WIREDGOV

The growth of CAV technologies has significant implications for financial markets. How industry responds will be key to successful innovation.

New research sets initial framework for Bank of England's monitoring of the impacts of CAV technology on insurance markets. Ensuring appropriate interventions that stike a balance between security and supporting technological innovation. 

Last year Bank of England undertook survey of companies engaged in the CAV market, including a number of techUK members. The aim was to understand the the impact new technologies could have on the insurance market. Creating a framework within which the Bank of England and Prudential Regulation Authority could monitor the state of the market and ensure regulation strikes the right balance between policy holder security and supporting technological innovation.

For insurers a gradual introduction of CAVs may allow time to adapt. However responses highlighted the need to transform aspects of the current insurance value chain, including claims management, underwriting and product development to enable the technology to come to the market.

From a regulatory perspective the following areas were identified as a top priroity:

• Evaluation of regulatory capital requirements: changes to the insurance risk profile will pose challenges to firms when developing their capital models and stress tests. Limited vailability of relevant historical data, particularly in the estimation of large infrequent loss events, will increase reliance on expert judgements. As the technology develops the Bank will seek to understand how insurers mitigate key risks identified in this research, which include cyber, litigation and the disruption arising from an expected shift of insurance to a product liability basis.
• Evaluation of factor-based regulatory capital requirements: the Bank will need to review the ongoing adequacy of the Solvency II solvency capital requirement (SCR) to reflect the risk profile of motor insurers. For example, for those firms operating on standard formula, the underlying pan‑European data used to calibrate the SCR will become increasingly inappropriate over time.
• Reporting requirements: from a practical standpoint, one area for the Bank to consider is whether to amend reporting requirements that reflect the future importance of productliability exposures (as this is not captured by the current Solvency II designations of ‘motor liability’ and ‘motor other’) and to support our ability to monitor trends.

Click here to view the full report.