Could the new accountability rules spring one last surprise on UK insurers?

The accountability regulations about to be introduced into UK insurance contain a requirement about which the regulator has been uncertain. Until now, that is. The regulator’s recent pricing review will almost certainly to have swept away that uncertainty. As a result, key pricing individuals will now have to be recognised as certifiable, with all the obligations that come with that.

This requirement originates with the Senior Managers and Certification Regime’s earlier introduction into banking. Many banks had investment arms whose trading was carried out using algorithms. And that algorithmic trading became recognised under the banks’ accountability regime as a certification function.

The Algorithmic Doubt

Now, as has been the regulator’s habit, those certification functions have been replicated in the insurers’ accountability regime. Yet back in a July report, the regulator thought that algorithmic trading was “unlikely to apply in practice to insurers”. ‘Unlikely’ then; pretty certainly now?

Algorithms were at the heart of several of the practices about which the regulator raised serious concerns in their review of pricing in the household market. And with algorithmic trading sitting there in the insurers’ accountability regime, insurers face a difficult choice.

Do they lean towards the regulator’s inclination in their July report and deem algorithmic trading as not applicable? Or do they read the October pricing review and recognise that with algorithms so central to pricing now, they should grasp that compliance nettle and treat it as a certification function.

Regulatory Eyebrows

If that choice is the insurer’s to make, it will be one that the regulator will undoubtedly take an interest in. After all, as well as the pricing practices themselves, the regulator has serious concerns about how pricing was being overseen. So some regulatory eyebrows could well be raised with those insurers who choose not to treat it as a certification function.

And those eyebrows won’t be raised in the direction of the algorithmic experts. They’ll be raised in the direction of the senior management and the board directors. In other words, the people responsible for making the key governance decisions within an insurer.

And therein lies an extra twist. With governance at the heart of the regulator’s pricing concerns, can some insurers risk making a wrong call on algorithmic trading?

It’s All About the Algorithm

In my mind, there is little difference between an algorithm deployed to trade investments and an algorithm deployed to price policies. Think about what this particular regulatory rule is centred around. It is not really about the trading of investments (and so neither the pricing of policies). It is centred around black box systems, full of levers and mysterious but influential levels of significance. The regulator wants all that to be handled properly.

And I think consumers want that too. Algorithmic systems are now central to ethical issues like fairness and non-discrimination,  across both underwriting and claims.

The ripples being sent out by the October pricing review are going to be wobbling the good boat ‘Insurance’ during much of 2019. It is critical that insurers grasp this spreading impact. They need to address issues like algorithmic trading, that could disrupt the course they’ve set for their business in 2019.