The exercise of regulatory discretion should be supported by a stronger focus to develop regulatory experts, rather than just more regulations, said Bank Negara Malaysia governor Tan Sri Muhammad Ibrahim in his keynote address at the 24th International Association of Insurance Supervisors (IAIS) last week.
Highlighting specific challenges for insurance regulation and supervision in the future, he said: “In the current state of constant change, building the capacity of supervisors is one of the most critical priorities to guard against threats to stability without impeding growth and innovation.”
Mr Muhammad said that the lifespan of regulations is getting shorter and shorter, with new areas of risk emerging faster than regulators can write new rules. Adding to the complication, potential threats are also creeping in from beyond the traditional regulatory perimeter. This can be both from non-traditional players, or unfamiliar business models or technologies. He said: “We may have to simply accept that we may never fully grasp or understand emerging risks facing the industry, in a timely manner.”
To address these issues, regulators need a better and effective approach to collate intelligence, including from non-traditional sources. There is clearly vast potential on the use of big data and machine learning to improve risk identification and assessments, said Mr Muhammad.
Regulators also need broader toolkits that allow for more targeted and proportionate interventions, he said. Citing an example, he said that good progress has been made in recovery and resolution planning that ensures large financial institutions can be unwound in an orderly fashion without threatening broader stability.
Mr Muhammad also emphasised that insurance supervisors need to recognise that regulation is as much an art as it is a science. He said: “Experience suggest that authorities should prioritise rules that are appropriate for their jurisdictions, and at the same time, allow room for regulatory and supervisory discretion to respond to emerging and specific risks. This is important if we are to reconcile and balance the trade offs between the practical limitations that regulators face, the desire to avoid excessive regulation, and the need for authorities to act to mitigate risks.”
Experimentation by regulators
He added that room should be allowed for experimentation by regulators. He said: “While rules are not meant to restrict innovation, they often have the effect of doing so. This might end up leaving customers worse off, and insurers exposed to higher business risks than necessary or appropriate. When faced with the stark choice of doing nothing and risking harm to public interests, or writing rules to control something that we do not yet fully understand, it is only sensible to experiment and learn from it.”
He said that for instance, in the field of InsurTech, some regulators have adopted “regulatory sandboxes” to test solutions and design regulations that are appropriate. He added: “There will no doubt be other approaches taken to experiment and innovate.”