Assessing the Potential Threats and Regulatory Concerns of Insurance Companies Regarding Financial Technologies

Marwan ZGHEIB, B00760993

Final Dissertation (Compilatio Version)

Professor Abdel Maoula CHAAR

Assessing the Potential Threats and Regulatory Concerns of Insurance Companies Regarding Financial Technologies:

An Exploratory Study  

Table of Contents

Acknowledgements

Executive Summary

Chapter 1  Introduction

1.1        Research Objectives

Chapter 2 Literature Review

2.1        FinTechs

2.1.1        Definitions

2.1.2        Impact of FinTechs

        2.1.2.1         In general

        2.1.2.2  In insurance

2.2        Regulations

2.2.1        Importance of regulations

2.2.2        Risks and uncertainties

2.2.3        Potential solutions

Chapter 3 Method

3.1        Research Design

3.2        Target Population

3.3        Data Collection Tools

3.4        Data Collection

3.4.1        The questionnaire

3.4.2        The interviews

Chapter 4 Results and Discussion

4.1        The Questionnaire Results and Discussion

4.2        The Interview Results and Discussion

Chapter 5: Conclusion

Executive Summary

Industries are experiencing the beginning of what many are calling Industry 4.0 - a revolution in its own right. Industry 4.0 witnessed the introduction of new types of technologies. Such technologies are disrupting the rules of the game in the market as we know them. This is particularly true with respect to the surgence of new risks that threaten to lead to implications that are sure to impact the insurance market - subject of the researcher’s interest.

This exploratory research paper investigates the impact Financial Technologies - FinTechs - have had so far on the financial services sector, with a closer insight into the change Blockchain is bringing to the insurance industry. The disruption began at the end of the 2008 financial crisis when Bitcoin, a Blockchain-based cryptocurrency, was introduced in response to the decreasing trust of customers regarding banks, insurance companies, and other financial institutions. The creation of Bitcoin triggered the rise of start-ups supplying a range of new diversifiable financial products, from crowdfunding to peer-to-peer lending and more. The benefits expected from these disruptive products lies in the service they supply: an encrypted and non-modifiable data ledger. The amount of money invested into these products has increased by the entry of big corporations into the market, which either aim to provide these services themselves or acquire those startups that do and gain an important competitive edge.

However, this hype is restricted to a limited growth rate due to the lack of public information on the matter. This has generated uncertainty and distrust amongst stakeholders - whether investors or customers. The unease has been heightened by the lack of a regulatory framework to monitor the use of these technologies and help investors elaborate the different aspects of each technology.

Among the different uncertainties expressed by insurers and bankers, the most prevalent ones are related to misinformation caused by system and data leakage. In a world where everything is digitalized, cyber security has become a major concern for companies, particularly in moments of crisis as evident in the current Covid-19 pandemic. It is to note that the 12-year-old FinTech industry is still considerably young when compared to other  century-long established sectors.

The present research hopes to bridge this divide by probing the perceptions, understandings, and fears of a non-random purposely chosen and stratified sample of professionals regarding the ongoing FinTech/InsurTech era. The research tools consist of  a questionnaire and semi-structured interviews. The research proposes a structure for the design and implementation of regulations and practices that will ensure an effective and safe transition of financial businesses in general, and insurance companies in particular into the use of these technologies. In addition, it hopes to have helped develop a clearer understanding of the problem at hand, paving the way for further research into the matter.

Chapter 1. Introduction

Ever since the Lehman Brothers Bank filed for bankruptcy on September 15, 2008, numerous businesses and economies suffered dramatic changes including job losses, currency depreciation, financial losses, and increasing homelessness. The greatest immediate casualty was the loss of people’s trust in banks and financial institutions. Repercussions still impact the entire financial world and economy. The long-term consequences are the prevalence of mistrust as is demonstrated by the fact that around 60% of customers today have only limited faith in their banks, if at all. This is so in spite of the implementation of strict regulations which partially increased brand visibility. Having said the above, the 2008 financial crisis, in addition to the increase of compliances and regulations on financial institutions, did have another important upside: the creation of financial technologies or FinTechs as commonly known today.

FinTech, according to Professor Douglas Arner from the University of Hong Kong, is often seen as the combination of financial services and information technology. Professor Arner further classified the evolution of FinTech into three different eras, as shown in Table 1.1 below:

Start-ups as well as big corporations in the likes of JP Morgan & Chase and HSBC have invested substantially in these new technologies in order to gain substantial competitive advantage in today’s ever changing financial markets, such as insurance, wealth management, digital marketing, cash management and telematics.

For the past decade, FinTech companies have been moving quickly, forcing companies to reconsider their core business models; indeed, the industry has experienced a strong expansion, especially in 2014-2015, where its growth in the United States reached an average rate of 54%. However, as surprising as this may seem, the industry’s growth rate in the following year was not sustained: FinTech companies' valuations in the U.S. dropped by 7% in 2015-2016. The sudden change of perspective could be explained by a number of  events that affected the industry in that year. According to Bloomberg, the financial industry experienced the highest number of cyber breaches in 2016, costing the US alone up to 109 billion dollars. On April 20, 2016, the World Economic Forum published a paper elaborating concerns evoked by larger businesses and governments regarding FinTechs, such as the ethical use of data and the need for new industry standards. Furthermore, on July 15, 2019, the US Treasury Chief Steven Mnuchin stated that Facebook’s cryptocurrency Libra “could be misused by money launderers and terrorist financiers”.  Shaken confidence further escalated when cryptocurrencies, notably Bitcoin,  experienced volatile fluctuations. Also, far from the political aspect of the topic, audit and financial consulting firms have also expressed their concern on the necessity to regulate FinTechs so that companies investing in them are able to establish stronger trust with their  stakeholders, namely customers and auditors.

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