Archives for June 2009
The Obama administration published its white paper on financial services industry reform this week, Financial Regulatory Reform: A New Foundation, Rebuilding Financial Supervision and Regulation (http://www.financialstability.gov/docs/regs/FinalReport_web.pdf) . This will now serve as a baseline against which the legislative process can act. So, while this is not law yet, there are some broad trends which can be noted in the approach which will have implications for insurance firms and their technology response.
A high level review of the document reveals the broad goals for insurance industry regulation and the proposal of two regulatory agencies which will directly affect the way business is done. Taken from the report, the principles underlying the recommendations specific to insurance are:
- Effective systemic risk regulation with respect to insurance
- Strong capital standards and an appropriate match between capital allocation and liabilities for all insurance companies
- Meaningful and consistent consumer protection for insurance products and practices
- Increased national uniformity through either a federal charter or effective action by the states
- Improve and broaden the regulation of insurance companies and affiliates on a consolidated basis, including those affiliates outside of the traditional insurance business
- International coordination
I anticipate much angst around points four and five, especially as these directly challenge the state regulatory set up and its effectiveness and efficiency. On a broad level, no one can argue that these are worthy goals, but how they are accomplished will be contentious.
The establishment of two regulatory agencies is proposed — the Office of National Insurance (ONI) and the Consumer Financial Protection Agency (CFPA). The duties of the ONI are fairly well detailed. From the report: “The ONI should be responsible for monitoring all aspects of the insurance industry. It should gather information and be responsible for identifying the emergence of any problems or gaps in regulation that could contribute to a future crisis. The ONI should also recommend to the Federal Reserve any insurance companies that the Office believes should be supervised as Tier 1 FHCs. The ONI should also carry out the government’s existing responsibilities under the Terrorism Risk Insurance Act.” The ONI will also serve as the U.S. representative to the International Association of Insurance Supervisors with “the authority to enter into international agreements, and increase international cooperation on insurance regulation.”
The potential impact on insurance of the CFPA is less clear. The report states that it would “protect consumers across the financial sector from unfair, deceptive, and abusive practices in credit, savings, payment, and other consumer financial products and services”. Insurance products, particularly life instruments such as variable annuities, are not specifically mentioned. The emphasis is on preventing a repeat of the perceived improprieties seen in the mortgage and credit card areas. However, it does not specifically exclude insurance and “other consumer financial products and services” is a very broad area.
Some of these lines will be drawn during as the Congress develops its legislation. Many, especially where Federal responsibility ends and state requirements begin, will only be determined once the Federal system is in place and active. The practical impact to insurance industry is that there is another sheriff in town now and they will be demanding our time and attention. Companies must prepare now for stress on their data management and compliance processes. (See the Celent reports Insurance Data Mastery Strategies http://reports.celent.com/PressReleases/20081126/DataMasteryStrategy.asp and Insurance Data Mastery Solution Spectrum http://reports.celent.com/PressReleases/20081203/DataMasteryVendors.asp). Pending upgrades to data management tools should happen now and any planned data conversions completed. Companies without a robust reporting environment should invest in these capabilities as the up front investment will be less than the continued expenses associated with a “catch up” approach. In 2010, plan for short timelines for compliance and a more confusing and expensive regulatory landscape.
While many people refer to Web 2.0 as a technology, Celent considers it more of an attitude. As already mentioned in one of my previous posts on this blog, Web 2.0 combines the need for more mobility, faster information flows, a higher degree of openness, and a strong reliance on collaboration and community. To do so people need to have easy-to-use tools, and the technologies nurturing this need are usually referred as Web 2.0 technologies.
There is a good example of the transformational power of Web 2.0 currently on the news headlines: the Iran post presidential elections troubles. For the Iranian government in place, Web 2.0 represents certainly a danger since it allows the mass people to be the instant messengers of what’s happening minute by minute in the capital city of Teheran. In this war of information, the Web 2.0 attitude is a strong ally for the protesters and the power in place could consider it as a weapon of mass disturbance. Outside of Iran, many people have understood the importance of the Web 2.0 attitude and the impact it can have in such a chaotic situation. Journalists firstly (just check the CNN website and you’ll understand what I mean) but more importantly politicians. What a surprise when I read that the US Government had contacted yesterday the social networking service Twitter to urge it to delay a planned upgrade that would have cut daytime service to Iranians disputing their election. In other words, these people see the Web 2.0 attitude as a weapon of mass democracy.
I am the author of a report Celent is publishing this week called “Reaping the Benefits of Web 2.0: European Insurers Strategies that Work” and I will present the main findings of my research about this topic in a webinar soon. This report and my webinar try to evaluate how the Web 2.0 attitude is currently perceived and adopted by the insurance industry. The Web 2.0 attitude cannot be neglected by insurance companies, but sometimes it seems difficult for them to determine whether it represents a transformational wave. In addition, it is still difficult for them to evaluate the value of initiatives in this area. The Web 2.0 initiatives launched by European insurers described in this report are very different in terms of the impact they might have and can generate on the organization, the level of risk involved, and their probability of transforming the insurance business. For those of you, who are interested in this topic, I invite you to read my report and/or attend my webinar and then determine whether the Web 2.0 attitude can be a weapon of mass development for insurers in the future!
Cloud computing and Software as a Service (SaaS) offer significant advantages and paths to valuable operating models. However, as with all opportunities, an optimum solution requires that a devil’s advocate position factor into transition planning. One area for the advocate to explore is the exit strategy for an insurer in a cloud computing and/or SaaS arrangement.
Typical outsourcing/multisourcing agreements include provisions regarding vendor insolvency, material breaches of contract, etc. As the recent General Motors bankruptcy demonstrates, no company is immune from default. Is there an escrow arrangement that provides protection to the insurer is the vendor goes out of business? Other critical areas to consider include: what are the material changes that will trigger exit clauses? For example, if a SaaS vendor changes a service provider they are using, does this represent a material change in the contract with the insurer? How does an insurer evaluate the political risks inherent in a vendor’s operations based on the countries they operate in today? How will this risk be assessed and managed on an ongoing basis as political events change?
Specific to insurance, however, special focus must be given to the data requirements of long tail lines like Workers Compensation. How will data be protected and accessible for decades into the future? For example, will data required for payments to be made still be available for decades into the future? How will state and, possibly, federal data requirements be satisfied in a service model?
Agreements can be structured to satisfy these and other concerns, but insurers pursuing the SaaS and cloud approaches must ask themselves what will happen if, for some reason one day, they want to “get off of that cloud”.
Celent is publishing two reports reviewing Policy Administration Systems (PAS) and IT vendors in Europe later this year. The first one will profile solutions available in the general insurance sector and the second one in the life and pension sector. For insurers the selection of a PAS requires the analysis of different parameters that have all their importance. Prioritizing decision elements is a crucial task in order to minimize the risk of choosing an inappropriate PAS and to face ultimately time-consuming and expensive customization efforts. In the frame of recent discussions with European insurers, I have noticed that European insurance companies conducting business in multiple countries are also facing difficulties to decide between two strategic alternatives when replacing their existing policy administration systems:
– Implement a single application in all geographies where they conduct business, or
– Select one specific vendor in each geographical region.
Knowing that insurers have their own specificity and objectives in terms of future expansion and strategy, I recommend them to define and rank priorities around four major key decision elements when reviewing this important question:
Functionality: I recommend insurers to define functionality priorities. To do so and based on our PAS reports, they should be able to build their own functionality matrix. This exercise can particularly support them to identify which functionality elements are more important than others and how they can support their strategic objectives in the long run.
Technology: I consider that technological flexibility is an important factor insurers should clearly assess when making the decision to replace their policy administration systems. Therefore, I encourage insurers to consider technology factors when prioritizing their IT requirements.
Experience: Since replacing a policy administration system can require considerable efforts in terms of customization, choosing an experienced IT vendor is important. Therefore insurers should emphasize factors related to insurance business know-how and expertise when evaluating vendors.
Geographical expertise: The insurance industry in Europe can be very different from one country to another and understanding insurance business drivers and challenges affecting a specific region is a must for IT vendors offering their solutions and services in a dedicated European insurance market. Regardless of their size, I recommend insurers not to neglect local and small IT vendors having specific expertise and knowledge in dedicated geographies.
Choosing the best alternative represents a key challenge for insurers’ CIOs since this decision can strongly impact their company’s ability to achieve strategic goals in the long run and I hope that our PAS reports will be helpful to them.