A variety of research findings show that legislation governing the industry can be a major headache for insurers. On the positive side, the emergence of better ways to manage data and use business analytics have the potential to help insurers more effectively deal with the growing number of rules and regulations they’re facing.
According to a survey of 533 global insurance executives, conducted by professional services and consulting firm Towers Watson in 2013, 61 percent said increased regulatory and legislative constraints, including consumer protections and capital requirements, will have a significant impact on their business in the next two years. In fact, regulatory constraints were second only to capital management challenges resulting from sustained low-interest rates and the volatile investment environment, according to Towers Watson.
In a recent report, “Executive Perspectives on Top Risks for 2014,” global consulting firm Protiviti, a wholly owned subsidiary of Robert Half, noted that there continue to be significant regulatory developments on the insurance industry front. For example, Own Risk and Solvency Assessment (ORSA) and the Solvency Modernization Initiative are critical regulatory priorities in the United States, according to the report, which Protiviti conducted with North Carolina State University’s Enterprise Risk Management (ERM) Initiative, and which included a survey of 370 board members and C-suite executives at companies in a variety of industries.
Questions remain regarding how regulators will respond, regulate and address the information they are receiving, the report said. Also of note in the United States, it said, the Federal Insurance Office has yet to have an impact, creating significant uncertainty at least until the agency publishes its state of the industry report.
“In the current, ever-changing world of U.S. insurance regulation, things are changing faster than ever,” said Shawn Seasongood, a managing director in Protiviti’s insurance practice. “Many industry experts consider ORSA the most significant program of insurance regulatory reform in the United States since the early 1990s, and predict that it will have a significant impact on the overall industry.”
Consulting firm PricewaterhouseCoopers (PwC), in its annual report on the insurance industry for 2014, notes that in the coming years, “finance and actuarial functions will be dealing with an unprecedented amount of change that will frame the insurance reporting and solvency landscape for the next generation. These requirements will come into effect at different times, and uncertainty remains about their final form.” As a result, PwC said, “companies need to develop thoughtful, proactive implementation strategies in order to avoid rework and changes that could ultimately lead to excessive costs and under delivery on original targets.”
U.S. companies are not alone in their struggles to deal with rules and regulations that govern their industry. A survey of insurance companies and intermediaries in the U.K., conducted in January 2014 by information management company EDM Group, showed that only 32 percent of the insurance intermediaries said insurers have coped well with the raft of new legislation that the industry has faced in recent years.
What’s more, 73 percent of the 112 intermediaries said customer service in the insurance sector has suffered as a result of insurers dedicating more resources to dealing with new legislation.
Only 35 percent of the 43 insurance executives surveyed by EDM said insurers have coped well with new legislation, and 23 percent said customer service has suffered as a result of dedicating more resources to these efforts. A large share of the insurance executives, nearly 70 percent, say that poor information management has had a big impact on the ability of insurers to deal with new legislation.
New legislation has been one of the biggest challenges facing insurers, EDM notes, and research suggests that poor management of data has had a negative impact. One critical way in which insurers are addressing this issue is by digitizing more of their information and relying less on paper-based sources of data, the report said. This will not only improve their levels of efficiency and cut costs, but also help ensure that companies are compliant with all of the legislation they must adhere to.
“The biggest impact for us is that every third-party contract needs to be reviewed and usually updated with the latest requirements,” said Jim Berry, VP of insurance operations at Safety Insurance Group. “In the insurance industry, where all the data resides in an increasingly intertwined information ecosystem, the impact of each subsequent change is considerable,” Berry said.
Regulations clearly have led to more costs for insurers, Berry said. But given the number of data breaches in different industries, “it's tough to complain about the regulation,” he said. “Our first obligation is to our customers, and we owe them a duty of care regarding their private information. If these [regulations] drive a better discipline of process, then whatever additional costs [involved] are worth it.”
Data management and analytics can play a huge role in helping insurers meet requirements, Berry said. “With the explosion of available data, we've found that job one is to [enhance] the process of acquiring and managing data,” he said. “By having cleaner, more complete data, we are better able to justify rate changes and introduce greater complexity to our rating. Analytics efforts allow us to produce data more easily than ever before — although still not as quickly as we would like.”
In fact, Berry said Safety is not yet using its data management and analytics capabilities to the fullest to meet the demands of regulations. “Most of our successes have come in integrating data from various systems,” he said. “But our goal is to leverage more third-party data to improve the integrity of the data. The regulations continue to evolve, so our efforts need to dovetail with those changes as well.”
Big data represents both the next major challenge and the next new opportunity across many industries, including insurance, Seasongood said. “Since the advent of social media and digital communication, companies have access to a staggering amount of data, in addition to their own customer, transactional and legacy data. For ERM and capital modeling to be successful, the organization must understand the sources of the required data, how the data is used within the business processes, which areas of the organization utilize the data, and the overall definitions for things, such as measures of data quality, so that the company can properly deploy the data,” Seasongood said.
The major concern is how to manage and store big data, including legacy data, securely, Seasongood said. “As news stories continue to break around unethical business practices, consumers are becoming increasingly wary of the threat posed to their privacy by improperly managed data,” he said. ”Given the amount of personal information insurers have about their customers, securing this data, big and legacy, has never been more important.”
But it’s important to note that big data offers opportunities as well as risks, allowing insurance companies to maximize return on investment through targeted marketing, underwriting and product development processes, Seasongood said.
“To this end, companies are beginning to hire data scientists and devote research efforts to analyzing big data for repeatable business patterns and other actionable information,” Seasongood said. “These new efforts have only recently started to be incorporated into the overall data governance programs of larger carriers. At midsize and smaller companies, data governance steering committees are also beginning to think strategically about ways to employ similar efforts while remaining cost-efficient.”
In the health insurance market, the Affordable Care Act (ACA) is requiring a considerable amount of effort for compliance, said Tom Scales, life research director at Celent, and a former executive at AmeriLife Group and AEGON Financial Partners.
“For those that are on the exchange, the interconnection alone was a huge investment,” Scales said. “This was not really a big data effort, but a more traditional integration effort.” In general, access to data has huge implications in our industry, and regulatory requirements are just one,” he added. “Certainly all the queries from state and federal regulatory bodies can be more easily met with a strong, successful big data initiative. It is just a tough, lengthy, expensive project for many, if not most, insurers.”
Being nimble is critical for insurers today. “If their in-house technical staff or vendor partner is responsive to regulatory changes, then it makes living with the changes easier,” Scales said.
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