Tag Archives: federal insurance office

What Will Trump Mean for State Regulation?

Insurance is regulated by states, and the states’ laws are implemented and administered by state insurance commissioners. This was affirmed in 1945 by the McCarran-Ferguson Act. Under that act, states regulate the business of insurance unless the U.S. Congress decides otherwise. In the past six years, the federal government has with regularity encroached on areas previously controlled solely by state insurance commissioners, such as through the following federal actions:

  • The creation by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) of the Federal Insurance Office (FIO)
  • Dodd-Frank’s creation of the Financial Stability Oversight Council (FSOC)
  • The Affordable Care Act (ACA)
  • The Department of Labor (DOL) fiduciary rule issued April 8, 2016

These federal encroachments have led to regulatory confusion. Although state insurance commissioners are the predominant regulator of licensed insurance carriers and producers, insurance companies that are deemed systemically important non-bank financial institutions are supervised both by the Federal Reserve and by their domestic state insurance regulators. This creates significant duplication and regulatory burden; the cost of that burden – as well as some of the confusion — is ultimately passed on to consumers. Under the ACA, for instance, state insurance regulators routinely must react to hundreds of pages of regulations that are published by the Centers for Medicare and Medicaid Services. Licensed insurance producers and carriers must overhaul their operations and distribution to comply with the 1,023-page DOL fiduciary rule.

See also: What Trump Means for Business  

As I see it, state legislatures have given state insurance regulators dual mandates: (1) to protect consumers from the moment of purchase through filing a claim and ultimately the payment or denial of that claim; and (2) to ensure companies are solvent and can meet their financial obligations to consumers. While insurance regulators at the state level can always improve, I do believe that collectively we do a commendable job. Insurance company failures are rare, and most states respond to consumer complaints in a very timely fashion.

Under a President Trump, I believe the role of state insurance regulators will grow as some federal regulations are eliminated. If Dodd-Frank is reviewed, the role of the FIO and even the FSOC could change. State regulators have argued tirelessly that the FIO is not a regulator and needs to stay in its lane as authorized under Dodd-Frank. State regulators are debating with the FIO the need for a covered agreement on reinsurance collateral and are worried about state law being preempted. I think that, under a Trump administration, state regulators may be listened to much more in this debate. State commissioners and the FSOC representatives with insurance experience have also worked to ensure that the FSOC recognize that insurance is not banking and that traditional insurance is not systemic to the global financial system. A Trump administration may agree with state insurance regulators on these issues and many more. Only time will tell, of course.

State insurance commissioners need to demonstrate through the execution of states’ dual mandates that we deserve the responsibility of supervising the insurance markets in our respective states and that we do it better than it could be done from the federal level. I believe the time for state insurance commissioners to shine is now, and I hope we all continue to deliver results as our roles as the regulators of insurance carriers and producers and as the protectors of consumers become increasingly important.

See also: What Trump Means for Workplace Wellness  

Competing in an Age of Data Symmetry (Pt. 3)

The Internet is a mirror of sorts — a data mirror. Right now, it is a sort of fuzzy data mirror, but the pictures grow clearer as the available data grows. Soon, the image of an insurers’ customer service, pricing and claims experiences will grow crisp. How will it happen? How will insurers respond and remain competitive?

In Part 1 and Part 2 of our series, we discussed data symmetry — the leveling of the playing field that is currently happening because insurers are gaining access to many of the same streams of data. The trend runs in contrast to data asymmetry, which allowed insurers to comfortably differentiate themselves by being good at the analysis of their own in-house data. As insurers use more and more of the same data and some of the same analytics tools and methodologies, they will find themselves in a pool of sameness. Differentiation by price and service will be less about introspective analysis and more about finding and delivering on real brand promises.

So, in today’s blog we are crossing a bridge of sorts. We are going to look at how the consumer will achieve data symmetry by gaining a clear view of the real insurer.

See also: Data Science: Methods Matter

Changes in scrutiny are causing data symmetry

Insurers are the subjects of constant scrutiny. The NAIC, the Federal Insurance Office, the Department of Labor, every state and every consumer protection organization have an interest in watching insurers. Yet all of that scrutiny may pale in comparison to the impact of the coming wave of individual consumer scrutiny.

Consumers are using ratings, stars, comments and shopping patterns to give instant feedback to all service providers. Feedback (real experience) is a sales tool for aggregators and retailers. It is a reason for consumers to choose particular channels or pipelines. Amazon and eBay don’t have to build trust for any one product. They only have to facilitate feedback and let the products, services and suppliers speak for themselves.

These outside views are the result of symmetrical data availability. Prospects are now able to compare any product or service, including insurance, with greater real data, including both sources that are verifiable and those that contain unstructured data. Consumers may look at an insurer through the lens of an insurance aggregator, such as Insure.com or The Zebra, or through simple search terms such as “worst auto claims experience in my entire life.” They may also witness an insurance interaction through their relationships with friends on social media.

Reputation analysis will hold tremendous power to validate or invalidate brand promises. Does the insurer make it simple to file a claim? Does it have a poor track record in paying claims? Are renewal rates much higher or lower than competitors’? These bits of information weren’t as public in the past. Today, they are common and easy to find.

See also: What Comes After Big Data?

Data symmetry’s effect on the insurer will operate much like a looking glass. The insurer will begin to see itself, not as it has attempted to portray its brand, but as it is perceived during real interactions. This will lead some insurers to make course corrections.

The good news is that data symmetry will supply healthy doses of reality. Insurers will know and understand their competition. They will have an unprecedented, timely idea about what customers really want and how well they are supplying it. If they are prepared for the coming levels of data symmetry, insurers will also be able to make agile shifts and meaningful steps toward selling insurance through many different channels. Many of these details are still food for our insurance visions. One thing is certain, however. Data and analytics will continue to unlock the secrets of market positioning to keep insurers competitive. Data’s relevance to business decisions will always grow.

Key Regulatory Issues in 2016 (Part 1)

The complexities of the current regulatory environment undoubtedly pose significant challenges for the broad spectrum of financial services companies, as regulators continue to expect management to demonstrate robust oversight, compliance and risk management standards. These challenges are generated at multiple (and sometimes competing) levels of regulatory authority, including local, state, federal and international, as well as, in some cases, by regulatory entities that are new or have been given expanded authority. Their demands are particularly pressing for the largest, most globally active firms, though smaller institutions are also struggling to optimize business models and infrastructures to better address the growing regulatory scrutiny and new expectations.

Across the industry, attentions are focused on improving overall financial strength and stability, guided by the recommendations of international standards-setting bodies and U.S. regulatory mandates that encompass governance, culture, risk management, capital and liquidity. Though historically under the purview of individual states, the insurance sector in the U.S. has been responding to influences at both the international and federal levels. The efforts of the International Association of Insurance Supervisors (IAIS) to develop insurance core principles (ICPs), a common framework for the supervision of internationally active insurance groups (IAIGs) and capital standards, have all laid the foundation for global regulatory change. These efforts have been further supported by new authorities given to the Federal Reserve Board, the Financial Stability Oversight Council and the Federal Insurance Office and by the designation of certain nonbank insurance companies as systemically important financial institutions (SIFIs). Following are some of the key regulatory issues we anticipate will have an impact on insurance companies this year:

1. Strengthening Governance and Culture

Despite heightened attention from regulators and organizations to strengthen governance structures and risk controls frameworks, instances of misconduct (i.e., professional misbehavior, ethical lapses and compliance failures) continue to be reported across
the financial services industry, including the insurance sector,
with troubling frequency. Boards and senior management are
now expected to define and champion the desired culture within their organizations; establish values, goals, expectations and incentives for employee behavior consistent with that culture; demonstrate that employees understand and abide by the risk management framework; and set a “tone from the top” through their own words and actions.

Line and middle managers, who are frequently responsible for implementing organizational changes and strategic initiatives, are expected to be similarly committed, ensuring the “mood in the middle” reflects the tone from the top. Regulators are also assessing an organization’s culture by looking at how organizations implement their business strategies, expecting firms to place the interests of all customers and the integrity of the markets ahead of profit maximization. They will consider business practices and associated customer costs relative to the perceived and demonstrable benefit of an individual product or service to the customer, giving attention to sales incentives and product complexities.

State and federal insurance regulators have joined the global push for enhanced governance, and, in 2016, insurers can expect heightened attention in this area through the Federal Reserve Board’s (Federal Reserve) supervision framework and its enhanced prudential standards (EPS) rule; the Financial Industry Regulatory Authority’s (FINRA) targeted review of culture among broker-dealers; and the National Association of Insurance Commissioners’ (NAIC) Corporate Governance Annual Disclosure Model Act, which became effective Jan. 1, 2016, and requires annual reporting following adoption by the individual states. Given the regulatory focus on conduct, insurers might experience some pressures to put in place governance and controls frameworks that specifically recognize and protect the interests of policy holders.

2. Improving Data Quality for Risk Data Aggregation and Risk Reporting

Financial institutions continue to struggle with improving their risk-data aggregation, systems and reporting capabilities, which means insurers, in particular, will be challenged to handle any coming changes in regulatory reporting, new accounting pronouncements, enhanced market opportunities and increasing sources of competition because of legacy actuarial and financial reporting systems. These data concerns are augmented by information demands related to emerging issues, such as regulatory interest in affiliated captives. In addition, there are expected requirements of anticipated rulemakings, such as the Department of Labor’s Fiduciary Rule, which necessitates a new methodology or perspective regarding product disclosure requirements and estimations of the viability and benefits of individual products. There is also the Federal Reserve’s single counterparty credit limit (SCCL) rule, which requires organizations, including nonbank SIFIs, to track and evaluate exposure to a single counterparty across the consolidated firm on a daily basis. Quality remains a challenge, with data integrity continually compromised by outmoded technologies, inadequate or poorly documented manual solutions, inconsistent taxonomies, inaccuracies and incompleteness.

Going forward, management will need to consider both strategic- level initiatives that facilitate better reporting, such as a regulatory change management strategic framework, and more tactical solutions, such as conducting model validation work, tightening data governance and increasing employee training. By implementing a comprehensive framework that improves governance and emphasizes higher data-quality standards, financial institutions and insurance companies should realize more robust aggregation and reporting capabilities, which, in turn, can enhance managerial decision making and ultimately improve regulatory confidence in the industry’s ability to respond in the event of a crisis.

See Also: FinTech: Epicenter of Disruption (Part 1)

3. Harmonizing Approaches to Cybersecurity and Consumer Data Privacy

Cybersecurity has become a very real regulatory risk that is distinguished by increasing volume and sophistication. Industries that house significant amounts of personal data (such as financial institutions, insurance companies, healthcare enrollees, higher education organizations and retail companies) are at great risk of large-scale data attacks that could result in serious reputational and financial damage. Financial institutions and insurance companies
in the U.S. and around the world, as well as their third- party service providers, are on alert to identify, assess and mitigate cyber risks. Failures in cybersecurity have the potential to have an impact on operations, core processes and reputations but, in the extreme, can undermine the public’s confidence in the financial services industry as a whole. Financial entities are increasingly dependent on information technology and telecommunications to deliver services to their customers (both individuals and businesses), which, as evidenced by recently publicized cyber hacking incidences, can place customer-specific information at risk of exposure.

Some firms are responding to this link between cybersecurity and privacy by harmonizing the approach to incidence response, and most have made protecting the security and confidentiality of customer information and records a business and supervisory priority this year. State insurance regulators have a significant role in monitoring insurers’ efforts to protect the data they receive from policyholders and claimants. In addition, they must monitor insurers’ sales of cybersecurity policies and risk management services, which are expected to grow dramatically in the next few years. Insurers are challenged to match capacity demands, which may lead to solvency issues, with buyers’ needs and expectations for these new and complex product offerings. The NAIC, acting through its cybersecurity task force, is collecting data to analyze the growth of cyber-liability coverage and to identify areas of concern in the marketplace. The NAIC has also adopted Principles for Effective Cybersecurity: Insurance Regulatory Guidance for insurers and regulators as well as the Cybersecurity Consumer Bill of Rights for insurance policyholders, beneficiaries and claimants. Insurance regulatory examinations regularly integrate cybersecurity reviews, and regulatory concerns remain focused on consumer protection, insurer solvency and the ability of the insurer to pay claims.

4. Recognizing the Focus on Consumer Protection

In the past few years, the Consumer Financial Protection Bureau and the Federal Trade Commission have pursued financial services firms (including nonbanks) to address instances of consumer financial harm resulting from unfair, deceptive or abusive acts or practices. The DOL Fiduciary Rule redefines a “fiduciary” under the Employee Retirement Income Security Act to include persons — brokers, registered investment advisers, insurance agents or other types of advisers — that receive compensation for providing retirement investment advice. Under the rule, such advisers are required to provide impartial advice that is in the best interest of the customer and must address conflicts of interest in providing that advice. Though intended to strengthen consumer protection for retirement investment advice, the rule is also expected to pose wide-ranging strategic, business, product, operational, technology and compliance challenges for advisers.

In addition, the Securities and Exchange Commission (SEC) has announced it will issue a rule to establish a fiduciary duty for brokers and dealers that is consistent with the standard of conduct applicable to an investment adviser under the Investment Advisers Act (Uniform Fiduciary Rule). The consistent theme between these two rules is the focus on customer/investor protection, and the rules lay out the regulators’ concern that customers are treated fairly; that they receive investment advice appropriate to their investment profile; that they are not harmed or disadvantaged by complexities in the investments markets; and that they are provided with clear descriptions of the benefits, risks and costs of recommended investments. In anticipation of these changes, advisers are encouraged to review their current practices, including product offerings, commissions structures, policies and procedures to assess compliance with the current guidance (including “suitability standards” for broker/dealers and fiduciary standards for investment advisers, as appropriate) as well as to conduct impact assessments to identify adjustments necessary to comply with the DOL Fiduciary Rule. Such a review should consider a reassessment of business line offerings, product and service strategies and adviser compensation plans.

5. Addressing Pressures From Innovators and New Market Entrants

The financial services industry, including the insurance sector, is experiencing increased activity stemming, in large part, from the availability of products and services being introduced to meet the growing demand for efficiency, access and speed. Broadly captioned as financial technology, or FinTech, innovations such as Internet-only financial service companies, virtual currencies, mobile payments, crowdfunding and peer-to-peer lending are changing traditional banking and investment management roles and practices, as well as risk exposures. The fact that many of these innovations are being brought to market outside of the regulated financial services industry — by companies unconstrained by legacy systems, brick-and- mortar infrastructures or regulatory capital and liquidity requirements — places pressures on financial institutions to compete for customers and profitability and raises regulatory concerns around the potential for heightened risk associated with consumer protection, risk management and financial stability.

For insurance companies, the DOL Fiduciary Rule will affect the composition of the retirement investment products and advice they currently offer and, as such, creates opportunity for product and service innovation as well as new market entrants. Insurers will want to pursue a reassessment of their business line offerings, product and service strategies, and technology investments to identify possible adjustments that will enhance compliance and responsiveness to market changes. Regulators will be monitoring key drivers of profit and consumer treatment in the sale of new and innovative products developed within and outside of the regulated financial services industry.

This piece was co-written by Amy Matsuo, Tracey Whille, David White and Deborah Bailey. 

An Open Letter to Federal Regulators

I welcome and applaud the federal government’s interest in the regulation of our nation’s insurance industries and markets. In response to the Federal Insurance Office’s request for comments on the “gaps” in state regulation, I appreciate this opportunity to present my views. Indeed, your request, Director McRaith, for comments upon such “gaps” seems to reveal what a keen, yet heretofore unpublicized, good sense of humor you must have.

To very briefly introduce myself, I am an economist, a CFA and a life insurance agent of more than 20 years who has worked with scores of life insurers. My views have been published by the Journal of Insurance Regulation, the American Council on Consumer Interests and various other industry trade publications. My positions are based on my extensive experiences with our nation’s profoundly problematic state-based insurance regulatory system, problems that those who have not been intimately involved with in the marketplace might find inconceivable.

State insurance regulators have never required the proper disclosure of cash value life insurance policies. Markets do not work properly without adequately informed consumers. While life insurance is, conceptually, a simple product, without the proper conceptual understanding of and the necessary relevant information, consumers cannot effectively search for good value. “The Life Insurance Buyer’s Guide,” published by regulators and mandatorily distributed with policies by insurers and their agents, is not just a little deficient—it is misleading, seriously incomplete and defective. And, it, in all of its various state editions, has been that way for almost 40 years.

Professor Joseph Belth has written about this national problem for more than 40 years. In 1979, the Federal Trade Commission issued a scathing report on the life insurance industry’s cash value products. Cash value policies are composed of insurance and savings components, and consumers need appropriate information about both. This specifically requires appropriate disclosure of these policies’ annual compounding rates on consumers’ savings element as well as annual costs regarding their insurance element. Both Professor Belth and I have separately developed very similar disclosure approaches. (More information about my approach and its comparative conceptual and marketplace tested-advantages is available on my website or upon request.)

The exceptional nature of this regulatory failure can be grasped by specifically contrasting the states’ regulatory track record on cash value policy disclosures with those of other financial regulators’ actions. Investment product disclosures have been mandated since the 1930s. Truth in Lending was enacted in 1969. And yet, while a consumer’s potential risks in making a poor life insurance purchase can arguably be shown to be greater than those in purchasing a poor investment or obtaining an unattractive loan, Truth in Insurance or Truth in Life Insurance legislation has never been promulgated by any state.

A second insightful perspective, and one with much more tangible consequences on its harmful impacts on consumers, can be grasped by reviewing a few basic facts about the current life insurance marketplace.

Three Facts

Fact No. 1: The life insurance marketplace is awash with misinformation; this should hardly be surprising. Life insurers actually run misleading advertisements and conduct training in deceptive sales practices. Evidence of such has been repeatedly submitted to state regulators. Moreover, given the industry’s commission-driven sales practices (commissions that can make those of mortgage brokers, now notorious for their own misrepresentations, look tiny), sales misconduct is pervasive. The harmful consequences of such agent misrepresentations are manifested every day, both directly and indirectly, in unwise purchases or other costly life insurance mistakes by American families. These misrepresentations go unrecognized because of consumers’ inadequate financial grasp of a product’s true conceptual framework, and these go unpunished because, as a past president of the national largest agent organization has written in widely quoted published articles, state laws prohibiting deceptive life insurance sales practices have virtually never been enforced.

Fact No. 2: Cash value life insurance policies that are sold to be lifelong products have extraordinary high lapse rates. Data shows that over an eight-year period, approximately 40% of all the cash value policies of many life insurers are discontinued. It is true there are many possible causes for consumers to discontinue coverage, but age-old evidence of consumer dissatisfaction has been a virtual five-alarm that state regulators have ignored for more than 40 years. Such lapses are especially financially painful to consumers, as the typically sold cash value policy has huge front-end sales loads (sales loads regarding which agents are trained to make misrepresentations).

It is very important that all readers fully understand that, contrary to pervasive misconceptions and misrepresentations, cash value policies do not avoid the increasing costs of annual mortality charges as a policyholder ages. The fundamental advantages of cash value life insurance products come from the product’s tax privileges. Tax privileges, however, are essentially a free, non-proprietary input. In a competitive marketplace, firms cannot charge consumers or extract value for a free, non-proprietary input. No one pays thousands of dollars in sales costs to set up an IRA. Cost disclosure will enable consumers to evaluate cash value policies by the policies’ price competitiveness and, as such, will drive the excessive sales loads out of cash value policies.

The heart of the battle over disclosure is that disclosure threatens to—and, in fact, will—undermine the industry’s traditional sales compensation practices. For example, over the past five years, Northwestern Mutual, the nation’s largest insurer, with $1.2 trillion of individual coverage in force, paid $4.5 billion in agent life insurance commissions and other agent compensation, while its mortality costs for its death claims were only $3.5 billion. (Northwestern paid more than $12 billion to policyholders surrendering their coverage during the same five years.)

Agents, naturally, do not like the idea of reduced compensation, but their arguments are not compelling. Insurers believe little life insurance would be sold without such agent compensation; that is, that the large and undisclosed agent compensation cash value policies typically provide is, 1) necessary to compensate agents for their sales efforts and yet, 2) could not be obtained from an informed consumer.

My position is that good disclosure on life insurance will drive the excessive and unjustified sales loads out of cash value policies, making them price competitive with pure-term policies, thereby enabling consumers to truly benefit from the product’s tax privileges. Also, product cost disclosure is an essential component of any fair business transaction (and, as all readers properly educated about life insurance know, a cash value policy’s premium and annual cost are different.)

Fact No. 3: It is undeniable that the sales approaches used today are not effective. Unbiased experts have, for decades, demonstrated that Americans have insufficient life insurance. In August 2010, the Wall Street Journal’s Leslie Scism reported that levels of coverage have plummeted to all-time lows. Contrast that with data showing consumers’ ever-increasing voluntary purchases of additional coverage via their employers’ group life insurance plans. Marketing research shows that fear making a mistake is the primary reason consumers avoid or postpone purchases and financial decisions. Inadequate disclosure on life insurance policies not only prevents consumers from being appropriately informed; it is also a main factor in their avoidance of the very product they so often need.

I predict publicity of appropriate disclosure will lead to: unprecedented sales growth, policyholder persistency, different levels of coverage, positive impacts on all other measurements of satisfaction regarding consumers’ future life insurance purchases and life insurance agents becoming trusted and esteemed professionals. Admittedly, appropriate disclosure could lead to litigation over agents’ and insurers’ prior misrepresentations.

As I think you may now understand, inadequate life insurance policy disclosure is a regulatory “gap” that is virtually the size and age of an intergalactic asteroid.

Other Gaps

As it is currently marketed, long-term care insurance (LTCI) constitutes another serious problem. While, theoretically, LTCI can make sense, the devil is in the details. Essentially, LTCI is a contingent deferred annuity, yet one where insurers retain an option to increase the premiums for entire “classes of insureds” and where consumers must confront post-purchase price risks without the information necessary to assess alternatives. Furthermore, consumers cannot transfer their coverage to a new insurer without forfeiting the value they’ve previously paid. Defective LTCI policies have let consumers be shot like fish in a barrel; in fact, the policies’ inherent unfairness makes loan sharks envious. Appropriate disclosure on LTCI would bring consumers drastically superior value and understanding.

Regulation of life insurance agent licensing is incredibly deficient. Agents should truly be financial doctors. However, states’ agent licensing requirements fail to make sure consumers are served by financially knowledgeable professionals; licensing exams are a joke. While there are many competent agents, it is quite possible that the overwhelming majority of agents—many of whom are new and inexperienced, as more than four out of five recruits fail in the commission-based environment within the first few years—do not possess the basic knowledge necessary to accurately assess a consumer’s needs or to properly evaluate different companies’ policies.

There is virtually no state regulation of fee-only advisers who charge for providing advice about life insurance industry products. Such individuals can cause harm to consumers in multiple ways: improperly assessing needs and evaluating policies and recommending policy terminations or other actions (beneficiary or ownership changes, inappropriate policy loans, etc.) that lead to policies being mismanaged. To my knowledge, the only state that actually requires licensing for fee-only advisers is New Hampshire. A cursory review of public records, however, reveals shocking omissions in New Hampshire’s enforcement of such rules. One of the state’s former insurance commissioners, who for years has operated a prominent website providing and charging for advice on life insurance, has never been licensed.

Agent continuing education (CE) requirements are problematic. Outdated courses are still deemed acceptable, similar courses can be submitted virtually indefinitely to fulfill bi-annual CE requirements, and many courses are so devoid of meaningful information that they are vacuous. While the potential merits of CE are undeniable, only serious testing and recordings provide the means of monitoring the true effectiveness of instruction and learning.

Another area for improved regulation concerns the insurer-agent relationship. This is not to suggest draconian involvement by the government, rather to recognize the legitimate public interests in properly structuring such relationships—just as is done in relationships between pilots and airlines, construction workers and contractors, nurses and hospitals. The contracts between insurers and agents show unequal bargaining power. Insurers have not only exercised their power unfairly but have—possibly illegally—prohibited certain agent conduct, while requiring other, on matters clearly outside the boundaries of the contract. Attorneys specializing in franchise law have stated that the typical agent’s contract is the most one-sided arrangement they have ever seen.

Over the past 20 years, I have written many articles and submitted extensive documentation of sales and managerial fraud in the life insurance marketplace, yet no one with any marketplace authority or power has ever taken any effective action. Nonetheless, my commitment to reform the life insurance industry and marketplace remains. In fact, while federal regulatory action and any other private assistance would be greatly appreciated, all that is needed for the transformation of the age-old, dysfunctional life insurance industry is the dissemination—the genuine and effective mass market dissemination—of the type of life insurance policy disclosure information that is available on my web site, BreadwinnersInsurance.com. [The full version of this letter is available on the site.]

The Case for Modernizing Insurance

Several drivers of change are compelling insurance companies to re-evaluate and modernize all aspects of their business model and operations. These drivers include new and rigorous expectations from regulators and standards, increasing demands for more relevant and useful information, improvements in analytics and the need for operational transformation.

The modernization creates considerable expectations for finance, risk and actuarial functions, and potentially significant impacts to business strategy, investor education, internal controls, valuation models and the processes and systems underlying each – as well as other fundamental aspects of the insurance business. Accordingly, insurers need more sophisticated financial reporting, risk management and actuarial analysis to address complex measurement and disclosure changes, regulatory requirements and market expectations.

Three key areas to look at:

Regulation and reporting

Changes in regulatory and reporting requirements will place greater demands on finance, risk and actuarial functions. Issues include:

  • Changing global and federal regulation (e.g., Federal Insurance Office, Federal Reserve oversight)
  • ComFrame, a common framework for international supervision.
  • Principle-based reserving
  • Own Risk and Solvency Assessment (ORSA), the Solvency II initiative that defines a set of processes for decision-making and strategic analysis
  • Solvency reporting measures
  • Insurance contract accounting

Information and analytics

Stakeholders are demanding more information, and boards and the C-suite need new and more relevant metrics to manage their businesses. Issues include:

  • Economic capital
  • Embedded value
  • Customer analysis and behavioral simulation
  • New product and changing underwriting parameters

Operational transformation

Those in charge of governance are demanding that the data they use to manage risk and make decisions be more reliable and economical. Issues include:

  • Updated target operating models
  • Centers of excellence
  • Enterprise risk management (ERM), model risk management and governance
  • New framework from the Committee of Sponsoring Organizations (COSO), a joint initiative of five private-sector organizations that provides thought leadership on ERM, internal controls and fraud deterrence
  • Optimization of controls, and efficiency studies

These drivers of change, which affect every facet of the business — from processes, systems and controls to employees and investor relations — have significant overlaps, and insurers cannot deal with them in isolation. To meet emerging challenges and requirements, simply adding processes or making one-off, isolated changes will not work.

Systems, data and modeling will have to improve, and the finance, actuarial and risk functions will need to work together more closely and effectively than they ever have before to meet new demands both individually and as a whole.

Moreover, all of this change is imminent: Over the next five years, leading companies will separate themselves from their competitors by fully developing and implementing consistent data, process, technology and human resource strategies that enable them to meet these new requirements and better adapt to changing market conditions.

The insurers that wind up ahead of the game will excel at creating timely, relevant and reliable management information that will provide them a strategic advantage. Legacy processes and systems will not be sufficient to address pending regulatory and reporting changes or respond to market opportunities, competitive threats, economic pressures and stakeholder expectations. Companies that do not respond effectively will struggle with sub-par operating models, higher capital costs, compliance challenges and an overall lack of competitiveness.

In subsequent articles, we will take a closer look at those leaders/business units that need to modernize.

 Eric Trowbridge, a senior manager, contributed to this article.