In Turkey, the insurance sector has long been considered as one of the prospective vanguards of the country’s economy. Turkey aims to be the world’s 10th biggest economy by 2023 with a worth of gross national product of US$2 trillion[i]. In line with this objective, the government has the insurance sector, among others, well in its sights. Newly emerging risks, recent dramatic events and the economic climate are important motives when shaping the underlying legislation and insurance tools. Against this backdrop, this article provides an outline of the latest developments taking place in the sector.
‘Türk Reasürans Anonim Şirketi’ introduced by the Ministry of Treasury and Finance
An Economic Programme was introduced in 2018[ii] aimed at stabilising the economy and building healthy and sustainable growth. To complement this, on 6 September 2019, the Ministry of Treasury and Finance founded Türk Reasürans Anonim Şirketi (“Turk Re”) to act as a lifeline support for the Turkish reinsurance market. The Ministry of Treasury and Finance is the sole shareholder of Turk Re which has a capital of approximately US$100 million. It seeks to contribute to the New Economic Programme, increase the domestic reinsurance capacity in Turkey and ensure resource efficiency[iii]. Ms. Selva Eren, General Manager of Turk Re, stated that they plan to retain US$210 million domestically out of US$1.4 billion which will be transferred abroad through reinsurance[iv].
New Turkish Private Pension Regulation and Supervision Agency
The Turkish government has also been undergoing structural reforms to ensure a more suitable transition and adaptation to European Union (EU) standards by taking into account the demands of the private sector. With this in mind, the Insurance and Private Pension Regulation and Supervision Agency (“IRSA”) was founded on 18 October 2019 as an autonomous authority to act as the new insurance regulatory agency. All references previously made to the Ministry of Treasury and Finance and the Undersecretariat of Treasury in relation to legislation in the field of insurance will be made to the IRSA according to the founding Presidential Decree No. 47[v].
The IRSA has been designated to prepare and implement legislation for the insurance and private pensions market. Its role is to monitor and guide this and where necessary, execute measures to protect the insured and also market participants. Furthermore, the IRSA is authorised to carry out inspections, audits and investigations relating to the insurance market and entities involved with private pensions.
The IRSA has been well received by the insurance industry. Mr. Atilla Benli, Chairman of the Insurance Association of Turkey, stated “…the expansion of the non-bank financial system has been a priority for the Ministry of Treasury and Finance as well as for ensuring a balanced and solid financial market. The establishment of the IRSA is an important step towards this goal and a long-awaited positive development.” He also stated “…We think the IRSA will make quick decisions, particularly with regards to secondary regulations.[vi]”
Insurance sector gaining momentum with further legislative and administrative developments
The insurance sector has gained momentum over the years following several noteworthy legislative and administrative developments. One such development, focused on Small and Medium Sized Enterprises (SMEs), is the introduction of Trade Credit Insurance, which provides coverage for any risk of non-payment of debts on sales that are not subject to any security instruments. Now the regulations are in force, SMEs with net sales below US$4.3 million can benefit from this insurance. Building completion insurance policies, credit insurance policies and short-term trade credit for SMEs have recently been introduced as products to limit the effects of the economic slowdown and currency volatility[vii].
Other regulations include the decision to develop the system on the basis of a government backed incentive, which provides insurance for SMEs for their trade credits with guidelines and tariffs announced by Ministry of Treasury and Finance in 2018 to be adopted by insurance companies for the credit insurance foreseen for SMEs[viii].
Legal protection, surety, and cyber security insurances are other noteworthy topics on the insurance sector’s agenda. Legal protection insurance, providing coverage for any expenses and other costs that need to be incurred in the context of legal disputes or settlements that fall under the coverage of the policy, have been included in Judicial Reform Strategy Document[ix] announced by the Presidency, and awaiting further detailed regulations. Surety insurances, on the other side, providing debtors with coverage against any failure in fulfilling their obligations specified under the policy, have been included in the programme of the Ministry of Treasury and Finance, as mentioned at the Export Master Plan[x].
In particular, cyber security insurances are nurtured by contributions from the private sector, which became more aware of the market’s needs particularly following the recent cyber-attacks in Turkey. The regulatory framework covering the needs of this rapidly growing market are yet to come; however, the private sector has already started to issue specific cyber insurance with the aim of securing digital platforms.
The global Insurance market requires further tools and services for both individuals and corporations who are now facing new risks resulting from the many changes to the social and financial environment, as well as those in relation to climate change and ongoing technological developments. The Turkish Government’s New Economic Programme demonstrates its support to exporters, contractors and all other foreign exchange earning enterprises through the development and diversification of products such as credit insurance. The newly established IRSA is also expected to ensure coordination and balance between the private sector and the government’s agenda. While much still needs to be done, progress is certainly being made in the government’s attempt to further enhance Turkey’s insurance market for all.
[i] 10th Development Plan, 2013; Available at http://www.sbb.gov.tr/wp-content/uploads/2018/11/Onuncu-Kalk%C4%B1nma-Plan%C4%B1-2014-2018.pdf
[ii] Press Release by the Ministry of Treasury and Finance dated 21 September 2018; Available at: https://hmb.gov.tr/haberler/yeni-ekonomi-programi-yep-aciklandi; see also the New Economic Programme at: https://ms.hmb.gov.tr/uploads/2018/10/yeni-ekonomi-programi.pdf ; see also Insurance and Individual Pension Activity Report, 2018; Available at: https://ms.hmb.gov.tr/uploads/2019/07/Sigortac%C4%B1l%C4%B1k-ve-BES-Faaliyet-Raporu-B%C3%B6l%C3%BCm-I.docx
[iii] Interview with Selva Eren dated 30 October 2019, available at: https://www.aa.com.tr/tr/ekonomi/turk-reasurans-as-kuruldu/1595522
[iv] Interview with Selva Eren dated 30 October 2019, available at: http://www.hurriyet.com.tr/yazarlar/noyan-dogan/doviz-cikisini-engelleyecegiz-41340329
[v] Article 19 of the Presidential Decree No:47, available at: https://www.resmigazete.gov.tr/eskiler/2019/10/20191018-6.pdf
[vi] Press Release dated 18 October 2019 regarding the establishment of IRSA, available at: https://www.tsb.org.tr/tsb-baskani-atilla-benli-nin-sddk-kurulusuna-iliskin-basin-aciklamasi.aspx?pageID=409&nID=15222&NewsCatID=331
[vii] Turkish Insurance Market Outlook 2016–17, p.33, http://www.jlt.com.tr/upload/files/Turkish Insurance_Market_Outlook_2016-17.pdf
[viii] Official Gazette no. 30635 dated 24 December 2018, https://www.resmigazete.gov.tr/eskiler/2018/12/20181224-9.htm
[ix] Turkey’s Judicial Reform Strategy Document, https://researchcentre.trtworld.com/images/files/info-packs/Juidical-Reform.pdf
[x] Turk Eximbank’s Role in 11th Development Plan and Export Master Plan, https://www.eximbank.gov.tr/content/files/3b3a03cc-8819-464c-baaf-1198853cc7d2/turk-eximbank-s-role-in-11th-development-plan-and-export-master-plan-20-09-2019
ENTERPRISE BLOCKCHAIN: DRAGGING INSURANCE OUT OF THE DARK AGES
Ryan Rugg, Global Head of The Industry Business Unit at R3
The history of insurance traces back to the development of modern business and insuring against its risks; property, cargo, medical and death. Insurance helps mitigate losses, wary of the financial losses a capsized ship could cause, forward-thinking vessel owners established communal funds that could pay for damages to any individual’s ship within the group. While this basic concept holds strong to this day, insurance is now a multi-trillion dollar industry that impacts almost every other sector of business, from healthcare to capital markets and aviation.
Despite the insurance industry’s image of being a conservative sector, insurers have been consistently innovative in the property and perils they protect against, but the supporting technologies and infrastructure have remained antiquated and unfit for purpose. Operational inefficiency is the single biggest threat facing the insurance industry today, and insurers are now taking steps to tackle this challenge head-on with purpose-built enterprise blockchain technology.
Inefficiency and fragmentation
Blockchain provides a solution to drive efficiency and security that would allow private data to be shared in a secure manner. Many policies are still sold over the phone rather than online, and the policies themselves are then processed on paper contracts, introducing huge potential for manual errors in claims and payments. This anachronistic infrastructure is even more surprising when you consider the complexity of the insurance ecosystem and the amount of parties involved in a transaction, including consumers, brokers, insurers, reinsurers and more.
The costs of this inefficiency and fragmentation are well documented. Inaccurate, disparate sources of data acquisition lead to long underwriting cycles and inaccurate risk profiling. Extensive manual intervention is required across the insurance value chain, ranging from contract placement to claims settlement. Archaic billing systems and complex billing processes lead to high reconciliation costs. Ambiguity in loss conditions, assessment procedures and claim settlement delays leads to increased litigation risk. It has been estimated that as much as 60% of customer premiums is consumed by these inefficiencies.
In addition, increasingly stringent and dynamic regulatory requirements continue to impact areas such as renewals and claims assessment. Insurers often have a complete lack of visibility of their liabilities and obligations, and a lack of transparency across the entire business. In today’s regulatory climate, it is unsurprising that authorities are beginning to demand more from insurers.
Blockchain technology is not a panacea for all of these problems, but with the right architecture a platform can address and reduce inefficiencies. There are also new revenue and growth opportunities in cutting-edge sectors such as cyber insurance that blockchain technology can help enable.
Tackling the blockchain privacy challenge
Blockchain offers insurance firms a new way to coordinate information between each other, by using a pre-agreed technology solution instead of relying on a third party’s bookkeeping. The technology enables disparate parties to connect via a shared platform environment. While this premise may appear simple at first glance, the insurance industry has specific requirements in relation to privacy and security that only certain blockchain platforms can fulfil.
For example, if a blockchain has the appropriate data privacy architecture in place, each insurance firm can maintain the same amount of control over their data as today, but with more flexibility. Unlike the traditional permission-less blockchain platforms – in which all data is shared with all parties – Corda shares information with those who have a “need to know,” ensuring the confidentiality of trades and agreements while also capturing the benefits of a shared distributed ledger infrastructure.
Blockchain platforms such as R3’s Corda have been purpose built for enterprise usage in industries such as insurance and tackle issues such as data privacy, scalability and security head-on. Following a period of experimentation with multiple consortia and technologies, insurers are now consolidating their blockchain efforts around Corda.
Testament to this is the recent decision of the industry-leading B3i consortium to port from IBM’s Fabric to Corda or RiskBlock decision to port from Ethereum. All the major insurance groups and ecosystems are coalescing on Corda in order to effect change and form standards. As Metcalfe’s Law states, the value of a network is proportional to the number of connections in the network squared – the more insurers that build upon on a common platform, the more valuable the platform becomes to all participants due to the interoperability of applications. The consolidation around Corda creates network effects industry-wide.
Contract placement: leveraging the network effect
To more tangibly examine the benefits of these network effects, we can look at a specific insurance use case that involves a network of many different entities and counterparties – contract placement.
Contract placement is the process of negotiating a potential insurance contract between a broker and an insurer in order to issue the contract to provide coverage for an end customer. For most commercial and specialty insurance scenarios, except for small commercial and some mid-market products, this is an arduous, complex process involving several entities – a broker, one or more insurers, and potentially a reinsurer and reinsurance broker. Furthermore, outsized risks generally mean that multiple insurers come together to insure the risk at the requested limit price, resulting in additional complexity for the broker in managing the placement process.
Contract placement, with the extensive negotiation cycle between a broker and insurers, as well as between an insurer and reinsurers – with or without a reinsurance broker thrown in – has several inefficiencies related to inter-firm coordination. Extensive manual intervention and reconciliation is required for brokers, insurers and reinsurers to keep track of requests and responses; high IT spend is required for all participating parties to maintain an audit trail of the negotiation history between different entities; and each firm must make heavy investments in document storage systems to maintain separate contracts over the policy lifecycle.
Leveraging the network effect by connecting brokers, insurers and reinsurers onto the same blockchain platform can deliver numerous benefits. These include:
- Near-instantaneous communication between participating parties to eliminate delays associated with reconciliation and coordination;
- Real-time consensus among all parties involved in the contract on coverage, price, terms and conditions;
- Complete audit trail from all sides of negotiations and data exchanges;
- Greater regulatory compliance throughout the insurance industry due to instantaneous communication of in-force contracts to the regulator;
- Eliminating the “double spend” problem of having the customer buy the same policy from different insurers by involving the notary (regulator);
- Reduced IT spend for individual firms, with eventual decommissioning of legacy document storage systems and reducing spend on document generation systems.
A brighter future
Blockchain technology offers great promise across many avenues, not only contract placement. Platforms like Corda can add value to many insurance business segments – commercial and specialty insurance, life insurance, personal lines and health insurance, along with niche areas like marine and trade credit.
The industry’s recent consolidation around Corda reaffirms that data privacy is pivotal for a network of enterprises and that the platform’s peer-to-peer data sharing approach matters for insurance blockchain applications going into production. For a highly regulated industry like insurance, only Corda can ensure that the entire supply chain of brokers, insurers, reinsurers and consumers can interact in a seamless, secure and private manner.
From contract placement to insurance as an industry, we are excited to see the new opportunities and efficiencies that blockchain technology will enable between this wide ecosystem of participants now that the right network – Corda – is in place.
TWO TO TANGO? MARKET DATA AND OPINIONS IN INVESTMENT MANAGEMENT
Sebastien Lleo is Associate Professor of Finance at NEOMA Business School (France)
Analyst views and expert opinions matter. They are an invaluable complement to market data when it comes to formulating relevant capital market expectations and to strengthening risk management models and practices. But watch out for behavioral biases!
“Garbage in – garbage out!” Every investment management professional has heard the warning that poorly formulated capital market expectations will get portfolio optimisers to produce inefficient, unrealistic, and even outright dangerous portfolios.
Thus, considerable efforts have taken place to turn available economic and market data into accurate capital market expectations. These lead to the development of slick statistical methods, effective econometric techniques, and powerful machine learning algorithms.
Opinions can also be an invaluable source of insights to construct accurate capital market expectations.
What are the types of opinions on financial markets?
Opinions take multiple forms in financial markets. They include analyst views, opinions from political and economic experts, super forecaster predictions, and investor polls.
Moreover, opinions abound on financial markets. Consultancy Quinlan & Associates reported that the bigger banks and brokerages emailed over 40,000 pieces of research every week in 2016, despite continuing job cuts in the financial sector. Social media also contribute to the spread of opinions: according to the financial website Modestmoney.com, there are at least 839 active financial blogs published in English.
Why should I use expert opinions?
Opinions have three key benefits.
First, opinions can be a crucial complement to traditional economic, corporate and financial market data to construct realistic capital market expectation, and keep those up-to-date. This statement is especially true in times of heightened uncertainty, such as market bubbles and financial crises, when traditional data fail to provide an accurate assessment of market conditions.
Second, opinions can strengthen risk management models and practices. Opinions can widen the range of scenarios considered in portfolio optimisation and risk management. Dissenting opinions provide a cornerstone for the construction of meaningful stress test scenarios.
Third, we can use opinions, even when traditional data are not. For example, assessors evaluate insurance claims, and appraisers estimate the value of illiquid assets, such as real estate and collectables, periodically.
How easy is it to collect opinions?
The inclusion of opinions requires extreme care.
Let’s look at analyst views and expert opinions. We all know that not all experts or forecasters are equally accurate. A widely reported study by CXO Advisory Group LLC tracked 6,582 forecasts for the U.S. stock market published by 68 experts between 2005 and 2012. The study found that average accuracy across experts was 47.4%, with individual accuracies ranging from a low of 21% to a high of 68%.
Therefore, investment management teams need to implement a process to guarantee the relevance of the opinions used in their models. This process, known as “elicitation,” is described in abundant literature. The books by O’Haghan (2006) and by Meyer and Booker (2001) are an excellent place to start. Essentially, the elicitation process helps to construct views that are specific, explicit, and structured. Opinions need to focus on a specific variable or parameter, such as the price of a given asset or the mean of a distribution. Opinions need to explicitly provide a mid-point or most-likely scenario, a confidence interval, and to relate the confidence interval to a probability distribution. Finally, opinions need to be structured to provide a transparent and auditable trail.
What are the implementation challenges?
Three main implementation challenges need addressing.
The first and most dangerous challenge is that opinions are often subject to the behavioral biases. Behavioral biases, in particular overconfidence, excessive optimism, conservatism, confirmation bias, and groupthink play an essential role in how finance professionals perceive and process information, and on how they form their forecasts. Recently, in a simulation study, Davis and Lleo (2020) recently found that the presence of biases explained nearly 70% of excess risk-taking. Therefore, it is crucial to debias forecasts before using them in any model.
Second, expert opinion models are Bayesian and therefore require the specification of a prior distribution. We can overcome this difficulty with some original thinking, as with Black and Litterman’ reverse optimisation exemplifies.
Third, aggregating of multiple expert opinions is considered an essential conceptual and computational problem because it requires engineering a joint distribution out of a collection of univariate distributions.
How can I integrate opinions in my portfolio selection model?
Currently, several families of portfolio selection models use opinions as input. The best-known and oldest is the Black and Litterman (1992) model, which uses analyst views to generate capital market expectations in a Markowitz-style single-period optimisation framework. This approach has been extensively discussed and developed in a large number of subsequent papers and chapters.
However, the Black-Litterman approach has two fundamental limitations. First, it is static, meaning that it locks portfolio managers into a “buy-and-hold” strategy, ignoring the possibility that portfolio managers may shift their asset allocation as financial market conditions change. Second, it ignores the presence of behavioral biases in expert opinions.
To address the first limitation, Frey et al. (2012) and Davis and Lleo (2013,2020) proposed two closely-related dynamic portfolio management models. Although both models are developed in continuous time, we can transpose them to a multiperiod discrete-time setting.
The second limitation has proved more elusive. At the moment, Davis and Lleo (2020) is the only dynamic portfolio selection model that addresses for behavioral biases.
Black, F., Litterman, R., 1992. Global portfolio optimisation. Financial Analyst Journal 48 (5), 28–43. Davis, M., Lleo, S., 2013. Black-Litterman in continuous time: the case for filtering. Quantitative Finance Letters. 1 (1), 30–35.
Davis, M., Lleo, S., 2020, Debiased expert forecasts in continuous-time asset allocation. Journal of Banking and Finance. 113.
Frey, R., Gabih, A., Wunderlich, R., 2012. Portfolio optimisation under partial information with expert opinions. International Journal of Theoretical and Applied Finance 15 (1). O’Hagan, A., 2006. Uncertain Judgments: Eliciting Expert’s Probabilities. Wiley.
Meyer, M., Booker, J., 2001. Eliciting and analysing expert judgment: a practical guide. ASA-SIAM Series on Statistics and Applied Probability. Society for Industrial and Applied Mathematics.
ENTERPRISE BLOCKCHAIN: DRAGGING INSURANCE OUT OF THE DARK AGES
Ryan Rugg, Global Head of The Industry Business Unit at R3 The history of insurance traces back to the development...
DISPELLING BIOMETRIC MYTHS AND MISCONCEPTIONS
By Lina Andolf-Orup, Head of Marketing at Fingerprints Gangsters cutting off enemies’ fingers to access secret locations and spies lifting...
FUTURE FX PROMO
FOUR WAYS OPEN BANKING AND AI WILL REVOLUTIONISE ACCOUNTANCY
Ed Molyneux, CEO and co-founder of cloud accounting software company, FreeAgent It’s been just over two years since the...
HOW FINANCIAL SERVICES CAN GET TO GRIPS WITH RISING SUPPLY CHAIN RISK
By Alex Saric, smart procurement expert, Ivalua UK businesses have never been more dependent on their suppliers to help...
TWO TO TANGO? MARKET DATA AND OPINIONS IN INVESTMENT MANAGEMENT
Sebastien Lleo is Associate Professor of Finance at NEOMA Business School (France) Analyst views and expert opinions matter. They...
AN ULTIMATE GUIDE TO TURNING YOUR EARLY RETIREMENT DREAM INTO A REALITY
Rick Pendykoski is the owner of Self Directed Retirement Plans LLC, a retirement planning firm based in Goodyear, AZ. ...
WHAT EVOLUTIONARY AI MEANS FOR FINANCIAL SERVICES
by Babak Hodjat, VP of Evolutionary AI at Cognizant Many banks and other financial services institutions (FIs) are beginning...
HARNESSING ANALYTICS IN THE FIGHT AGAINST FRAUD
By Anna Lykourina, EMEA Fraud Analytics Expert at SAS In the past, the fight against fraud has been a...
ERSTE BANK HUNGARY IMPROVES AND SECURES THE REMOTE BANKING EXPERIENCE WITH ONESPAN MOBILE SECURITY
Leading Hungarian bank deploys OneSpan’s Mobile Security Suite to one million customers to make mobile banking convenient while fighting fraud...
HOW WILL LENDERS TREAT THE FINANCIAL SYMPTOMS OF COVID19?
COULD the coronavirus pandemic spark a financial crisis similar to that which was seen in 2008? Tim Kirby, Group Commercial...
ISO 20022 – THE BEDROCK FOR PAYMENTS TRANSFORMATION
Lauren Jones, Global Payments Ambassador, Icon Solutions The financial services industry has seen ISO 20022 grow firmly over the...
2020 VISION: TRANSFORMING THE LEGAL DOCUMENTATION LANDSCAPE THROUGH STRUCTURED DATA
Jason Pugh, Managing Director, D2 Legal Technology The derivatives industry has been transformed by the proactive engagement of its...
WHY LANDLORDS SHOULD MAKE THE MOVE TO THE ALTERNATIVE PROPERTY INVESTMENT SECTOR IN 2020
Reece Mennie, CEO of leading UK investment introducing firm, Hunter Jones The new decade is expected to bring with...
PROTECTING YOURSELF AGAINST LOSS OF FUTURE INCOME IN A RECESSION
By Gerard Visser, Financial Planning Consultant at Alexander Forbes Financial Planning Consultants. With low GDP growth, credit ratings downgrades and the COVID-19 pandemic,...
MOBEY FORUM TO ADDRESS DATA PRIVACY AND INNOVATION IN THE AGE OF AI WITH NEW EXPERT GROUP
Mobey Forum, the global industry association empowering banks and financial institutions (FIs) to shape the future of digital financial services, today announces...
HOW TO MANAGE YOUR SMALL BUSINESS’S FINANCES
There are a lot of fantastic business ideas that end up failing during the early years. Why? A lack of...
THE EVOLUTION OF THE TECH CFO
Gavin Fallon,General Manager, UK, Nordics & South Africa Board International Chief Financial Officers (CFOs) have traditionally been seen as...
IS FRAUD PREVENTION CONVERGING WITH REGULATORY COMPLIANCE?
By Manuel Rodriguez, Fraud Solutions Manager at SAS Several relevant reports show how the world of fraud and financial crimes is mutable...