FCA warns of operational risks around cloud adoption and digitalisation
The Financial Conduct Authority (FCA) has warned London market insurers of the heightened risks that can arise around operational resilience, amid carriers’ increased adoption of cloud technologies and digitisation programmes.
In a recent Dear CEO letter, the regulator has warned that digitalisation and re-platforming initiatives create “significant risk of harm to market and consumers if these major transformation programmes are not managed and executed appropriately.”
The FCA’s head of wholesale general insurance Charlotte Cross stated in the letter that third-party and outsourcers’ failures or weak technology controls can lead to “operational disruption, unauthorised losses or disclosure of consumer data”.
The letter, which was dated 28 September but has subsequently come to the wider market’s attention, added that a reliance on third parties and technology outsourcers presents “the potential for systemic risk” if many firms rely on the same provider which is then hit by an operational issue.
The FCA’s letter detailed other concerns it has around Lloyd’s and London company market firms, including the lasting impact of the pandemic on certain classes of risk.
It stated that the regulator has seen reports of market hardening for business lines such as employer’s liability, professional indemnity or building insurance.
“Some customers have experienced large premium increases or were unable to find insurance that met their needs, as a result,” the letter added.
Regarding claims handling, the letter from Cross said the FCA has observed “a number of issues” suggesting that firms do “not always deliver claims outcomes that are fair and timely”.
She added that this has been observed with BI insurance, on which the FCA is still publishing monthly data on interim and final settlements.
Finally, the FCA noted that it will write a letter again in 2023 to London market carriers, to provide an updated view of the key risks firms face, the extent to which these risks are being mitigated, and its new supervisory plans as a result.