Cybercrime and crisis insurance products to boom in coming years

13 September 2016 Consultancy.uk

Insurance against a range of risks in the political risk and crisis management space are set to boom in the coming years, after a period of lacklustre profitability growth within the market. Particularly cybercrime insurance, already the single largest segment, will see continued strong growth of +20% per annum to 2018, followed by insurance products for product recalls.

Threats from a range of actors, from terrorists to organised crime and cybercrime syndicates, remain a bane for people and businesses around the world. The insurance industry has, for centuries, sought to take the edge of a variety of risks by providing a range of products that cover potential losses from contingencies.

According to a new analysis from KPMG, the recent relative stall within the Political Risk and Crisis Management insurance market is not likely to stick around forever, even while things will remain relatively flat over the coming year. The analysis, titled ‘Political risk and crisis management insurance’, considers market trends as well as a way forward for market participants.

Political Risk and Crisis Management

Market trends
The phenomenon of global terrorism as well as the rapid expansion of cybercrime has seen increased activity within the realm of Political Risk and Crisis Management insurance. The insurance segment is itself not well delaminated however, with three broad categories covering a range of risks (which themselves often contain a rich array of possible needs from clients).

The Credit & Political category has a market size of around $2.1 billion, of which around $1 billion is related to non-payment, $675 million to contract frustration and $375 million to confiscation. The Political Violence category is mainly related to terrorism, which particularly in the West been on the increase in recent years following incidents in France, Belgium and elsewhere, and has a market size of $1.1 billion, while war on land has a market of around $150 million. The largest single segment is Other Crisis Management, which contains events like kidnapping & ransom, with an insurance market of $420 million, product recall, with an insurance market of $1.5 billion, and cyber security, a market valued at around $2.8 billion.

Expected annual growth rates across market segments

Changing market
According to the firm’s analysis, much of the market will see relative slow growth over the coming two years. The trade credit insurance market is set to grow by 4%, while contract frustration is set to grow by around 5%, confiscation will be up just 2%. Terrorism, while a big media event, is not likely to see significant growth in the current period – up just 4% annually to 2018, while War on Land is set to grow slightly to 6%.

In the Other Crisis Management segment, cyber security is set to grow the most rapidly, at 20% per year. Increased digitalisation and an increased range of ways to penetrate businesses, combined with every increasing sophistication under cyber criminals, mean that businesses continue to face stiff adversaries. Product recall, which can be particularly burdensome on businesses, is expected to see a strong 7% growth. Marine piracy is the only item to see a decrease, at -10%, on the back of improved global efforts to end the phenomenon.

The Big Four firm highlights that insurance companies may benefit from companies seeking new products that meet their specific requirements – particularly within the cyber security space. These products may themselves not be directly insurance cover related, but may instead focus on prevention through advisory related to risks for businesses and means to mitigate those risks. The changing phenomenon of global terrorism, from large scale property damage to business interruption, means that insurers may need to develop new solutions as clients seek to avoid indirect threats arising from terrorist activity.

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An 8-step framework for banks to prepare for FRTB changes

02 April 2019 Consultancy.uk

With FRTB expected to come into force in 2022, it is critical that banks implementing necessary changes remain on track for their compliance timelines. Whether a company is aiming for the mandatory Standardised Approach (SA) or the voluntary Internal Models Approach (IMA), the programs often represent a significant investment, requiring process, systems and cultural change. 

Drawing from its experience in helping banks meet the milestone set in their compliance timelines, Capco – a management and technology consultancy for the financial services industry – has developed an eight-point prioritisation framework for FRTB preparation and implementation. Natasha Leigh Giles, a Managing Principal at the consultancy, outlines the main dimensions of the framework: 

Prioritisation framework for FRTB

1. Front office operating model

For those who have already implemented the Volcker rule, the desks are well defined with monitoring and governance frameworks. However, for companies that have not been required to adhere to the U.S. regulation, there may be additional work involved in implementing desk-level controls as required under FRTB. The trading desk structure is especially important for banks planning to implement IMA, as this regime is applied at the desk level and requires that the full flow of the selected desk is able to pass the IMA requirements (including the modelability test for the risk factors). Key business decisions may be required if a desk trades complex products that are more aligned for SA treatment. 

2. Product scope

In order to reach the IMA status, products are required to be supported with additional data sets including historical market and reference data as well as risk factor pricing evidence. The opportunity for 2019 lies in refining the assessment on the feasibility of each product type to ensure a clear scope is agreed for the IMA environment. If the challenges are too complex or costly to overcome, such as access to historical market data, availability of price verification for the risk factors or significant enhancements to support computational capacities, then these products should be scoped out of the IMA program as soon as possible in order to save time and effort on continuing analysis. 

3. Client & trading activities

There is no need to wait until the FRTB implementation timeframe to undertake a holistic review of client and trading profitability – including the capital impacts. For example, running training and awareness campaigns within the front office can help the traders to understand the impacts of their activities and encourage changes in the way that they trade. By considering this holistically as a business and operational change, it can help keep the focus and resources on the primary (profitable) business in preparation for the compliance deadline. 

4. Internal controls

Methodology, reporting, auditability, and process governance for internal controls also need to be monitored in detail. We recommend having clearly defined processes accompanied by effective training across front-to-back office. For some banks, it will be beneficial to audit existing capital adequacy processes to ensure that findings are highlighted in advance of the implementation timeline and the appropriate focus is achieved within senior management.

5. Data & metrics

Financial institutions need to consider their overarching governance and ongoing management for the data (including ownership, quality control, golden source storage solutions, etc.) and the ongoing control framework for ensuring the data remains accurate and relevant for capital adequacy modeling. If there has not been a data lineage exercise already applied, this is a great opportunity to deliver business benefit, even in 2019. By creating agreed definitions, preferred sources, ownership and workflows for managing data quality, the benefits of more accurate data can already be applied to existing capital calculation models. 

Framework for FRTB

6. Model management & validation framework

In preparation for the FRTB regime, an opportunity for 2019 is to understand if there are gaps or control concerns to manage immediately. Model enhancements across SA and IMA will need to be productionized for output accuracy and refinement, however, these need to be maintained alongside existing Basel 2.5 BAU models and other concurrent changes e.g. LIBOR Transition. Business process optimization, testing environments and automation tools, documentation and model validation can all be reviewed for immediate benefits and prepare the process for a smooth implementation of the future FRTB models. 

7. Technology platform & testing environments

With regards to technology planning, the opportunity in 2019 is focusing on gaining agreement of the front-to-back FRTB future state architecture including the use of vendors as applicable. By ensuring a disciplined focus upon design and solution definition across all requirements, it provides a clear baseline for implementation planning and scheduling. Establishing a technology architecture which allows for FRTB data feeds, model enhancements, control definitions and accurate capital calculation outputs will provide the program with essential data and metrics needed for decision making. 

8. Leverging synergies

Once a baseline plan has been established, it is possible to identify synergies across other programs – such as the SA-CCR (Standardized Approach for Counterparty Credit Risk) or the IMM (Internal Models Methodology) – that could deliver overlapping benefits at reduced effort. Understanding requirements, defining the future state architecture, and implementing the change in a complex environment requires a mix of strategic principles and program management. Therefore, we consider it an opportunity for 2019 to take a centralized approach for data lineage and requirements gathering as this would be beneficial for optimizing capital costs across both the market and credit risk environment.

Conclusion

By considering each topic strategically in 2019, benefits such as data quality enhancements, strengthened internal controls and flexible test environments will not only bring immediate business value, but also set a solid foundation for a comprehensive FRTB implementation in the years to come. 

For more information on Capco’s model and the its approach in helping banks plan for FRTB, download the full whitepaper on the firm’s website.