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Blockchain: Golden Opportunity in LatAm

Blockchain technology’s potential for disrupting the re/insurance industry is frequently mentioned, and it’s easy to understand why, given the nature and volume of data that flows between the insured, insurer, broker, reinsurer, service providers and other external stakeholders.

Something that hasn’t been discussed, however, is the extent to which specific markets, and those in Latin America, in particular, could be helped by this technology. That markets across the Latin American region could use blockchain technology to establish a new status as a role model for efficiency and technological development and a desirable place to conduct and attract business appears not to have been recognized.

Approached correctly, blockchain technology represents a golden opportunity to not only introduce real, tangible operating efficiencies into Latin American market practices and operations but also to transform the image of the region’s business environment and discard many of the long-held and damaging misconceptions.

Lack of transparency, lack of data integrity, inefficient and outdated business practices, poor claims data and excessive operating expense are some of the more common complaints of foreign management on the subject of their participation in LatAm markets. While these concerns are certainly not valid across the board, it is difficult to argue that there’s no substance to some of them.

Implementing blockchain technology into market practices could instantly address all of these issues by bringing total transaction transparency, providing consistent processes (vertical and horizontal) and introducing multiple transactional efficiencies, enabling significant time and cost savings.

Putting this in an operational context, during typical high-pressured renewal periods, underwriters would witness considerable reductions in valuable processing time and in the cost of placing their risks by eliminating the rekeying of data and eliminating duplicate tasks for the cedent, broker and reinsurer. The new policy as a “single source of the truth” has considerable benefits for all parties in the chain, not least removing the likelihood of costly future disputes.

As blockchain applications can be designed to process treaties, send notices to all participating parties and process the associated premium and commissions, technical accounting teams can be leaner and more focused on improving transaction efficiency. Payments no longer become stuck or withheld for unreasonably long periods, as all parties can access and follow the payment flow, thus freeing considerable administration time and assisting Treasury needs. Claims teams will see faster processing and verification of claims. Audit teams and compliance staff will enjoy the substantial benefits that transparency brings, especially around the burdensome “know your customer” (KYC) and anti-money laundering (AML) processes. The impact could be significant and enterprisewide.

These benefits could, of course, apply to most re/insurance markets. However, several markets in Latin America have particular characteristics that mean they stand to achieve potentially greater upside benefits and, from a practical perspective, enable easier implementation.

See also: Blockchain in Insurance: 3 Use Cases

First, several ecosystems in Latin America are already familiar with blockchain technology as a result of the wide adoption of crypto currencies and digital assets in the region. As blockchain technology is a key element of crypto currencies, a high level of familiarity and expertise with the technology already exists in the region, which re/insurance industries could leverage. As adoption of crypto currency continues to grow in markets such as Argentina, Colombia and Brazil, in particular, the use of blockchain technology will also grow, increasing the supply of resources with technical blockchain knowhow.

The structure of markets such as Argentina, Brazil, Chile, Colombia and Mexico, lends itself to an easier adoption of blockchain. There are relatively fewer players (than in, say, U.S. markets) operating in more localized markets, which makes intramarket collaboration – which is vital – much easier and quicker to achieve than in larger international markets, which are often more fragmented. In addition, the more relationship-oriented nature of the markets in these countries where there’s a higher degree of trust, long-standing bonds and greater familiarity between players will also induce a greater level of collaboration.

The relatively lower direct cost of labor in Latin American markets has in many cases resulted in unnecessarily high head count in back office functions performing menial, heavily manual tasks such as rekeying of data, repetitive receivables collections procedures and reconciliation work. This has often resulted in bloated expense ratios, less effective processes and additional HR burden. Blockchain will streamline many operational processes, significantly improving efficiency and minimizing headcount.

The regulatory and compliance burdens imposed on businesses in several Latin American markets are substantially greater than in many other international markets. This burden translates to increased expense as well as greater demands on valuable management time. Blockchain would bring efficiencies to the compliance and regulatory aspects of the business through transparent, consistent processing and more streamlined processes. AML and KYC procedures are obvious examples that would see immediate benefits. The potential gains are exponentially greater where the regulatory burden is heavier.

So, the case for blockchain in Latin American re/insurance markets seems pretty clear. The big challenge facing these markets lies in making the transformation and successfully managing the implementation of blockchain technology. Stakeholder collaboration is absolutely fundamental to the success of blockchain in any market. The technology needs to be embraced by multiple market participants, and serious conversations need to take place among the risk takers, the service providers and regulators and national associations before any transformation can begin. No single entity alone can make this happen; influential players that see themselves as leaders need to step up and drive the initiative into their markets.

While blockchain is long-established in technology circles, it is perceived as a UFO in re/insurance circles, too complex to understand and beyond the reach and comprehension of most operational management. It shouldn’t be. There are several solutions and advisers who are accessible and can assist the entire process from preparing feasibility and design to managing implementation. Blockchain is an active and growing sector.

See also: Is Blockchain Ready to Hit the Market?

Largescale adoption of blockchain technology in Europe and the U.S. has been relatively slow to date, which probably means international companies are unlikely to invest the required resources in their Latin American operations, at least until a proof of concept has been established in the traditional markets. The onus may therefore lie with the larger indigenous entities in the region to take the first meaningful step forward and begin the collaboration.

Whoever seizes the initiative and delivers this new world stands to gain not only financial and operational rewards but also recognition in a larger context: true recognition as a market leader in thought leadership and innovation. Opportunities to make such a profound impact on a market do not come around often.

2016 Latin America Insurance Outlook

Despite sluggish economic growth and troubling inflation in key markets, the 2016 insurance market outlook for Latin America remains relatively bright. The rollout of new insurance products and distribution approaches at a time of low market penetration should drive strong growth for insurers. Insurance premium growth is expected to rise by around 6% to 7% in 2016 and possibly beyond should the economic environment improve as expected. At the same time, the emergence of end-to-end digital capabilities is transforming the Latin American insurance market. This digital market disruption will force insurers to make rapid revisions to existing business models to stay competitive and build market share.

Customer expectations rising

Commercial customers will continue to require more sophisticated insurance solutions in 2016, including coverage for business interruption, cyber security, civil unrest and errors and omissions. Latin American consumers, many of whom are young, cosmopolitan and tech-savvy, will continue to push for new insurance channels and services that fit their lifestyle. To respond, insurers will need to simplify and adapt products for Millennials and sharpen their focus on mobile and social media interactions. Evolving customer needs throughout the region are compelling insurance companies to rethink their strategies, processes and services. The rise of financial technology, or fintech, companies is causing insurers, particularly in the consumer insurance sector, to reconsider their business models and increase their investment in new digital technologies. Despite a desire to avoid conflicts with legacy models, insurers realize that flexibility, efficiency and innovation are critical for success in a more demanding marketplace

Competition heating up

The liberalization of industry regulation across Latin America has opened insurance markets to wider competition. The abundance of insurance capital has intensified competition from various directions: from global insurers seeking a foothold in the region to local insurers looking to expand cross country to entrenched insurers defending their turf. These competitive trends are keeping insurance rates flat through much of the region and, in some cases, pushing them lower. The most substantial rate decreases have been in non-catastrophe property.

Pockets of premium increases can be found in areas of instability, such as Venezuela. However, insurance capacity is very limited for Venezuelan political risk, with most risks dependent on the international reinsurance market.

As markets develop in Latin America, commercial demand is increasing for new forms of insurance coverage, such as environmental liability. The opening of the oil industry to the private sector in Mexico, for example, is exposing new oil exploration and production entrants to potential losses from environmental damages. But market capacity is still restrained in key markets, such as Brazil, where only a few insurers offer such liability coverage.

Read our Market Outlook for LATAM Insurance in 2016 to understand more about the dynamics facing the South America Market here.

Insurance Risk in Latin America

Latin America’s compound growth remains attractive and yet, overall, insurance penetration rates still remain low in many countries. Particularly in life insurance, despite continuing economic growth and reduced poverty levels, penetration is low, suggesting there is still significant growth ahead for the insurance sector. We have seen significant reforms across the region from both a fiscal and regulatory standpoint, in everything from capital and exchange controls to consumer protection. We believe a key challenge for insurers over the next decade is navigating this rapid acceleration toward modern regulatory and operational realities.

Around the world, regulators are setting the expectation that insurers will raise their game. The trend is clear, toward better risk management, better governance, more precise measurement of capital in a risk sensitive way and more detailed and transparent reporting to regulators.

We presented our first report for Latin America in 2012, focusing on risk-based capital (RBC) and emerging regulations in four markets: Argentina, Brazil, Chile and Mexico. We have expanded our coverage and also added Colombia, Peru and Uruguay to our new overview.

In the past two years, each Latin American market has faced a different journey to a risk- and economic value-based solvency framework. More open markets in the Pacific Alliance (Chile and Mexico) have enhanced their risk management processes, while Brazil is seeking Solvency II equivalence by 2016. Mexico’s new law, modeled on Solvency II, is likely to be implemented ahead
of the rest of the world. Peru and Uruguay have no immediate plans to pursue a Solvency II approach. Although both countries are attracting foreign investment, the market size and number of players are impeding regulation. With Argentina’s high inflation and economic concerns, adopting an RBC framework in the short term is unlikely.

The challenge to understanding Latin America remains that most insurers in the region are not well-prepared for the expected changes in governance, risk management, capital requirements and reporting. At EY, we believe that effective risk management and the ability to quantify and price risks accurately are a core competence for a successful insurance company. We also observe globally that the leading insurers will typically look to define their own vision for their capabilities in these key areas, rather than simply following the iteration of each piece of regulation. Leading firms will also typically go on to deploy these capabilities more quickly and effectively across their businesses at the point of decision making, and being ahead of competitors in this way is a source of clear commercial advantage.

Argentina

The Argentine insurance market has made minimal progress in its approach to RBC in recent years. As other Latin American countries take steps toward Solvency II equivalence, Argentina is only superficially addressing this issue. In a country experiencing high inflation, tight regulation and fluctuating economic market concerns, RBC is only one in a long list of initiatives on the regulatory agenda of the Superintendencia de Seguros de la Nación (SSN).

Nevertheless, insurance is a fast-growing industry that continues to show resilience in premiums and tolerance for expansion in a challenging environment. Annual growth percentages are measured in Argentine pesos, so the inflation rate has a significant impact on those figures. As of 30 June 2013 (last fiscal year-end), there were 184 companies (108 in property/casualty) writing insurance in Argentina – with 29 new companies added in the past two years. International players continue to make acquisitions to enhance their positions in the industry. Growth has been most prominent in workers’ compensation and motor insurance, producing increases of 42% and 35%, respectively, from June 2012 to June 2013.

Brazil

The Brazilian insurance market continues to achieve double-digit growth. The industry is witnessing a series of mergers and acquisitions and the arrival of multinational insurance and reinsurance companies, mostly from Europe. In addition, the sector experienced the largest initial public offering in the world last year, when BB Seguridade raised approximately US$5.75 billion in the BOVESPA stock exchange.

Although national bancassurance players dominate the Brazilian insurance market, international insurance companies continue to grow at a higher rate through M&A and strategic alliances.

Given the continuous growth in the market, the Brazilian regulator, Superintendência de Seguros Privados (SUSEP), is working with the European Insurance and Occupational Pensions Authority (EIOPA) to achieve Solvency ll equivalence in Brazil. This will facilitate the investment of European insurance companies in Brazil and Brazilian companies in Europe. SUSEP will sign an agreement that will adopt Solvency ll rules partially or fully by 2016, based on a comparative study that EIOPA will perform to measure Brazilian regulation against the Solvency II regime.

Chile

The insurance market in Chile continues to shift from its present regulatory framework to a more sophisticated RBC approach to solvency assessment that better reflects current industry risks. New methodology proposed by the Superintendencia de Valores y Seguros (SVS) is an important step toward building an integral and holistic RBC model.

The Comframe capital framework implementation requires each risk category to be managed individually, with most supervision on a product-by-product basis. Most insurers will need to improve their risk function or implement a holistic approach to risk management. Also, local skilled resources are scarce for the level of technical knowledge imposed by this regulation. Many will need to develop better data analytics, systems and precise risk measurement if they are to increase capital efficiency and profitability.

Chile is one of the more stable markets in the region, primarily because of tight controls over insurance products and asset portfolios. This stability is essential in a market that offers rich growth potential. While the ease of doing business in the country presents an opportunity, product expansion remains an emerging challenge due to a lack of insurance product awareness and consumer perceived value.

Colombia

Colombia enjoys strong economic growth and enormous potential for financial stability over the next three to five years. GDP growth is about 4% a year, ahead of the average for the region. This is driven by stronger activity from foreign investors, a stable macroeconomic environment and a growing middle class. The free trade agreements that Colombia has engineered with major world markets are one example of the tremendous potential the country offers.

Insurance regulation is moving toward a more risk- and economic value-based solvency framework, with tightened capital market regulations. As a result, Colombia is ahead of many global rapid growth markets in reforming regulatory processes, protecting investor rights and cross-border trading to increase the ease of doing business for small companies.

Recent rules that allow foreign insurance companies to establish branches and operate as local insurers have changed the complexion of the Colombian market. Global industry players are entering, buying local insurers or considering start-up companies. This should encourage increased capacity, product diversification and greater competition. Colombia’s premium growth was US$8b in 2013, and rate reductions of as much as 10% were expected for property and life/accident insurance in 2014.

Mexico

The Mexican insurance market is the second largest in Latin America. As of December 2013, gross premiums totaled $334.19 billion Mexican pesos or approximately US$25.6 billion, an increase of 11% over the prior year; this increase includes the effect of a large biannual policy of the government. Despite having one of the lowest proportions of insurance penetration in the region (almost 2% of GDP), Mexico continues to grow above the country’s nominal GDP. New insurance laws and Solvency II regulations are leading to market consolidation, as well as growth in specialty and consumer product lines. The high demand for life insurance is reflected in individual life premiums, which rose 23% in 2013, following a 19% increase in 2012, basically for the success of some savings products.

The regulatory framework in Mexico is evolving toward a more sophisticated risk-based capital approach. A proposed Solvency ll – type insurance law has been under review by the Mexican regulator, Comision Nacional de Seguros y Fianzas (CNSF) and the Mexican association of insurance companies, Asociacion Mexicana de Instituciones de Seguros (AMIS) since the second half of 2008.
The Mexican Congress approved the new regulation in April 2013. Quantitative impact studies and qualitative impact studies are moving forward, and new accounting principles are under discussion. Legislation in the country continues to advance and is likely to be implemented ahead of the rest of the region.

Peru

Peru’s steady economic growth and expanding middle class are attracting new business and opening doors for insurance companies. The Peruvian economy is supported by rapid growth in investment, low inflation, strong economic fundamentals and an annual GDP growth rate of nearly 6%. The country has an investment rating in Latin America that is second only to Chile and offers a favorable legal framework for foreign investors. The financial sector, including insurance, is second only to mining (gold, zinc and copper) in direct foreign investment.

In the last decade, insurance industry sales in Peru have grown more than 200%, from PEN2,700 million (approximately US$776 million) to PEN9.069 million (approximately US$3.36 billion) in 2013. As of December 2013, 40% of total net premiums were from general insurance, 14% from accident and health, 21% from life insurance and 25% from the private pension fund system. It is important to note that only approximately 16% of the urban population has private insurance and 18% has health insurance – and this number has stagnated over the past five years.

The insurance market is highly concentrated in Peru, with 2 of the 15 insurance companies accounting for 60% of total gross written premiums. Overall, insurance penetration rates remain low, as they are in many other Latin American countries.

Uruguay 

Uruguay is a small country with stable economic growth, expanding tourism and rising disposable income. It was one of the few countries in Latin America that was able to avoid recession in 2008, and it continues to grow, with an economy based largely on exports of commodities like milk, beef, rice and wool. Some of world’s largest banks and financial institutions maintain branches there, and it was fortunate not to experience the impact of the global financial crisis or ensuing government intervention.

Although the Uruguayan insurance market is highly competitive, it has no more than 15 companies competing for market share. The largest in the country is Banco de Seguros del Estado (BSE), a government-owned insurer with about 65% of the market share as of December 2013.

Gross written premiums for the insurance industry totaled UYU21.6 billion (US$1.1 billion) in 2012, with a CAGR growth rate of almost 19%. Motor insurance and general liability insurance were leaders in the non-life segment. An increase in demand for pension products contributed to the significant growth in the life segment.

For the full report from which this excerpt is taken, click here.

Global Outlook for P&C, Life-Annuity

In 2015, the macroeconomic environment across much of the world shows significant improvement, with GDP rising in many countries and both the middle class and high-net-worth populations expanding in number and financial resources. These factors bode well for the global outlook for international property-casualty and life-annuity insurance companies.

Key challenges in 2015 include rising competition, generally soft pricing conditions and tight profit margins. To effectively surmount these problems, many insurers are investing in technological solutions that improve front-end sales, distribution and customer service and enhance back-end operational efficiency and expense management.

If one word could sum up the focus of insurers in 2015, it is “technology.” Many insurers are investing in digital platforms that strengthen their relationships with customers across all product classifications and geographies. Their goal is to empower both businesses and consumers to better shop for insurance, making products more transparent, easier to understand and compare.

Across all regions, insurers are capitalizing on data analytics, cloud computing and modeling techniques to sharpen their market segmentation strategies, reduce claims fraud and strengthen underwriting and risk management. They are also investing in technology solutions to optimize processes, increase collaboration across the enterprise and demonstrate capital adequacy and financial solvency for regulatory compliance purposes.

Now that much of the world has returned to more stable economic conditions, it makes eminent sense for property-casualty and life-annuity insurance companies to invest in digital solutions that widen margins and provide competitive differentiation. But technology is a two-edged sword, as the shocking number of data breaches clearly demonstrates. Thus, one last important “spend trend” in 2015 for international insurers—cyber security.

Our comprehensive global outlook explores the various challenges and opportunities confronting global insurance organizations in 2015. In this report, we offer our perspective on the property-casualty and life-annuity insurance markets in Asia-Pacific, Canada, Europe, Latin America and the U.S.

 Asia-Pacific
  • Although insurers in Asia-Pacific are likely to confront deteriorating economic conditions in 2015, growth prospects remain solid for life and non-life insurance products, with GDP projected to rise 5.5%.
  • Rising real estate and financial asset values are enabling insurers throughout the region to produce higher premium volume from the increased protection levels.
  • The growth of the middle class and high-net-worth population in Asia-Pacific presents the opportunity for insurers to increase their sales of personal lines insurance products, as well as health insurance.
  • Commercial lines insurance prospects remain strong, given the region’s elevated catastrophe risk, the rise in infrastructure and home building across much of Asia- Pacific and a low insurance penetration rate.
  • Insurers are challenged to invest in data analytics and modeling capabilities, as well as Internet and mobile digital sales, distribution and customer service solutions, given an increasingly technologically sophisticated population.
  • Regulations addressing insurer solvency, capital and risk management are moving to the front burner, in addition to consumer protections in the areas of data privacy and security.
 Canadian Property and Casualty
  • Profit margins for property-casualty insurance companies in 2015 are challenged by continuing low interest rates and GDP growth, the volatile investment climate and expense increases from needed infrastructure improvements.
  • A major competitive opportunity for insurers is to strengthen their relationships with customers, effectively putting them in focus across all product classifications and geographies, while digitally empowering them to better shop for and compare insurance products.
  • A key challenge in 2015 for Canadian property-casualty insurers is to improve the industry’s low level of consumer trust by integrating distribution and communication channels and providing more transparent information.
  • Opportunities to improve both commercial and personal lines sales and optimize growth are available to insurers that invest in technologies, such as cloud computing, mobile solutions and business collaboration software.
  • Building an enterprise data excellence infrastructure via more robust data analytics and predictive modeling will help insurers pinpoint new growth opportunities, optimize claims outcomes, reduce the incidence of claims fraud and mitigate bottom line risks.
  • Regulatory pressures in 2015 include demands on property-casualty insurers to become more disciplined in their risk management, capital planning and operational oversight.
 Canadian Life
  • Although providers of life insurance and annuities in Canada have endured several years of constrained growth, opportunities exist to improve competitive standing by providing products to underserved consumer markets.
  • A key challenge for insurers in 2015 is the need to develop more robust mobile digital technologies, data analytics
    and social media strategies to address growing consumer expectations of more refined product sales and distribution.
  • To boost sales revenue, providers of life insurance and annuities in Canada must make their products easier to understand and compare, in addition to streamlining the transaction process.
  • To enhance customer experience and enable self-service features, life insurers must consider the value of a digital platform enabling the sharing of information with and among intermediaries and consumers.
  • A key opportunity in 2015 for life insurers is to develop solutions absorbing the longevity risks of pension plan actions to lower risk, which are driven by improvements in life expectancy and the low-interest-rate environment.
  • Regulatory pressures continue to intensify, putting the onus on life insurers to improve their compliance and control functions, implementing more robust governance programs to address key business risks.
 U.S. Life-Annuity
  • Growth prospects are promising for U.S. providers of life insurance and annuities, as the overall economy improves, consumer wealth increases and interest rates creep higher.
  • Key challenges in 2015 include growing competition, especially from new capital entrants seeking to disrupt traditional market positions with new models and market approaches, aligning with rising customer expectations.
  • To succeed in this environment, providers of life insurance and annuities must expand their digital capabilities with new Internet, social media and mobile tools that empower customers and distributors with self-service features, while also making insurance products easier to understand, compare and buy.
  • A major opportunity to widen margins exists for insurers that leverage big data and the cloud to transform back offices systems and processes; these decisions must be weighed against the cyber security risks and regulatory issues they present.
  • As many consumers turn to online banking and investment services to manage their finances, they will seek similar opportunities from providers of life insurance and annuities, presenting opportunities for insurers that develop online advice and transactional models.
  • A continuing challenge in 2015 is the need to navigate the wide array of complex capital solvency and risk management regulations enacted in the aftermath of the financial crisis and overseen by competing regulatory authorities with different demands.
 U.S. Property-Casualty
  • Despite slow-to-rebound interest rates and inflationary medical and food costs, strong performance for U.S. property-casualty insurers is expected, with combined ratios returning to those in the years before the financial crisis.
  • A key challenge includes slow premium growth, which continues to be inhibited by rising competition, an overabundance of capital and inexpensive reinsurance, the latter a consequence of low insured catastrophe losses the last two years.
  • The soft pricing conditions are constraining profit margins, compelling insurers to focus on expense management and operational efficiency, reducing costs through technology upgrades, process optimization, selective offshoring and enhanced risk management.
  • The use of data analytics and modeling techniques to improve underwriting and back-office processes remains a potent opportunity for U.S. property-casualty insurers to bolster their competitive standing.
  • On the distribution front, insurers will optimize the channel mix, adding distribution outlets and expanding aggregator and direct-to-consumer models, while providing consumers with enhanced product price transparency and real-time support and service.
  • To address the evolving array of capital solvency and risk management regulations, and achieve compliance with different regulatory authorities, property-casualty insurers will need to invest in more skilled management and data analytics resources in 2015.
 Latin America
  • Insurer growth prospects are generally favorable, although market demand for property-casualty and life insurance products is evolving at different rates, given disparate economic factors across the region.
  • The expansion in Latin America’s middle class and high net worth populations, as well as the region’s technologically savvy younger generations, create opportunities for providers of automobile insurance and mobile technology warranties.
  • As more homes and office buildings are built throughout the region, the need to insure these structures from the damaging effects of natural disasters is a positive trend for commercial property and homeowners insurers.
  • A key challenge for many insurers in 2015 is the need to modernize their operations and distribution models to adapt to rising business and consumer expectations of digital, mobile and Internet interactions, particularly for commercial lines of insurance where intermediaries retain control.
  • On the regulatory front, regions are addressing global standards on capital solvency and risk management
    on different timetables, putting the onus on insurers to continually monitor and evaluate these developments to exploit a competitive advantage.
  • As competition throughout Latin America intensifies
    in 2015, insurers that best leverage data analytics
    and predictive modeling techniques to improve their underwriting and management of risks have the opportunity to make more profitable business decisions.
 Europe
  • European insurers will continue to be challenged on both sides of the balance sheet in 2015, as economic recovery throughout the region is overshadowed by low business investment rates, slower global growth and heightened competition in many classes of business.
  • There is a greater responsibility for insurance companies to interact with the customer, provide a range of digital communication channels, encourage loyalty and brand awareness and tailor products and services to individual needs.
  • A growing number of insurers are scaling up their analytical capabilities to be in a better position to use data in a more connected way, drawing meaningful insights at virtually every stage of the insurance life cycle from customer targeting to product design and pricing, underwriting, claims and reporting.
  • Regulatory initiatives will require greater transparency regarding the information provided to customers, revisions to relationships with distributors and greater governance and oversight over new and existing products.
  • Finance is under pressure to show it can be a better business partner in planning, budgeting and forecasting, adding more value while also responding to regulatory requirements and tax challenges.

For the full EY report from which this was excerpted, click here.

Solvency 2: An Outcome Very Different Than Planned

The original intention of the EU's Solvency 2, the regulatory requirement for capital held by insurers, was to create a framework that inspired policyholder confidence and restore trust. The real outcome was to force insurers to undertake massive programs of data management at costs that, for some Tier 1 insurers, have exceeded $200 million. Some insurers said they would pass the cost on to their customers, which I’m sure wasn’t the intention.

In what was arguably worse, the cost became so great that other useful programs were put on hold because of this burning regulatory platform. The knock-on effect has been to create delay especially in customer-facing activities (which would have had a far better impact in improving confidence and trust).

Some international insurers suggested that the requirements might prevent them from trading in Europe – creating a “Fortress Europe” – but Solvency 2 seems to be emerging in multiple guises around the globe, in China, Latin America, South Africa and of course the U.S. in the form of RMORSA.

There’s lots written on this topic, such as http://www.solvencyiiwire.com/, and I won’t bore you, but as I looked out at the faces at a major conference in the U.S. where I spoke recently, I recognized the look I saw in many insurers in Europe in 2008 — that of not really knowing what was going to hit them.

Insurers were to discover that more than 80% of both cost and implementation time was absorbed in data management, 15% on analysis and the small balance on risk reporting. Yet the reporting element proved to be the only part visible – reminding me of an iceberg analogy, with the reporting being that part of the ‘berg visible above the waterline.

Comparing risk and regulation to an iceberg is interesting, and as I looked around the room at the conference, I wondered how many attendees were ready for what would be, for them, a long and difficult passage. But not, I hope, a Titanic one…