- May 16, 2022
- Tech
- Data
- Cloud
- Luxembourg
- Security
- Startup
- Development
- Digital
On 22 October 2018, the Luxembourg insurance sector
regulator, the Commissariat aux Assurances (CAA), issued an impactful text in
the form of CAA Circular 18/9 introducing new harmonized evaluation
questionnaires relating to risks of exposure to money laundering and terrorism
financing for life-insurance companies.
Article by Finologee
Circular 18/9 turns three years old today – and now that the
initial push by life insurance companies for preliminary scoring of contract
portfolios is over and that the next 2024 deadline is in sight, it is a great
time to look back at its key requirements and contemplate as to how life
insurers can make the most of the opportunities which digitalisation offers in
order to enhance their assessment, risk-scoring and score lifecycle management
methodology.
1. A look back at the key requirements stemming from
Circular 18/9
In a nutshell, the CAA asked all Luxembourg life insurers to
ensure that each contract in their portfolio be reviewed and assigned an
Anti-Money Laundering (AML) risk score by relying on a new standardized
evaluation questionnaire. Furthermore, the CAA wanted initial visibility on the
overall risk scoring of all Luxembourg life insurance contracts by the end of
2019. To make meeting this deadline feasible, a two-step approach was
implemented with the following key dates:
–End of 2019: by then, life insurers had to score all
existing contracts, but had the possibility for eligible contracts (i.e.
individual insurance contracts which did not exceed a certain risk level) to
either carry out a full manual assessment upfront, or to apply a temporary
risk-based “model point” approach. In practice, the “model point” approach
meant grouping contracts with homogenous risk profiles together, define a
representative sample of contracts within each group, evaluating manually those
sample contracts, and applying the mean score obtained for the sample to the
group.
–End of 2024: all sensitive contracts assessed
through the model point approach must be manually re-assessed by then.
–End of 2027: all less sensitive contracts assessed
through the model point approach must be manually re-assessed by then.
However, these are deadlines and life insurers are expected
to have an “action plan” before then enabling them to review all contracts
within a “reasonable delay”.
In addition, insurers must do the following on an ongoing
basis:
–New subscriptions: the new questionnaires must be
used for all new subscribed insurance contracts
–Contract movements/changes: every movement in a
contract (e.g. additional payment, partial or total surrender, etc.),
significant change (e.g. update of beneficiary clause, guarantee, transfer,
etc.), or significant modification of an AML risk factor triggers:
-a full manual re-assessment for
contracts assessed through the transitory model point approach in 2019,
-an update of the questionnaire
for contracts already fully manually assessed in 2019 (based on the risk level
resulting from the movement/change, there is the possibility to only update
relevant questions).
Periodic reviews in the absence of movement: There
must also be internal procedures setting risk levels/criteria for carrying out
periodic reviews of contracts even if there is no movement over a given period.
2. Challenges and opportunities
Circular 18/9 has therefore, on top of the obligation to
review all stock contracts, created an ongoing obligation for life-insurers to
integrate the new CAA questionnaire within their standard client onboarding
process. On top of this, a process is also needed for monitoring and updating
the information with each contractual or AML risk evolution.
It is therefore strategic to build efficient, resilient and
sustainable processes to ensure compliance.
Below are a few considerations as to how digitalisation
could be utilised to maximise efficiency and fluidity in meeting the Circular’s
requirements:
a. Using digital tools to enable quick score
calculation: completing questionnaires and performing scores calculation
efficiently is important. Although
calculating scores manually may be feasible for an individual contract, doing so
for all portfolio contracts can increase substantially operational risk. A
digital transposition of the standard assessment questionnaires, with an
automated score calculation, improves the overall efficiency and robustness of
this sensitive process. The standard CAA questionnaire is a perfect candidate
for digitalisation, with pre-defined answer possibilities and pre-attributed
scores per response.
Tip: although this may
also be done using widely available digital tools (e.g. an excel sheet),
implementation of a module in a dedicated contract portfolio management tool
could be a robust and reliable alternative, as it improves reliability and
facilitates control and maintenance of risk scoring. It has the additional
benefit of enabling direct linking of the obtained score and questionnaire
responses to the full contract/policyholder profile, as well as facilitating
archiving and future updates.
b. Optimising the communication channels used to
obtain up-to-date and streamlined information: it may be especially
challenging to collect all required information to properly fill in
questionnaires (ideally whilst minimising the risk scoring) for existing
contracts subscribed. In this case especially, but even for newly subscribed
contracts, a fluid information stream between involved parties
(end-client-broker-insurance company) is paramount. This can be optimised using
digital channels, for example by creating remediation campaigns addressed
either to brokers and/or directly to end-customers. These can be carried out
via email or paper mail complemented by other means such as SMS channels
letting the customer select the preferred approach.
See the article How to choose the rightcommunication channels to retrieve data from your clients? - Finologee
Tip n°1: some
sections of Circular 18/9 standard questionnaires may justify triggering a
remediation process for existing stock contracts, geared towards obtaining
up-to-date documents/information from end-customers and/or brokers to be able
to insert up-to-date responses generating a lower risk score. For instance,
up-to-date pre-obtained identification documents adds zero risk points,
whereas, if this documentation is absent, four risk points are added to the
overall score for the contract. The CAA also recommends this for tax compliance
documentation, stating that “a good practice consists notably in obtaining a
tax compliance statement from the client”.
Tip n°2: for most
standard questions in Circular 18/9, a delegation to brokers could be
envisaged, for instance by making completion a mandatory part of the onboarding
process for a new client contract. Although ultimate responsibility for
compliance and risk assessment remains with the life insurance company, this
can save precious back-office time by stream-lining the obtention of most
required information.
c. Using digital platforms to fluidify internal
communication streams: communication platforms connecting different
departments can facilitate interactions and in turn, compliance with Circular
18/9 obligations, for instance by triggering an automatic assessment review by
the compliance department in the event of a contract modification notified by
back-office teams – which is important to comply with the ongoing obligation to
update the questionnaire assessment where there is a movement on the contract.
d. Efficient score lifecycle management:
Circular 18/9 requests life
insurers to have a high traceability of assessments carried out and resulting
scoring. Section 3.6 of the Circular imposes the following:
“It is essential that companies
can identify at any time in their management systems the contracts that have
been scored through the "model point" approach.
In addition, the initial score of
each contract (and each question), whether it is derived from manual or
automatic scoring, as well as all successive scores, must be stored in an
electronically usable system and be accessible at a given date in order to
ensure a reliable audit trail.”
Life insurance companies should
look to use tools that will improve the process efficiency in storing and
updating scores, as well as be sufficiently reliable over time to avoid loss of
data/difficulties in retracing score and assessment updates (e.g. avoid manual
encoding).
e. Optimised use of pre-existing information:
Some of the information needed to
complete the 18/9 questionnaire is information that would have been already
collected for other reporting/regulatory purposes, or simply for back-office
contract management purposes. For example, the type of investment profile of
the contract and the premium amount are information elements that are also
required to comply with the risk categorisation obligations pursuant to CAA
Circular 15/3. Beneficiary clause characteristics, meanwhile, would likely
already be collected for legal/compliance purposes.
Tip n°3: Having a
centralised database containing the source information, which can be used from
there for multiple purposes, is a good way of maximising efficiency whilst
avoiding potential errors resulting from duplicating information (especially
manually), therefore also improving data/information quality.