James McCarthy, Director of Solutions Engineering, NS1
More than 90 percent of people in the UK use online banking, according to Statista and of these, over a quarter have opened an account with a digital-only bank. It makes sense. Digital services, along with security, are critical features that consumers now expect from their banks as a way to support their busy on-the-go lifestyles.
The frequency of cash transactions is dropping as contactless and card payments rise and the key to this is convenience. It is faster and easier for customers to use digitally-enabled services than traditional over-the-counter facilities, cheques, and cash. The Covid pandemic, which encouraged people to abandon cash, only accelerated a trend that was already picking up speed in the UK.
But as bank branches close—4865 by April of 2022 and a further 226 scheduled to close by the end of the year, Which research found—banks are under pressure to ensure their online and mobile services are always available. Not only does this keep customers satisfied and loyal, but it is also vital for compliance and regulatory purposes.
These incidents do not go unnoticed. Customers are quick to amplify their criticism on social media, drawing negative attention for the bank involved, and eroding not just consumer trust, but the trust of other stakeholders in the business. Trading banks leave themselves open to significant losses in transactions if their systems go down due to an outage, even for a few seconds.
There are a multitude of reasons for banking services to fail. The majority of internet-based banking outages occur because the bank’s own internal systems fail. This can be as a result of transferring customer data from legacy platforms which might involve switching off parts of the network. It can also be because they rely on cloud providers to deliver their services and the provider experiences an outage. The Bank of England has said that a quarter of major banks and a third of payment activity is hosted on the public cloud.
There are, however, steps that banks and other financial institutions can take to prevent outages and ensure as close to 100% uptime as possible for banking services.
Building resiliency strategies
If we assume that outages are inevitable, which all banks should, the best solution to managing risk is to embrace infrastructure resiliency strategies. One method is to adopt a multi-cloud and multi-CDN (content delivery platform) approach, which means utilising services from a variety of providers. This will ensure that if one fails, another one can be deployed, eliminating the single point-of-failure that renders systems and services out of action. If the financial institution uses a secondary provider—such as when international banking services are being provided across multiple locations—the agreement must include an assurance that the bank’s applications will operate if the primary provider goes down.
This process of building resiliency in layers, is further strengthened if banks have observability of application delivery performance, and it is beneficial for them to invest in tools that allow them to quickly transfer from one cloud service provider or CDN if it fails to perform against expectations.
Automating against human error
Banks that are further down the digital transformation route should consider the impact of human error on outage incidents and opt for network automation. This will enable systems to communicate seamlessly, giving banks operational agility and stability across the entire IT environment. They can start with a single network source of truth, which allows automation tools to gather all the data they need to optimise resource usage and puts banks in full control of their networks. In addition it will signal to regulators that the bank is taking its provisioning of infrastructure very seriously.
Despite evidence to the contrary, downtime in banking should never be acceptable, and IT teams can make use of specialist tools that allow them to dynamically steer their online traffic more easily. It is not unusual for a DNS failure (domain name system) to be the root cause of an outage, given its importance in the tech stack, so putting in place a secondary DNS network, or multiple DNS systems with separate infrastructures will allow for rerouting of traffic. Teams will then have the power to establish steering policies and change capacity thresholds, so that an influx of activity, or a resource failure, will not affect the smooth-running of their online services. If they utilise monitoring and observability features, they will have the data they need to make decisions based on the real time experiences of end users and identify repeated issues that can be rectified.
Banks are some way into their transformation journeys, and building reputations based on the digital services that they offer. It is essential that they deploy resilient technology that allows them to scale and deliver, regardless of whether the cloud providers they use experience outages, or an internal human error is made, or the online demands of customers suddenly and simultaneously peak. Modern technology will not only speed up the services they provide, but it will also arm them with the resilience they need to compare favourably in the competition stakes.