Data is the new gold. Not only gold for the insurance sector, but mostly for the data vendors who sell these data. By using trusted Open Data sources the procurement of good data no longer has to cost any money.
Since the financial crisis of 2008, international legislation and regulations have focused extra on transparency of the financial market and the availability of data. Every insurer, large or small, must have access to reliable data.
One of the causes of the financial crisis in 2008 was the lack of transparency of the financial markets, which made it difficult to estimate risks. As a result of a joint initiative of regulators, the Financial Stability Board and the G20, it was decided to develop a universal identification code for legal entities; the Legal Entity Identifier or LEI for short.
One of the major advantages of the LEI is that company information is recorded in the same way all over the world and that this information is accessible to everyone, anywhere, anytime. To encourage the use and issuance of the LEI, it has been included in many reports (eg Solvency II) to supervisors (eg DNB, ECB), whether or not as a mandatory field. As a result, nearly 1.7 million LEI codes have now been issued worldwide. Within the European Union, an LEI code is even mandatory to be able to trade in financial instruments. Within the EU, supervision is regulated in the European System of Financial Supervision (ESFS). One of the main tasks is to harmonize supervision and to propose binding technical standards. It is the use of such standards that can ensure better harmonization of laws and regulations at European level.
One of the members of the ESFS, the European Securities and Markets Authority (ESMA), has an extensive List of Registers in which information related to financial instruments (shares, bonds, derivatives) can be accessed and downloaded free of charge.
The quality of open data sources
A frequently heard criticism of open data sources is that they are not reliable. “Everything can be found on the internet”, it is often suggested.
There is some truth in that. Regulators are therefore closely involved in making data public, so that this data can be trusted. In addition, the European Commission has recently introduced a new directive. The “Open Data and Public Sector Information Directive” includes access to company data. EU countries have until mid-2021 to transpose this directive into national legislation. This will result in even more Open Data that can be reused and for which no costs are involved.
The gold of the data vendors
It is mainly the reusability of data that provides the gold to data vendors. They have certain data at their disposal and can sell it an unlimited number of times (to different customers or multiple times to the same customer) and generate a lot of turnover.
A concrete example is information about the companies in which insurers invest. Take, for example, a corporate bond from BMW Finance N.V. The identification code (ISIN) of this investment is US05600LAA44.
Solvency II prescribes that this bond must be reported and, among other things, stated who issued the bond and what the parent company (ultimate parent) of this entity is. Both entities must be identified with an LEI code. Requesting such information from data suppliers can easily cost a few euros per investment. For an average insurer, that quickly means thousands of euros per report. Sour, because this information is available as Open Data, as shown in the image below.
It doesn’t therefore have to cost anything to determine that the LEI code of BMW Finance N.V. is 5299006ZHG3IXU0PNJ56 and Bayerische Motoren Werke Aktiengesellschaft is the parent company.
The use of Open Data is still a challenge for many organizations.
Companies specializing in RegTech solutions use reliable Open Data as the primary source for their services, such as providing data for regulatory reporting.
Now that so much data is freely accessible and a lot more Open Data will be added in the future, the challenge is no longer so much in obtaining data, but is shifting towards connecting the various data sources. Various Open Data sources can now be fully downloaded, but as an insurer, what good is a large dataset of which only 10% is relevant? Application Programming Interface (APIs) makes it possible to extract data from Open Data sources in a targeted manner. It is therefore no surprise that developing and providing APIs is one of the recommendations of the European Commission.
By using standardized identification codes, the challenge of linking data together is made relatively easy. Supervisors also recognize this, because if such a code is reported, they request less additional information. After all, they can also obtain such information themselves from open data sources.
By collecting Open Data from these standardized identification codes, insurers are also better able to take full advantage of the reduced reporting obligation.
RegTech companies are seeing an average 5-10% increase in the number of entities identified with an LEI code from what most data providers can offer.
It can therefore also be concluded that the use of Open Data improves data quality. The data is more complete, consistent and most importantly, it is uniform. There is only one truth when it comes to identifying entities worldwide.
Cost reduction is high on the agenda within the ESFS. The European Banking Authority has launched an investigation into reducing reporting costs and has called on all banks to complete a questionnaire and submit case studies. A follow-up study on this point within the insurance industry is to be expected and the use of open data sources could play a very prominent role in this.
The greatest gains can be made in eliminating the often sky-high purchasing costs and replacing them with the much lower automation costs required to process the Open Data. On an annual basis, this can quickly lead to cost savings of around 80% due to the (free) reusability of data.
The EBA investigation is still ongoing at the time of writing. The results of this research are expected at the end of 2020 and early 2021.
We are also very much looking forward to the national legislation that should come into effect next year based on the Open Data and Public Sector Information Directive and what this will entail for additional possibilities for cost savings.
Open Data provides the insurance industry with opportunities for far-reaching cost reduction. The biggest challenge is connecting various Open Data sources. The use of APIs and standardized identification codes helps with this. The most important point of attention with Open Data is the reliability of the data. Rely on data sources made available by regulators or other authorities.
This article was published in Dutch in ‘de Beursbengel’, October 2020