AMAZON: threat or opportunity for the insurance and financial companies?
di Silvia Dell’Acqua e Barbara Galli

Articolo

Apr 17 2018
AMAZON: threat or opportunity for the insurance and financial companies? di Silvia Dell’Acqua e Barbara Galli

Some facts are objective: consumers need immediate and customized attention, as people have less and less disposable time, and Amazon is the point of reference when talking about customer experience: transparency and clear communication. Furthermore, Amazon is a “place” where a customer can rapidly find any product and any service. Nevertheless, people need banking services and life and P&C insurances.

Does this mean that Amazon can be a threat for the insurance and financial industry? Or is it an opportunity to form a strategic alliance? This article tries to give these questions an answer, both looking at what happened in the past and gathering some insights from the web: the latter analysis has been conducted by Barbara Galli, Director at Doxa and author of the book “Web Listening. Conoscere per agire”[1].

For what concerns the bank industry, Amazon already offers a credit card (co-branded with Jp Morgan) and a service, called “AmazonPay”, to pay on third party websites though the Amazon Account; in the US, a service called “Amazon monthly payment” is available to split the outgo into installments. In addition to that, Amazon is currently designing with Jp Morgan and Capital One Financial a financial product, similar to a cash account, in order to both reduce the transaction fees paid to credit card companies (e.g. Visa/MasterCard) and to collect information about the financial position and purchasing behaviors of its customers. Is Amazon trying to replace the banks?

First of all, we must recall that it would not be the first time for a corporation to try to acquire banking licenses: in the past, Walmart was stopped more than once by lawmakers and banking groups (1999 in Oklahoma and 2006 in Utah). Looking at the Amazon case, it seems that their strategy has more to do with enabling people to get theirs goods faster, smoothing the selling process, rather than to be a business to make money out of. Nevertheless, banks should worry as they are losing their cross selling opportunities. Amazon is not the only example where customers can skip the bank in the selling process: for instance, also IKEA is offering lending services, like many other retailers.

For what concerns the insurance industry, Amazon has already made some moves too. In 2016, the US-based retail giant has cooperated with Liberty Mutual, one of the largest diversified auto and home insurer in the US, enabling their consumers to navigate the insurance process by using their voice. This was possible thanks to Alexa, the voice service that allows customers to interact with devices in a more intuitive way: customers can access via vocal commands an insurance glossary, or can find a nearby agent to get a quote.

In 2017, Amazon has partnered with The Warranty Group to launch in the UK a P&C insurance policy, called Amazon Protect, to cover against accidental damages, malfunctions or thefts of goods bought on its ecommerce platform. Finally, in 2018, Amazon has entered the US employee healthcare market, collaborating with JP Morgan and Berkshire Hathaway to create a healthcare company with the aim of cutting costs and improving services for their US employees. It seems that Amazon wants to look overseas too, having already recruited insurance professionals in London to join a new team focused on the insurance market of the UK, Germany, France, Italy and Spain.

According to some rumors, dated beginning of 2018, Amazon was considering to use India as a test lab for expanding its insurance operations, investing in the insurtech Acko (provider of online insurance products). Such an operation would give Amazon the possibility of a huge expansion opportunity: nowadays only 3% of insurances are bought online, but this percentage is expected to skyrocket as India’s young population attains financial maturity – like it happened in China.

The important question is: can Amazon really supersede the insurance companies? Advisory practices need to serve both preferences: those who like traditional face to face and those who like the digital market. Currently, most life insurance sales occur when an agent engages in discussion about very personal issues, making people think about their deaths, sometimes without promising any immediate reward – probably the empathy of a human being can be crucial in this type of transactions.

On the other hand, it is indubitably that the current customer experience in purchasing an insurance policy can be improved: sometimes customers suffer a lack of understanding of the policies (pricing, exclusions, guarantees) together with an inefficient processing and products that are mostly commoditized (for both life and P&C insurances). Insurers should personalize products and provide transparency, demonstrating excellence in on-demand distribution. Amazon can be the opportunity to form a strategic alliance, acting as an aggregator and generating synergies for cross selling, though the functions “customers who bought this also bought…” or “customers who viewed this also viewed…” (e.g. goods for babies and life insurance for the parents or furniture for a new house and a fire P&C policy); user reviews could instill a sense of trust among the customers.

One question remains open: would customers buy insurance policies from Amazon? Some insights to answer this question can be found in the web. A quick web listening exploration has been run on what has been discussed, setting queries on the topics mentioned above

  • Amazon pay
  • Amazon and the insurance market
  • Amazon, JP Morgan and bank accounts
  • Amazon and Liberty mutuals
  • Amazon and Acko
  • Amazon and the warranty Group

Furthermore, the general feeling of the Italian customers about this major player entering a new marker has been analysed. The topics treated are not “trending” yet: there are about 1620 posts published during the last year on the open web [2], almost all related to “Amazon pay” (1451); the number dramatically decreases when it comes to more specific issues as “Amazon, JP Morgan and bank accounts” (114) or “Amazon and the insurance market” (51), nearly no conversations on the other topics. As shown by the peaks of conversations registered, the curiosity and attention level is high when linked to major news and events (e.g. Amazon Pay introduced in Italy, Europe Assistance releases Amazon Pay and Prima Assicurazioni forms an alliance with Amazon Pay).

Among the top engaging posts, those of Quixa and Wired dominate the web: the former refers to the promo of receiving a 50 Euro coupon when purchasing/renewing a Quixa insurance policy paying by Amazon Pay (770 interactions, 15 shares); the latter, dated April 2017, announces that digital payments attract the multinational corporation Wired (140 interactions, 34 shares).

The level and topics of conversations gathered above do not allow yet for a proper sentiment analysis, but a survey run on the Italian online population gives a clear indication on their feeling about Amazon becoming an insurance player. Though the level of credibility of banks and insurance companies is still higher, the Italian surfers are open to consider Amazon as a valuable player: 32% are willing (surely + probably) to subscribe a car insurance with Amazon and the percentage increases to 40% when Amazon partners with a “traditional” player (insurance company / bank). Figures are not that distant (roughly 10 p.p. less) when the underlying considered is a Life/Health insurance. In both cases, the latter counts for roughly half of the total population willing to buy an insurance policy. [3]

To catch opportunities and anticipate trends, the insurance companies should keep one ear open by the mean of prompted surveys and web listening, identifying the most proper way to offer their proposition by a distinctive communication, in each territory, be it social or not. As to Amazon, looking at its brand image, one thing is sure: it meets trust, quality and service expectations, a good starting point to be leveraged [4]

 

Bibliography

[1] https://www.linkedin.com/feed/update/urn:li:activity:6376753915790192640

[2] data retrieved from the crawling platform Tracx ; dedicated queries; Doxa courtesy. Web listening from March 2017 to March 2018, open web (social properties excluded); Focus: Italy, conversations in Italian

[3] Sample representative of Italian Internet population; 1010 respondents; fieldwork: march 27th – April 4th 2018

[4] Sample representative of Italian Internet population; 1010 respondents; fieldwork: march 27th – April 4th 2018

ECB on the 9th surveillance programme in Spain

News

Apr 17 2018
The European Commission (EC) and the European Central Bank (ECB) reported on the ninth surveillance program in Spain at the beginning of last week . The staff reported a satisfactory and persistent economic growth in all economic sectors, particularly in the banking sector.

This sector benefits from an increased, comfortable level of liquidity and enjoys continuous profitability, with some financial institutions being also able to increase the amount of debt securities issued. Core and non-core capital instruments contributed to keep capital buffers at a safe level, and helped in reducing the aggregate amount of NPL in banks’ balance sheets.Namely, the NPL ratio for Spanish banks (including cross-borders activity) moved down to the EU average. Financial institutions further improved their business models, and increased their capability of supplying new loans to the economy.

Threats are represented by the high level of private and public debt, as well as by the high unemployment rate. Since the country is currently enjoying an expansion pahse, European authorities suggests the Spanish government to profit from this favourable situation to pursue fiscal consolidation and also to reduce the level of debt among all sectors.

It will be important that Spain puts in place policy efforts to ensure a durable growth path and achieve higher productivity growth. This includes steps to continue reducing unemployment, make the labour market more inclusive, improve the business environment and enhance the innovation capacity of the economy.

Statement by the staff of the European Commission and the European Central Bank following the ninth post-programme surveillance visit to Spain (HTML)

Basel committee complements the SA-CCR approach for counterparty risk

News

Apr 17 2018

The Basel Committee’s final standard on The standardised approach for measuring counterparty credit risk exposures (SA-CCR) includes a comprehensive, non-modelled approach for measuring counterparty credit risk associated with OTC derivatives, exchange-traded derivatives, and long settlement transactions. The Committee’s objective was to develop a risk sensitive methodology able to better discriminate between margined and unmargined trades, and providing more meaningful recognition of netting benefits.

The SA-CCR limits the need for discretion by national authorities, minimizes the use of banks’ internal estimates, and avoids undue complexity by drawing upon prudential approaches already available in the capital framework. It has been calibrated to reflect the level of volatilities observed over the recent stress period, while also giving regard to incentives for centralised clearing of derivative transactions.

The SA-CCR retains the same general structure as that used in the Current Exposure Method (CEM), consisting of two key regulatory components: replacement cost and potential future exposure. An alpha factor is applied to the sum of these components in arriving at the exposure at default (EAD). The EAD is multiplied by the risk weight of a given counterparty in accordance with either the Standardised or Internal Ratings-Based approaches for credit risk to calculate the corresponding capital requirement.

A first consultive document was published in June 2013, followed by a joint quantitative impact study (JQIS) aimed at assessing the capital impact of the methodology. After giving due consideration to the feedback received from respondents to the consultative paper and the results of the JQIS, the Committee made a number of the adjustments to the proposed methodology prior to finalising the SA-CCR. These include:

  • increased specificity regarding the application of the approach to complex instruments;
  • the introduction of a supervisory measure of duration for interest rate and credit derivative exposures;
  • removal of the one-year trade maturity floor for unmargined trades and the addition of a formula to scale down the maturity factor for any such trades with remaining maturities less than one year;
  • the inclusion of a supervisory option pricing formula to estimate the supervisory delta for options;
  • a cap on the measured exposure for margined transactions to mitigate distortions arising from high threshold values in some margining agreements; and
  • adjustments to the calibration of the approach with respect to foreign exchange, credit and some commodity derivatives.

The standardised approach for measuring counterparty credit risk exposures (PDF)

IOSCO: Harmonisation of critical OTC derivatives data elements

News

Apr 17 2018

The International Organization of Securities Commisions (IOSCO) issued a report providing technical guidances to regulatory authorities, in order to assess definitions and formats of a set of OTC derivatives which are reported to trade repositories.

Specifically, the report provides the guidelines for harmonizing data elements concerning these transactions, that is, of settlement dates, counterparties, collaterals and so on. The report is presented as “jurisdiction-agnostic”, in the sense that it aims at taking account of any relevant international regulatory standard but it does not provide thorough definitions of the methodologies to apply to data in order to reach a sufficient harmonization level.

Harmonised critical data elements can facilitate global aggregation of  data, so that the international authorities can use them to build a cross-border overview of the aggregate OTC market, and favour international amendments contrating the propagation of systemic-type risks. Details can be found in the original report:

Harmonisation of critical OTC derivatives data elements (PDF)

Christine Lagarde and the benefits of crypto-assets

News

Apr 17 2018

The International Monetary Fund (IMF) managing director Christine Lagarde approached the topic of crypto assets for the second time within a few weeks. One month ago, she expressed the possible drawbacks of crypto currencies market, focusing on the potential use for money laundering and the financing of terrorism (link below). Today, the intention was to disclose the bright side of crypto assets market, disentangling all benefits that these brand new financial products might bring about.

First of all, the number of cryptocurrencies available is doomed to decrease, thus we must focus on the crypto-assets which will mostly fit customers’demand and thus survive this market’s “natural” selection process. Secondly, she suggests policy makers to “keep an open mind” and to address their efforts towards a regulatory framework ” that minimizes risks while allowing the creative process to bear fruit”.

Before crypto-assets can earn a relevant place among the big changes in financial activities of this last century, they must earn the confidence of the public, and this confidence comes along with the support of authorities and consumers themselves. In this sense, international cooperation is fundamental , as crypto-assets know no boundaries: the consensus among regulatory authorities becomes then mandatory.

Furtherly, although the need of brokers and intermediaries will remain, crypto assets can promote a more diversified financial structure, and a more balanced relationship between centralized and decentralized service providers. This could enhance the capability of the financial systems to resist large shocks. We must however not forget that crypto assets might magnify the risks in trading leveraged products. In case the crypto-market ingests mainstream financial products, this threat will manifest in a faster transmission of financial shocks to all market segments.

“There should be systemic risk assessment and timely policy responses, as well as measures to protect consumers, investors, and market integrity” she continues, although the regulatory agenda must not discourage innovation, but instead learn from it. This includes also the possibility of letting central banks develop their own crypto-currencies, and use Distributer Ledger Technolgy (DLT) to increase the efficiency of financial markets. This last proposal has already been made by the Australian Securities Exchange, to manage clearing and settlement of transactions.

An Even-handed Approach to Crypto-Assets (HTML)

Addressing the Dark Side of the Crypto World (HTML)

Basel Committee: revisions to minimum capital requirements for market risk

News

Apr 12 2018

The Basel Committee on Banking Supervision today issued  a revision to the minimum capital requirements for market risks which is available for public consultation. Improvements to the capital requirements for trading activities are a key component of the Committee’s duty of reforming global regulatory standards in view of the latest global financial crisis.

The proposed changes include:

  • changes to the measurement of the standardised approach to enhance its risk sensitivity (including changes to FX risk);
  • recalibration of standardised approach risk weights applicable to general interest rate risk, FX risk and equity risk;
  • revisions to the assessment process to determine whether a bank’s internal risk management models appropriately reflect the risks of individual trading desks;
  • identification of risk factors eligible for internal modelling are better clearified;
  • exposures subject to market risk capital requirements are thoroughly redefined.

The consultative document also proposes a recalibration of the Basel II standardized approach for banks with less material risk exposure. These proposals follow the decision by the Group of Governors and Heads of Supervision to extend the implementation date of the market risk standard to 1 January 2022, to give banks additional time to develop systems infrastructure and for the Committee to address certain aspects of the framework.

The Committee plans to finalise any revisions to the market risk standard as soon as possible to allow enough time for national implementation and for banks to develop the necessary infrastructure. The proposed revisions are designed to support smooth implementation of the standard.

Revisions to the minimum capital requirements for market risks (PDF)

ECB: economic conditions and monetary policy reviews

News

Apr 12 2018

The Governing Council of the European Central Bank (ECB) met in Frankfurt this March to discuss the latest accounts in monetary policy in Europe. The Council focused at first on the review of current financial and economic developments, and secondly on the proposal of new monetary policy strategies in the next future. We summarize here the main points:

 Financial market developments

  • Valuations across broad asset classes are consistent with continued optimism about the outlook for global growth.
  • Real long-term yields had risen by around 20 basis points in the Euro area since the start of the year. Part of this movement reflected adjustments in term premia, but it also likely reflected investors’ views on growth prospects
  • Expected earnings on equity markets are driven by two opposite forces: expected earnings were continuing to push stock valuations high, while the increase in discount rates was pulling stock prices low.
  • ASW for Debt Securities: only those of high-yield non-financial corporations (NFCs) had increased somewhat. When looking at sovereign yield spreads vis-à-vis Germany, the resilience had been notable.
  • Volatility in equity markets had been exacerbated by technical flows, such as those prompted by investors following risk-parity and short volatility trading strategies, but the VIX index had fallen back from the very high levels reached in early February 2018.

The global environment and economic and monetary developments in the euro area

  • Global activity and trade momentum remained sustained: global trade indicators pointed to sustained growth around the turn of the year. Global goods import growth had slowed in the fourth quarter but trade indicators were relatively afloat, with the global PMI standing above its long-term average.
  • Current Euro area economy is in an ongoing economic expansion. Favourable financing conditions and steady income and profit growth, together with a robust labour market, continued to be the key factors supporting aggregate demand. According to the latest data, Eurostat’s flash estimate had put euro area real GDP growth at 0.6%, quarter on quarter, in the fourth quarter. The expansion had been broad-based across sectors.
  • Outlook on Euro area economy reflects such positive developments, projecting real GDP growth at 2.5% in 2017, 2.4% in 2018 ,1.9% in 2019 and 1.7% in 2020. The favourable growth outlook was supported by a number of factors, including a continued global expansion, the ECB’s very accommodative monetary policy stance, improving labour markets and diminishing deleveraging pressures for NFCs and households.
  • Inflation as measured by the annual HCIP stood at 1.2% in February, down of 0.1% with respect to previous month. Measures of underlying inflation remained low by historical standards, although they had shown a marked improvement since the trough in 2016. Recent developments had confirmed a gradual upward trend. In the March ECB staff projections, headline inflation was expected to reach 1.7% in 2020, driven by underlying inflation, after 1.4% in both 2018 and 2019.
  • Money and Credit growth in the broad monetary aggregate M3 had remained robust and within the narrow range of 4.5-5.5% observed since the launch of the expanded asset purchase programme (APP) in early 2015. In January 2018 the annual growth rate of loans to NFCs had continued its upward trend, while the annual growth rate of loans to households had remained unchanged.
  • Banks’ capital ratios had continued to strengthen in the third quarter of 2017, reflecting mainly an increased positive contribution from recapitalisation. Balance sheet de-risking had also continued to support capital ratios, as asset quality had been improving in line with macroeconomic fundamentals and balance sheet restructuring.

Monetary policy decisions and communication

Taking into account the foregoing discussion among the members, on a proposal from the President, the Governing Council decided

  • Interest rates on the main refinancing operations, marginal lending facility and deposit facility would remain unchanged at 0.00%, 0.25% and -0.40% respectively.
  • Net asset purchases, at the current monthly pace of €30 billion, were intended to run until the end of September 2018, or beyond, until it saw a sustained adjustment in the path of inflation consistent with its inflation aim.
  • Principal payments under the APP, that is, from maturing securities purchased under the APP will be reinvested for an extended period of time after the end of the net asset purchases, and in any case for as long as necessary. This would contribute both to favourable liquidity conditions and to an appropriate monetary policy stance.

 

Account of the monetary policy meeting (complete)

CPMI/IOSCO: supervisory stress testing of CCPs

News

Apr 12 2018

The Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO) today published the Framework for supervisory stress testing of central counterparties (CCPs).  The framework provides authorities with guidance to support their design and implementation of supervisory stress tests for CCPs.

In April 2015, the G20 finance ministers and central bank Governors asked the Financial Stability Board to work with the CPMI, IOSCO and the Basel Committee on Banking Supervision to develop a workplan for identifying and addressing gaps and potential financial stability risks relating to CCPs that are systemic across multiple jurisdictions and for enhancing their resolvability (the joint CCP workplan).

Since then, the committees have published guidance to enhance CCPs’ resilience, recovery and resolvability. The report published today addresses another key aspect of the joint CCP workplan. The CCP supervisory stress testing framework is designed to support tests conducted by one or more authorities that examine the potential macro-level impact of a common stress event affecting multiple CCPs.

Among other things, such supervisory stress tests could help authorities better understand the scope and magnitude of the interdependencies between markets, CCPs and other entities such as participants, liquidity providers and custodians. This type of supervisory stress test is different from, yet may complement, other stress testing activities conducted by authorities seeking to evaluate the resilience of individual CCPs.

In June 2017, the CPMI and IOSCO published the Consultative report: Framework for supervisory stress testing of central counterparties (CCPs). During the consultation period, they held an industry workshop with representatives from
various market sectors and authorities from different jurisdictions. The comments received emphasised the importance of:

  1. Seeking feedback from different stakeholders on the design and operational aspects of a supervisory stress test;
  2. Managing the resource burden associated with these tests;
  3.  Protecting data;
  4.  Promoting the transparency of test methodology and results as much as possible

 

Framework for supervisory stress testing of central counterparties (PDF)

ESA: latest report on risks in the securities, insurance and banking sector

News

Apr 12 2018

The securities, banking and insurance sectors  in the European Union (EU) is affected by several different risk sources, which are periodically reported by the Joint Committee of the European Supervisory Authorities (ESAs) shows. In the second half of 2017, ESA highlighted the set of risks of major concern for financial stability as grouped in three categories:

  • sudden repricing of risk premia (as showed by the recent spike in volatility);
     
  • uncertainties around the terms underlying Brexit;
     
  • cyber-attacks. 
 The report adresses a set of policy actions both to European / national  authorities and to financial institutions:
  • Sudden risk premia reversal: supervisory stress testing remains a crucial tool for the management of systemic risk – these tests are to ensure that systemically relevant sectors and players are safe to withstand market shocks, such as insurance and occupational pensions sectors, central counterparties (CCP), banks and in the future asset managers;
  • Brexit: the ESAs recommend EU financial institutions and their counterparties, as well as investors and retail consumers, to consider timely mitigation actions to prepare for the UK’s withdrawal from the EU – including possible relocations and actions to address contract continuity risks;
  • Cyber security: the ESAs encourage financial institutions to improve fragile IT systems, explore inherent risks to information security, connectivity and outsourcing. To support this, the ESAs will continue addressing cyber risks for securities, banking and insurance markets and monitor firms’ use of cloud computing and potential build-up of cyber risks; and
  • Climate change: the ESAs recommend financial institutions to consider sustainability risk in their governance and risk management frameworks and to develop responsible, sustainable financial products – moreover, supervisors should enhance their analysis of potential risks related to climate change for the financial sector and financial stability.

 

Joint Committee Risk Report – Spring 2018 (PDF)

Joint Committee Risk Assessment Reports  (PDF)

 

Conferenza “From Blockchain&Bitcoin to Distributed Ledger Technologies, Smart Contracts and Cryptocurrencies in Finance”

Segnalazioni

Apr 11 2018
Il Nicola Bruti Liberati Quantitative Finance Lab del Dipartimento di Matematica del Politecnico di Milano organizza nei giorni 9-10 maggio 2018 la conferenza

From Blockchain&Bitcoin to Distributed Ledger Technologies, Smart Contracts and Cryptocurrencies in Finance

La conferenza si rivolge al mondo accademico e a quello dell’industria finanziaria con l’intenzione di fare il punto attorno a tre temi: aspetti tecnologici legati al mondo DLT e degli smart contracts, i risvolti economici e finanziari di questi strumenti, le potenziali applicazioni al mondo della finanza. La conferenza ha un taglio multidisciplinare con l’intervento di esperti informatici e del mondo della finanza, esponenti dell’industria finanziaria e delle autorità di regolazione,

La conferenza sarà preceduta da un tutorial che intende fornire un’introduzione sulla tecnologia di questi strumenti.

Per dettagli sul programma e per la registrazione https://www.mate.polimi.it/fintech/.