- The first pillar defines capital requirements. It quantifies the minimum capital requirement (MCR) and the solvency capital requirement (SCR).
- The second pillar provides qualitative requirements in terms of supervision and review. Indeed, the European Commission wants to emphasize the need for insurance companies to implement efficient risk management systems.
- The third pillar introduces the market discipline concept. Insurance companies have to promote transparency and support risk-based supervision through market mechanisms.
We are now in the final stages of our report on the opportunities and challenges facing the Life & Pensions industry resulting from the UK’s Retail Distribution Review (RDR – see my June blog entry ) and will publish shortly. In total, we have conducted 22 interviews from across both the industry and technology partners supporting the implementation of RDR and surveyed 5 of the top product providers to understand their level of readiness.
What is interesting to me is the seemingly low levels of confidence that some firms have in their own post-RDR business strategy and operating model. Clearly, there is still a lot of uncertainty over what the winning strategies post-RDR might look like and what this could mean for the end consumer. What is clear, however, is that the industry is taking it seriously and that there could ultimately be more than one winning strategy as the market segments further.
Even with all of the good preparatory activity underway across the industry, there is still a feeling of nervousness in the air. It reminds me of taking my exams. You’ve done your homework, you’ve focused on revising the things that you think are important (and probably aligned to what you know best in the hope that it will come up as a question), you have a clear plan in place for sitting the exam…but you haven’t yet sat the exam. Adding to the anxiety, in the case of RDR, the examining body hasn’t yet released all of the chapters in the core reference text from which to revise. Hopefully, the guidance on commission for legacy products and the time-table for cash rebates will be released by the FSA soon.
As we approach the final two months of 2011 and you work through your 2012 budgets and detailed implementation plans, why not join us together with the FSA, Focus Solutions, Altus and AT8 for an additional revision session on the 15th November 2011 at the Barber Surgeon’s Hall?
Follow this link to register Count-down to RDR – Are you ready?
Getting back to December 2008, I wrote a blog post mentioning that Solvency II was under threat and that we could expect some more delays of its effective implementation. Last week the FSA in the UK announced that it is likely that the effective date of the new regulation implementation will have to be delayed by a year and enter into force certainly in January 2014. Actually this decision comes following the request from The Lloyd’s of London insurance market and the Association of British Insurers to obtain more clarity around the Solvency II implementation by FSA.
This is certainly good news for insurance companies as it gives them more time to prepare and take advantage of the Solvency II implementation not only to comply with the new regulation but also to understand the opportunities for risk management process and resources improvements and consequently make the right decision to mitigate their risks. With the change of the Solvency II roadmap I also expect from insurance companies to spend more money on preparation and change programs in order to promote a smooth transition. This delay will also allow insurers to dedicate more time to navigate the Solvency II IT vendor landscape. According to me, the Solvency II application landscape can be difficult to navigate for insurers even though some vendors have managed to bind strategic partnerships recently (acquisition of Algorithmics by IBM for instance). For more information about this market I encourage you to read the following report Celent has published last year: Solvency II IT Vendor Spectrum.
The big question mark going forward is whether the economic situation for the next two to three years will allow the regulator and insurance companies to work in a more stable environment to operate this transition.
With less than 400 working days to go until ‘go live’ for the UK Retail Distribution Review, many Life and Pensions companies are deep in the middle of planning their implementation. Due to start on 31st December 2012, this legislation will introduce major changes to the way that new long-term savings and investment products are sold across the UK.
Its broad aims are to improve professional standards of investment advisors, improve the clarity around how firms describe their services, and to address the potential for commission to influence advice decisions. Practically, this means subscription to a new code of ethics including new definitions for advice, raised levels of professional education, and an end to traditional ways of charging commission for investment related products in favour of transparent fees.
Many industry analysts and commentators are already predicting structural changes within the market once consumers, armed with new information about how much they are being charged for advice, begin to shop around and start to ask tough questions about the value they are receiving from both the advisor for the advice fee paid and the performance of underlying products.
Technology has a critical role to play in helping organisations remain fighting fit in a post-RDR world.
Meeting the basic compliance needs
- Ensure that underlying systems are able to manage both fee based services as well as commission. Both of these approaches will need to run in parallel post-RDR as the legislation only applies to investment related business transacted after the ‘Go Live’ date.
- Ensure that only RDR compliant propositions are available for sale post 31st December 2012. Web-sites, other channel systems and channel partners all need to be changed.
- Ensure that Platforms comply with the final set of rules on charging and rebates due to be released in Q3 this year, and offer essential services such as re-registration.
- Update internal management reports and operational controls to track performance of business initiated both pre and post RDR.
Demonstrating value and positioning for growth
- Developing new propositions including new channels to market, such as D2C, and access to new funds.
- Employing innovative uses of technology to build stickier relationships with the end consumer (such as improved UIs, online tools, mobile apps and social media).
- Transforming the cost base to compete head-on with new entrants, such as greater use of straight through processing and strategies to isolate or remove the legacy to prevent it becoming a drag on resources.
Navigating the change
- Balancing competing priorities between now and ‘Go Live’ date – such as Solvency II, the EU Gender Directive and other internal strategic change programmes.
- Being ready to react once the final set of rules on Platforms are published in Q3 2011.
- Securing the investment and the team – including the right mix of capabilities to exploit the opportunities for growth.
Over the coming months, Celent will be researching the impact that RDR will have on technology strategy for organisations and evaluating the readiness of the market to implement the change. For more information or inclusion in this research, please feel free to get in contact with me.
And for those of you outside of the UK looking in thinking that this does not apply to me, beware! The European Community is revising its plans for the Insurance Mediation Directive (IMD) and Packaged Retail Investment Products (PRIPs) initiatives, and no doubt will look to see what lessons it can learn from the UK’s RDR. So, watch this space!