NEEDHAM, MA--Until recently, regulatory compliance has been a relatively straightforward issue for U.S. insurance companies. Long deemed a service for the "public good," the insurance industry has been regulated by various entities for over 100 years - making compliance as commonplace as breathing for most insurers.
Yet research from TowerGroup explores how current events have thrust this otherwise veiled and usually uninteresting aspect of insurance into the light of public awareness. A broad array of regulations - from the Health Insurance Portability and Accountability Act of 1996 (HIPPA) through to the USA PATRIOT Act of 2001 and the Sarbanes-Oxley Act of 2002 - has raised both the stakes of compliance and the investment needed to achieve it.
"The complexity and depth of some of the more prominent new regulations have caused otherwise staid compliance areas within insurance companies to take a hard look at how to optimize compliance-related activities," said Jamie Bisker, research director of the Insurance practice at TowerGroup and author of the research. "Although it is possible to comply with these regulations through modifications to existing process and manual efforts, such solutions would be inefficient and uneconomical. The time is rapidly approaching when the complexity of financial services transactions and the need for accurate analysis can only be tackled with the assistance of automation."
However Bisker also added that the scope of regulations impacting financial services overall, and insurance in particular, are such that even automated systems will need constant attention to perform properly. "Spending estimate for individual carriers to get up to speed on these issues range from the low six figures to several million dollars, depending on the carrier's state of preparedness," he said.
Highlights of the research include:
- Coming into compliance with recent regulations has carried a high price tag. As one example, estimates place the cost of the privacy provisions alone of the Financial Modernization Act of 1999 (Gramm-Leach-Bliley) at greater than $150 million for the US insurance industry. Even HIPPA compliance, which has less direct impact on the insurance sector, is estimated to cost Property & Casualty (P&C) and Life & Annuity (L&A) insurers somewhere in the several hundred million dollar range.
- New compliance issues are still in a state of evolution, causing uncertainty for the industry. One specific area of concern for carriers relative to the USA PATRIOT Act is how anti-money laundering and "know your customer" provisions will ultimately impact independent insurance agents and brokers - and how carriers can best collect data to detect and report any suspicious activity coming through this channel.
- To deal with this increasing complexity, TowerGroup advises insurers to ensure that their internal compliance or government relations departments involve IT as early as possible as new regulations are reviewed - given that a company's regulatory response often depends on its ability to access and manage information. Second, TowerGroup advises insurers to modernize core system infrastructure where most of the data required to support compliance resides.
Bisker noted that the broad array of compliance issues facing carriers today further underscores the need for adaptive and flexible IT architectures that can quickly extract and manage information. "Electronic content management and data warehousing are two technologies that will play an increasing role in managing compliance responsibilities. These tools will require modernized infrastructure that integrates lines of business to support the information access and knowledge management required for effective regulatory compliance," he said.
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