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From trading to borrowing and lending, services that were once the sole realm of investors and their financial institutions are now being created as DeFi projects. These are powered by smart contracts on the blockchain. But DeFi is not just about disruptive technology.
These projects are supported outside the traditional financial services and fintech support structure. The balance of economic power has shifted away from centralized institutions to the participants in the network. Investors control the funds in their digital wallets, and other participants get financially rewarded for funding these new financial services for investors, playing new roles such as “crypto miner,” “proof of stake validator” or “liquidity provider.”
Simply put, the traditional financial services ecosystem is being radically transformed as this decentralization moves ahead.
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1. Decentralized finance
Will the next pandemic happen in another 100 years or just five?
As we enter 2021, there’s a lot more
information
for actuaries to navigate – and luckily,
a lot more computing power to manage it all.
& complexity
Will COVID-19 be with us for decades but be managed effectively alongside the common flu or evolve in unexpected ways?
ESG
Decentralized finance (DeFi)
NEXT
I’ve written about ESG a few times this year, from the need to act now to the variety of impacts we’re seeing from the rise of sustainable investing. And the lack of standards has been a concern for some time. But it’s now clear that all institutions will need an ESG score just to attract investors – and it needs to be as strong as possible. Do you have a plan?
New technology models are coinciding with the long-term shift in remote working
to open up a new avenue to a better ESG score. Historically, you’d need to power to heat and cool a data center, all of which is carbon-heavy. What if, instead, you had the same platform – but it was designed as a multi-tenant SaaS that’s based in a
low-energy data center?
You just subscribe to the bit you need, so it’s a fraction of the energy requirement. Incorporate that reduction into your ESG score – and at the same time give your business the power it needs to expand.
2. ESG
all of which are heightened with a remote workforce.
governance
Not only were largely office-based infrastructures under extreme pressure, but the pandemic also raised concerns about:
security
scalability
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Should there be flat additions for mortality, or should older age groups and impaired lives be affected differently?
Could excess deaths be spread out over a number of years?
And ultimately, should there be a stronger correlation between mortality and the economic fallout of a pandemic?
This simple model needs to be revisited
for internal risk management purposes.
Review the resilience of your solvency platform and framework
Crypto has been in the news a lot, but the traditional institutional financial industry isn’t necessarily ready to support all of the latest and greatest advances that are generating the press. As my colleague John Omahen points out, there’s still a lot of uncertainty around custody, regulation and technology – and how it plugs into traditional financial institutions’ operations and technology platforms that have been in place for many years.
For example, although retail investors can easily trade crypto or NFTs through crypto exchanges, institutional investors have a number of other considerations that make crypto investing more complex, including KYC/AML and best execution. Then they have to integrate all of the post-trade transaction and life cycle data into their traditional books and records platforms and ensure the data is kept in sync with their digital asset wallet technology or custodians.
But despite the uncertainty and complexity, you need to be thinking about crypto and digital assets now.
3. Crypto and digital assets
Regulation has traditionally led insurers’ robust approach to solvency, with Solvency II driving stronger governance and control of modeling results. Now, critically, insurers must look deeper and consider all of the aspects of their solvency models that haven’t worked as well.
You must also ask yourself serious questions about the changing nature of the workplace in the pandemic. Will what started off as emergency lockdown measures become a more permanent shift and keep many staff working from home or remotely more often? Should cloud computing and SaaS-based platforms form part of your protection against future challenges to business continuity?
4. Digital data delivery
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Let’s solve insurance risk with flexibility and control
NEXT
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Look at the stresses and combinations of stresses that you are running on your models. How did any pandemic modeling you carried out compare to actual COVID-19 results and would it have protected you in previous pandemics? Or should the stresses be higher and more explicitly targeted?
In terms of solvency, it’s important to gauge how well your stochastic and stress tests on models actually protected your company. What’s more, could you have survived any additional shocks after the initial market falls in March? By focusing on reverse stress testing, you can uncover any hidden risks and vulnerabilities that may also cause insolvency.
Assess stress testing
Consider layering on several mortality scenarios, but be prudent and make sure you underestimate for annuitant mortality and overestimate for life assurance mortality.
Some basic assumptions should also be made in the stresses about the pattern of mortality either worsening due to increased deaths from COVID-19 or the impact of long-COVID improving because of improved public health, hygiene and resistance to future viruses or flus.
However, remember that at this stage there is still a danger of over-modeling, overthinking and spurious accuracy, with not enough data or knowledge to support more complex models.
Rethink mortality assumptions
Tying back to your solvency platform and framework, actuaries need to be able to answer senior managers’ most fundamental questions, fast. At the start of the pandemic, C-suite executives were desperate to know what could happen next, the impact on their solvency ratio and whether risk teams could model all this remotely.
To consistently provide a rapid response in these circumstances, you need a risk platform that is well governed, scalable and accessible in the cloud, with the flexibility to model changes quickly.
Deliver timely information
Solvency modernization is now a reality for insurers around the world, with many countries echoing the spirit and format of Solvency II and the upcoming Insurance Capital Standard.
Beyond compliance, these supervisory guidelines are helping create a stronger insurance sector and improving protection for policyholders and the overall management of insurance companies. What better reasons to modernize solvency through both your technology and your risk modeling framework?
Push ahead to meet new solvency requirements
Staying on the same theme, one of the biggest challenges facing the industry is the reporting on different asset class investments, especially with new asset classes like crypto.
The end investor typically wants to see all of their investment data in one place. Frictionless platforms, APIs and artificial intelligence can synthesize
the data to make it presentable and useful to that investor across their
entire portfolio. This ensures that risks are being diversified and managed holistically. And as digital assets like crypto move into the mainstream
as 5-10% of investor portfolios, this consolidated reporting will be
critically important.
Crypto and digital assets
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Martin Sarjeant, senior vice president, Product Management, Insurance, FIS
It’s time to think about where financial services is going next. We’ve covered a number of future-oriented topics on our recent podcast series including CX, digitization and data, the disruption driven by artificial intelligence and the need to take a step back when thinking about risk and compliance.
But let’s take the conversation further. Where should you really focus now?
Tony Warren,
EVP, Head of Strategy and
Solutions Management, FIS
Six Trends to Track
in Financial Tech
Article
(DeFi)
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Let’s solve insurance risk with flexibility and control
Of course, regulations don’t go away. And the biggest challenges are around new and enhanced surveillance, oversight and regulations around the data flow. We’re seeing greater enforcement of existing data security, risk and AML regulations, as well as expanding requirements for behavioral surveillance (such as electronics communications) and ESG-related mandates.
The digital asset explosion brings its own challenges as regulators attempt
to enforce existing rules such as KYC, AML and trade surveillance to a new technology stack and market dynamics, as well as digital-specific mandates such as the FATF Travel Rule.
But there are also interesting opportunities. For instance, when it comes to regulatory reporting, authorities across the globe are shifting to demand more granular, real-time information and towards a pull (rather than push) model. This means the industry can gain efficiencies by shifting from mechanical report production to cloud-based information management tools.
5. Regulatory change
Regulatory change
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Lending is not just evolving quickly, it’s transforming in multiple dimensions, from each tier of the market to origination and servicing across multiple loan types.
For example, a shift of financing to the point of sale with buy now, pay later (BNPL) is changing the balance in consumer lending. SMB lenders are streamlining and automating cash advance, while lending origination marketplaces are giving small businesses a wider range of lenders. And for complex commercial loans, machine learning is fine tuning banks’ ability to determine what loan products to offer, streamlining origination and improving their view of credit risk.
There are also regional variations; for instance, the lines between commercial, small business and consumer lending origination are blurring everywhere, but especially in Asia, where the market increasingly prefers to use a single origination solution for all three types of loans.
Finally, something I’ve already mentioned a couple of times in this piece – digital assets. Crypto-backed loans are an easy way for mainstream banks to enter the market, and from there they can move to crypto-denominated loans. In the commercial space, we’re starting to see the first DeFi-syndicated loans, which
use the traditional syndication structure to package DeFi assets. That’s definitely worth watching in the coming year.
And throughout, the digitization of the experience – driven by consumer expectations for easy and instantaneous online transactions – is even pervading the complex, traditionally high-touch lending world. That’s a theme that we’ve seen develop over the last few years and it will remain important in 2022 and beyond.
So, just when we think the pace of the market can’t get any faster, we’re proven wrong. Change continues to accelerate. In a post-COVID world that’s driven by decentralized finance, enhanced technologies and a data-hungry community
with ESG sensitivity, it’s even more important to cut through the noise to create
a smoother and smarter world. Do you have the technology, infrastructure and expertise to succeed?
6. Lending ecosystems
Lending ecosystems
Digital data delivery
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