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Wealth Management

MOVING INSURANCE TO A PREDICT AND PREVENT MODEL

By Manan Sagar, CTO for Insurance, Fujitsu UK

 

In Philip K. Dick’s The Minority Report, three future-gazing mutants are used to alert the police force about crimes before they are committed. The premise is, by predicting when and where crimes will happen, they can prevent them from happening at all.

While Dick’s novel is fantasy, the idea of preventing incidents from happening can be transferred to the real world. And the insurance industry has begun to use data to move from the classic ‘repair and replace’ model to ‘predict and prevent’.

In essence, this means a shift from reactive insurance policies to proactive. In being reactive, customers purchase insurance policies and nearly immediately forget about it… until an accident happens.

But by using data to predict potential incidents and damage, insurance companies could reduce the likelihood and severity of losses suffered by their customers and consequently improve their operating ratios.

 

Manan Sagar

Too little, too late

Currently, many traditional insurers use a system where the customer pays for a policy, which is then left or forgotten about until something happens; they then make a claim.

Take home insurance policies, for example. Generally, consumers will purchase and leave them. While everything is fine, there’s no issue; however, it becomes a very expensive problem for both the insurer and customer if something does break.

But with the massive amount of data points insurers own, they can change the way policies are not just bought, but also utilised by customers.

Water damage is the number one cause for home insurance claims, and if the customer gives the insurer access to those data points, they could help to prevent it. The insurer is alerted when there is excessive water pressure in a particular household, which would lead to pipes bursting. This activates an insurance claim, which interacts with the water company to fix the issue and the potential incident and consequent losses are avoided before the loss happens.

This is possible to do at scale with the automation technology now available and the prevention focused model could work for many different areas of insurance. It will build trust between insurers and their customers by demonstrating value and insurance premiums will begin to be viewed lesser as an “annual tax” and more as a “service charge”.

 

If it ain’t broke, it might still need fixing

Some may argue that the current model of insurance is working. Companies are, for the most part, remaining profitable and change could be viewed as risky by key stakeholders.

But the predict and prevent model can help insurers save in instances that have been a thorn in the side for many years.

Take fraud – it’s a massive cost to insurance companies; it was estimated by KPMG that in 2018, fraud cost UK insurers £1.2 billion.

While predict and prevent won’t completely eliminate fraud, the number of cases would drop. If someone is claiming they had a car accident, there is enough data out there to get the full picture of what happened.

Traditional insurance companies are also under pressure to buy into these services because of the cheaper alternatives that are hitting the market. As with other areas of financial services, insurance is being disrupted by a number of insuretech companies that are agile and cheaper than traditional insurance.

With all the money-saving comparison sites, consumers are savvier than ever about what company will get them the best deal. Recent research found that households could be losing up to £1,400 a year by not changing car and home insurance companies each year – meaning long-standing customers are being incentivised to change insurers.

This comes back to an important point around trust. If customers cannot trust their insurers to give them a fair price, why should they continue to pay for their services?

When there are cheaper alternatives available, traditional insurance companies need to demonstrate value by helping their customers reduces their losses by focusing on prediction and prevention.

 

Unlocking the power of data to foster a new relationship

The “predict and prevent” model works by analysing vast volumes of data to find patterns in the causes of particular risks. By identifying the beginnings of these patterns in real time data, interventions can be made before the pattern plays out. Think of a manufacturing business. By tracking the health of factory machines right down to individual components, insurers can not only create more accurate predictions about their likely operational lives, but actually recommend timely repairs to stop the machine from breaking down, saving not just money on both sides, but also reducing accidents at workplace. The power of data can be similarly applied to aircraft or locomotive and in maintaining railway, water and energy lines.

The focus on preventative rather than reactive activities can help to change the role of the industry as a whole. Organisations can focus on getting things right for the future, rather than addressing the mistakes of the past. That will help to create a culture based around social purpose – that is of growing importance to both employees and customers today.

 

Wealth Management

STOCK MARKET ANALYSTS DISCUSS HOW TO INVEST DURING A RECESSION

  • Online tool looks back at how world markets recovered after the last recession in 2008
  • Analysts take learnings from previous recessions to offer insight on how to invest during a period of instability
  • Certain areas of the stock market can increase in value during a recession

The economic crash due to Covid-19 is a unique event, however stock market experts have taken learnings from previous recessions to predict the stocks that may increase in value during this time.

IG Markets, Europe’s largest online derivatives trading provider, has taken learnings from previous recessions, using historical data and online tools such as Decade of Trade, which visualises world stock market trends over the 10 years since the 2008 crash, to provide predictions about the areas of the stock market to watch during an inevitable recession.

 

Stocks to watch during a recession

Under expansionary circumstances, stocks that have strong growth prospects such as healthcare and consumer staple sectors, for the future typically command lofty valuations and produce high returns, as investors bank on the company’s ability to generate more income as time progresses. This phenomenon typically results in high price to earnings (P/E) ratios like those currently present in some of the market-leading tech stocks.

In the event of an economic downturn, however, these profit-hopeful stocks are often discarded as investors align their income assumptions with slowing growth and lower consumer spending.

On the other hand, stocks with stable – but often more modest – income generation tend to be more insulated from dramatic stock shocks that frequently accompany recessionary periods. These stocks are known as “defensives” and, broadly speaking, include the utility, healthcare and consumer staple sectors. Given their profitability profiles, they become an important collection of stocks to keep an eye on when the broader market encounters a rough patch.

Consequently, a portfolio comprised entirely of equities is remarkably vulnerable in times of recession, particularly at the onset when losses are often steepest. With that in mind, it may prove beneficial to look outside of the equity market for some of the best recession-proof investments.

 

Gold can be an investment during a recession

XAU/USD is widely regarded as a safe haven asset for its stable store of value and tangibility. Further still, gold can act as an inflationary hedge, making it an attractive investment in times of recession and in periods of lower interest rates when inflation may threaten to take hold. Gold has demonstrated an almost innate ability to retain its value during contractionary periods, thus making it an attractive investment in times of uncertainty.

 

The US dollar: an attractive currency during recessions

Sharing similarities with gold, the US Dollar also boasts safe haven attributes. Due to its role as the world’s reserve currency and the backing of the world’s largest economy, the US Dollar is both incredibly liquid and sought after. Issued by the Federal Reserve, the Greenback is arguably the safest currency in the world and has become a quasi-currency of exchange in many nations where domestic currencies have had their purchasing power fall, due to inflationary pressures or other economic woes.

Consequently, holding US Dollars during periods of uncertainty or turmoil is often viewed as an attractive alternative to other assets. Evidenced in the Great Financial Crisis when the United States dragged the rest of the world into a global recession, the US Dollar surged almost 25% during 2007 to 2009 even as the Federal Reserve lowered interest rates to the floor.

The Dollar’s strength was largely owed to the fact that the Federal Reserve possessed ample liquidity and the US economy was soon in a position to recover while others were mired in recessions – some of which have never fully recovered.

Joshua Warner, Anaylst at IG Markets, said: “While there is a strong argument that a global health pandemic like Covid-19 has been on the radar of governments and institutions for decades, the lack of preparedness of most governments and businesses shows how unprecedented the current situation is.

“It is almost guaranteed that the UK will enter a recession in the coming months. The Bank of England (BoE) has said it is likely to be the sharpest one on record, while Chancellor Rishi Sunak has warned it will be a ‘severe recession the likes of which we haven’t seen before’.”

Peter Hanks, Junior Analyst at Daily FX.com, said: “With the benefit of hindsight and the lessons of the three most recent recessions, it can be argued the best recession investments are not stocks at all, but rather assets that retain their value even as growth slips. Therefore, if equity exposure is a must-have in your portfolio, the US Dollar and gold should also be given consideration – particularly for the risk-averse investor or one who suspects an impending recession.”

 

To learn more about the stock market over the last 10 years to understand future trends, please visit: https://www.ig.com/uk/special-reports/decade-of-trade

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Wealth Management

SECURING THE EVIDENCE FOR VAT AND TAX

Filippa Jörnstedt, Senior Regulatory Counsel at Sovos

 

Businesses are almost entirely digital in their nature. With sophisticated technology now in the reach of most, the measurement and reporting of business transactions have transitioned from slow, manual processes to being automated, allowing finance teams room to breathe. However, alongside the positives of these advancements, there also comes a responsibility to understand the wide-ranging requirements of governments worldwide when it comes to financial transparency.

Recently, we’ve witnessed a shift towards more continuous transactional controls and reporting schemes carried out in real-time, as governments look to reduce their VAT gaps and discrepancies in their economies. Historically, the pressure was on businesses to report their own transaction data, but with the new formats being used, governments are beginning to take matters into their own hands. This makes logical sense, as there is far more complex real-time data being submitted by businesses that governments have access to.

Filippa Jörnstedt

The figurative stick that is VAT control reform is often introduced together with a carrot: removing the need to collate and submit periodic reports, such as VAT returns, to the tax authorities. Ideally, this means less pressure on businesses.  That is, until a problem surfaces, such as data being interpreted in the wrong way, or a dispute arising about the timing of a transaction. Often, these problems originate from reporting being mishandled or through the clearance of transaction data, so keeping a rigorously organised and in-depth record of financial information is imperative for businesses to avoid these problems. Aside from this, it allows them to substantiate any government reports and fix any issues. The difficult aspect, though, is how to build these archives in this way.

 

Digital paper trails

In previous iterations, financial employees were responsible for collating and archiving paper invoices, receipts and other data to provide evidence of their business activity. So, the process of archiving isn’t new, but it needs to reflect the digital times we find ourselves operating in. Simply put, this isn’t a manual task anymore, but many businesses have seemingly just moved to e-archiving without too much thought to just how crucial it is to get right. Modern tax authorities are asking for specific details behind each transaction, paying particularly close attention to time and date, so the archive cannot simply be moved to a digital filing drawer.

Looking at a recent example, India’s reporting requirements now involve invoice data to be sent to the authorities in real-time, for pre-approval and registration onto a state-operated platform.  The invoice will only be considered valid following the generation of a unique Invoice Reference Number by the same platform.

Looking at this from an audit perspective, if a business is later questioned on a transaction then they need to be able to quickly find the correct evidence of that particular transaction, as well as any government response message in relation to that transaction, or risk major fines. Alongside India, also countries closer to home such as Poland and Finland are shifting the way they operate with invoicing and reporting, following Italy’s successful system change last year.

And this is a clear trend; audits into business activity are only going to become more precise and closer to real-time as further governments see the benefits of adopting these methods of tax control. Real-time reporting and mandatory e-invoicing makes sense more widely as these systems have proven to be very effective at reducing VAT gaps, with evidence of this going back decades in areas of Latin America.

 

An authority shift

As outlined, with further countries adopting real-time reporting or variations of this, the tax authority is becoming more central to processes as they receive and gather details on VAT owed by businesses. Reporting in this way makes sense, but pressure on finance teams to keep incredibly detailed data-trails is more important than ever. Tax authorities are increasingly building rich data records of their own as they are receiving more and more granular data in real-time. As a result, the source-of-truth no longer primarily lies with the taxpayer’s financial records, but instead with the tax authority’s ledgers.

To keep pace with this, businesses can no longer simply file away invoices digitally, but also need to record as much data as possible to corroborate the authorities’ records of their transactions. By doing so, they are building an evidence base to be able to dispute any queries or wrong decisions to safeguard their activity. Keeping this front of mind will make the process of addressing any problems far easier than relying on old, less-detailed archives.

Throughout the EU, there are many variations in archiving laws that need to be adhered to. German requirements are set out in their GoBD principles, but in Italy the regulations are far more technical and detailed, reflecting their tax setup. This Italian model asks businesses to provide a documented description of their archives, an overview of its process, but also a delegation plan to show assigned responsibility for those processes. This isn’t an easy set of requirements, especially with laws frequently changing.

The whole aspect of archiving has long been important, but now the stakes are higher; it’s not simply a box-ticking exercise. A complacent, old-school approach to both invoice and transaction data archiving could now result in severe repercussions for businesses. A robust digital strategy is vital.

 

Managing archives to reflect the new normal

Digitalisation does have the benefit of taking some of the pressure off businesses, but this switch in data authority from the business to the tax authority doesn’t mean less work. Regardless of where information is stored, e-invoices must be now kept centrally and be available at any time for those that may need them. Storing these individually, including specific supporting transaction data will mean faster access to relevant evidence for any issues that may arise. Fortunately, technology is now available to do much of the heavy lifting.

To keep up with continually shifting regulation and, importantly, keep compliant with it, businesses must examine how they manage their transaction data and how to ensure their VAT evidence locker is fully stocked. Because legislation may change, but compliance is always compulsory.

 

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