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Pinsent Masons gets cloud guidance improved for insurers

International law firm Pinsent Masons has seen a number of its recommendations enacted following its response to EIOPA’s consultation on cloud guidance, making it easier for insurers to comply with their regulatory requirements.

The guidance, which sets to place strict regulatory demands on insurers in respect of both the contents of their contracts with cloud providers and their governance of those contracts, has been under review since June 2019, with the final guidelines now being issued.

In its response to the consultation, the firm raised a number of concerns about both the wording of and rationale for some areas of EIOPA’s draft guidance. Those concerns addressed fundamental matters such as the scope of the guidance and potentially confusing concepts and terminology. They also focused on the requirements around the content of insurers’ cloud contracts, their exit planning, the extent of information that insurers would have to document about their contractual requirements, and the location of data in the cloud.

Pinsent Masons’ recommendations have led to the re-drafting of certain definitions, the removal of unclear language and greater clarity and alignment with the European Banking Authority (EBA).

Some of the changes included the removal of references to ‘material outsourcing’ to describe the concept of a ‘critical or important operational function’. EIOPA also agreed to drop plans that require insurers to assume that their purchase of goods or services from, or entry into arrangements with, cloud providers constitute outsourcing arrangements that are subject to its guidance in cases where the matter is unclear. They also deleted wording around having ‘directly measurable’ service levels specified in contracts after the firm said it was it was unclear how insurers could comply with that obligation.

Commenting on the guidelines, head of Fintech propositions at Pinsent Masons, Luke Scanlon said: “When regulators bring out guidance and impose rules which vary slightly from other requirements for regulated entities, this can lead to unintended consequences and cost for financial institutions. Ultimately, this cost is borne by the customer and therefore it is positive to see that EIOPA has taken the views of the sector into account and made some adjustments to its final guidance.

“In our response to the consultation we put forward the views of our clients impacted by this guidance to ensure that the final guidelines are fit for purpose. This is particularly important following recent data from the Bank of England which shows that insurers are falling behind with regards to the adoption of cloud based technology in comparison to banks. We hope that these changes will now facilitate far greater adoption across the sector.”

All new cloud outsourcing arrangements entered into or amended on or after 1 January 2021 will be subject to the guidelines, while insurers will have until the end of 2022 to bring cloud outsourcing contracts entered into prior to that date into line with the new requirements.

KPMG hires Zurich veteran

KPMG has announced the appointment of Graham Boffey as insurance partner in its financial services consultancy team, effective October 01.

In his new role, Boffey will work closely with Simon Ranger, head of insurance at KPMG, to support clients across the UK market. Boffey brings considerable insurance industry experience and most recently acted as head of UK distribution at Zurich Insurance. He began his career at IBM and Barclays, and spent more than a decade at Aviva, where he fulfilled many roles including chief executive officer of Aviva Healthcare, and, later, managing director of corporate benefits.

“It’s great to be heading back to KPMG – its UK leadership team is bold and braced for change and I want to take that mentality out to clients,” said Boffey. “Customers, and society at large, are putting ever greater pressure on big businesses to demonstrate their value and nowhere is that more prevalent than in insurance; a sector designed to help people protect what’s important to them. Simon and the team at KPMG understand that we have to change now to be relevant in the future. I’m looking forward to getting to know the team and their clients to help them make that change.”

“Graham brings with him a huge amount of experience and a practical understanding of how the industry needs to change,” said Ranger. “He’s helped some of the biggest insurers navigate some of the choppiest waters over the last few decades. I’m sure our clients will appreciate his knowledge, and, most importantly, our colleagues will benefit enormously from working with him.”

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The case for regulatory-driven diversification in Ship Finance

A decade ago, we all knew of at least one shipping company that felt safe receiving its debt financing from a single source (a behaviour that was, unfortunately, encouraged by some bankers), and eventually experienced immense pain when some key-lenders abruptly withdrew from ship financing.

Back at that time, sourcing finance from a handful of different – typically European – banks (as opposed to, from a single one), was considered a sound approach to funding diversification, since the key driver for a Bank’s approach to lending was its own business policies and individual circumstances.

That was then. Next, the banking crisis happened. And then the shipping one followed… Both led to (a) an increased regulatory attention to bank-lending towards the shipping industry; and (b) the regulatory framework being the dominant parameter shaping each Bank’s business activity.

One unsurprising consequence of the above was that (European) bank lending, when it came to shipping, became much less abundant. A second, and initially less anticipated, change was that the approach of lenders, regulated by the same regulator, became significantly more homogeneous. A shipowner friend recently confided to me – half-seriously, half-jokingly – that “if I remove the bank logos from the term sheets I receive, I cannot really tell which-one sent me which.” This is mostly the result of the tighter regulatory framework under which European banks are operating and, jokes aside, highlights the need for regulatory diversification.

Given the importance that debt capital has for an industry as capital-intensive as shipping is, no shipping company can afford all of its lenders to operate under the same regulatory framework. Were it to do so, the result might be that next time something important happened, its lenders would be highly likely to change their views about their shipping exposure at the same time and in the same way. It is like operating a VLCC in high-seas, with no internal bulkheads limiting cargo shifting around: you don’t want to be on it when the wind starts blowing hard…

Thankfully, the alternative financiers, who flocked-in during the last few years, are a crowd made-up by highly different animals. We can hence observe “blocks” of lenders, each defined by the main regulator they operate under, with their respective members behaving in a correlated way. European banks are such a block, with a couple of sub-blocks, defined by the risk-rating model each bank uses to rate its obligors.

Another block are the Chinese financial institutions, another are the Japanese, each having different local regulatory frameworks and/or adopting global ones (like Basel IV) at a different speed than their European counterparts. An additional regulatory diversification bonus comes from the different local central banks’ monetary policies and the impact these have on respective lenders’ balance sheets and capacity to lend.

There is, of course, the block of lenders that are completely untouched by lending regulatory frameworks, such as the various credit funds: their activity is, of course, also contingent on market realities, views, models and limitations but – and this is the key issue here – these are different from the ones traditional financiers have.

The optimal mix of funding sources is a moving target, given the constantly changing finance scene, and also it differs from company to company, depending on parameters such as fleet size, corporate structure, or employment profile (but also some more nuanced ones like specific industrial relationships). A ship-finance specialist, whether internal or external to the company, can be the key for keeping this mix as-close-as-possible to optimal at all times.

Some might argue that the above approach is an expensive one: “I have a financier who provides me with a very competitively priced product, and I feel comfortable with him” or “Why start a new relationship with a geographically/culturally distant and/or more expensive lender?” are comments sometimes made.

In a nutshell, the answer is that diversification, even at some cost, works like an insurance policy. For an industry that has grown up having insurance at its heart (who can imagine shipping without it…) the concept of paying what could appear to be a ‘premium’ to hedge against a known and accepted risk (that of lack of financing), but which could pay-off in multiples later on, should not be that strange.

The ship financing scene is trying to find again its balance, while overall volatility in the finance world is increasing. Seeking regulatory diversification of funding sources might prove to be an efficient way to avoid “déjà vu all over again” as dear old Yogi Berra would have put it…

Dimitri G. Vassilacos is a Partner at Ship Finance Solutions (SFS), a boutique financial consulting firm specializing in the shipping sector. Prior to that he had assumed a variety of positions during a 20-year-long career in the banking sector, including Head of Greek Shipping at Citibank and Manager of the Shipping Division at National Bank of Greece.