KYC Compliance for Insurers: How to Prevent Fraud and Ensure AML Compliance – IT Frae

Kyc and Insurance: The lowdown

Little is clear cut in the insurance sector. While banks, building societies and their wider financial counterparts provide on-going services to long-standing customers, insurers and specialist brokers alike are often restricted to a cyclical, single transaction that is typically driven by cost.

Financial crime has rocketed over recent years, and while the insurance sector may not be an obvious target for fraudsters seeking low-hanging fruit, the mass consumer migration online means nowhere is off-limits. In the last year alone, some 75% of new motor insurance policies and 68% of non-advised life insurance was bought over the internet^[1]. General insurers and general insurance brokers are also subject to the FCA’s AML rules and must have adequate systems and controls in place to prevent financial crime.

REGULATORY REQUIREMENTS

In spite of the insurance sector’s growing scale, there’s a disconnect in regulation across jurisdictions. The US has scrutinised annuities and life insurance policies for some time, while the EU has made no bones about its ambitions to bolster sector regulation in the future. And with four in five UK adults owning at least one insurance product^[2], this could well become a reality sooner rather than later.

At present, the onus is very much on insurance firms to do the right thing for their customers and they would be wise to do so. The reputational damage of treating customers unfairly has derailed many consumer-facing firms, and those whose brands have stayed intact can expect a hefty price tag for their misdemeanours. In the last year alone, The Carphone Warehouse and Standard Life Assurance accumulated close to £59 million in fines from the FCA for insurance-related breaches^[3].

INDUSTRY OBLIGATIONS

Inertia around the real risk of financial crime within insurance is exacerbating the vulnerability of this specialised market. The Financial Action Task Force (FATF), an intergovernmental agency set up to tackle money laundering and terrorist financing, has warned that insurance brokers’ lack of awareness has made them prime targets for financial criminality. FATF names life insurance as a go to for criminals, while general insurance also presents high-level risk. So, what are direct insurers and brokers required to do to protect their customers?

UK insurers and intermediaries are expected to report suspicious activity in line with the Proceeds of Crime Act 2002, with fines or prison sentences subjected for serious breaches. In order to understand customers and ensure suitability as their needs and circumstances evolve, firms must instil and adhere to robust Know Your Customer (KYC) practices.

KYC IN PRACTICE

When firms establish a business relationship with a customer, they must undertake due diligence to identify that customer and ensure they are who they claim to be. Basic insight such as their name, date of birth and address may suffice, but politically exposed persons (PEPs) and individuals in high-risk jurisdictions will warrant more complex checks for clarity and peace of mind.

Once customers have been identified and verified, firms must maintain watertight records of this due diligence and supporting documentation to evidence compliance with the Money Laundering Regulations. KYC goes far beyond onboarding: as people, their circumstances and situations evolve, firms will need adequate internal controls and monitoring systems in place to stay ahead of change, taking a proactive approach to ensure customers are served appropriately.

Insuring businesses present additional complexities: insurers or brokers will need to identify the ‘beneficial owner’ who is acting on behalf of other people, businesses, partnerships or trusts. Only by establishing that they are transacting with a corporation’s ultimate beneficial owner, can insurers minimise the risk of financial crime occurring. Screening must be undertaken amongst third parties to glean the same level of assurance and insight as with customers themselves – after all, criminals will do what it takes to break and to enter.

WARNING SIGNS

Players in the insurance market cannot afford to be complacent. Failure to report any suspicious activity could cost firms and their employees dear. Suspicious activity comes in varying forms, from claims submitted in the early stages of a policy or customers failing to attend adjuster or assessor appointments. Payment anomalies should be scrutinised, from overpayment and refund requests to customers looking to pay through third parties or settling large premiums via foreign currency, wire transfer or other mediums. If there is any doubt, err on the side of caution and alert the National Crime Agency of any concerns.

WHAT’S THE ANSWER?

With a gross written premium (GWP) totalling £99.9bn in 2018, the UK insurance industry is a growing target for criminals looking for safe havens for their money. And the pressure on the industry is immense: failure to report money laundering activity or corruption could result in irreparable reputational risk and sanctions of varying severity, depending on the jurisdiction involved.

Proactivity is key to protecting your customers and your business, from staying close to industrywide developments, risks and concerns, to revising your own processes in line with this insight. As industry players have increasingly found, manual methods are costly, time consuming and ineffective, while technological advances have been transformative in safeguarding customers, businesses and employees alike. Automated AML and KYC platforms both ameliorate and standardise processes, paying dividends to direct insurers and brokers in time, cost and resource efficiencies, accuracy of insight and peace of mind.

With real-time access to legally authoritative global company data, Kyckr connects insurers to over 180 company registries covering 170 million legal entities in 120 countries via a single API. The solution collates timely and accurate insight into companies, directors, shareholders and uses innovative technology to substantiate this information and drive prompt and complete KYC decisions.

With fully automated corporate customer validation and verification solutions and API-based technology that aids the seamless verification of customers, Kyckr connects users directly to the registries to ensure up-to-date and accurate insight at every search.

While technology has been a game changer in the fight against financial crime, it cannot work in isolation. As the insurance industry continues to grow, market players must combine innovation with their own insight and initiative to understand and stay close to their customers and stem suspicious behaviour. Complacency risks making the sector an easy target for opportunists but by pulling together we can build the company and industry-wide defences to stop financial crime in its tracks.