Count down to RDR – Are you having pre-exam jitters?

Count down to RDR – Are you having pre-exam jitters?

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?

Solvency II delayed

Solvency II delayed

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.

Count down to RDR – How ready is the UK Life & Pensions Market?

Count down to RDR – How ready is the UK Life & Pensions Market?

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!

Regulation raise IT hackles

Regulation raise IT hackles
The much feared UK emergency budget speech was made yesterday, and amongst a raft of changes impacting every corner of the British society was an increase in the tax on insurance purchases. The rate is to increase to 6%. A new peculiarity to this system is that tax on insurance sales will rise to 17.5% where the insurance is sold by seller of another product e.g. mechanical breakdown insurance (eg on domestic electrical appliances and secondhand cars), travel insurance, and insurance sold with TV and car hire. The challenge for the IT department is to respond in a timely fashion. Older legacy systems will have charges codified in several places and this reflecting this increase is not a simple matter. And once the change is made in the several systems and many places, there is the round of testing that is required. This whole cycle of change can be up to 9 months depending on current workload and dedicated IT test slots. In a conversation with a CIO on a different set of regulations, Solvency II, she raised the prospect of potentially having to replace incumbent legacy systems if they could not capture the additional data elements required in a reasonable cost. Adding new data elements to a core system, and having this reflecting in the appropriate screens is no trivial matter. And once again, requires serious investment of IT staff for testing for production. These real life use cases highlight the need to IT systems to be able to keep up with the change of the business, without a crippling cost. In choosing new systems, IT folk must focus as much on functionality as on the cost of ownership. As this week has shown once more, fleet of foot should be a key mantra in new system investment.

Grappling with indemnity spend

Grappling with indemnity spend

The British property insurance market is a sizable one, and is the second largest sector in general insurance, after motor, with a reported premium of £12.1 billion in 2008. In the last five years, claims and expenses for the sector have risen by 22%, while premium (commercial, household, and domestic) has only grown by 15%. Extrapolate these growth trends, and it’s clear that the sector will face serious profitability challenges in the coming years.

In addition, these are not benign times for property insurers— increased flooding, aggregators, and fraud all pose challenges. Insurers remain constrained by a financially challenged government with overwhelming budget pressures with regard to flood protection. If the motor market is anything to go by, it will be very difficult to stop the erosion of premium by the aggregators. Continued investment in fraud detection processes and technology will help keep the fraud contained.

It will become increasingly important for insurers to have control over indemnity spending to reverse this trend. Celent believes that there are solid technology options to support the insurer in doing just this. The application of estimation tools can improve fairness, accuracy, speed, and consistency of claims.

Using technology, an insurer can anchor the claim at the point of FNOL and improve fairness, accuracy, speed, and consistency of claims. The claim handler can make better decisions about fulfillment choices according to insurer strategies. Case studies show reductions in indemnity spending of 10%, and a reduction in adjuster review time of 50%. These are precisely the types of improvements insurers need to seek in the coming years to protect their property book.

Estimation tools can help speed the process by providing quality data earlier in the process, and through automated assignments to field adjusters. The improved accuracy of the work required improves transparency for the policyholder and reduced overpayments by the insurer. These tools create a clear audit trail of how the claim has been handled, which can support an insurer’s efforts in TCF regulation.

2010 Celent Insurance CIO Surveys

2010 Celent Insurance CIO Surveys
It is at this time of the year that Celent conducts its famous surveys providing useful insights about insurers preoccupations, priorities and plans for the coming year. This year we have decided to apply the same usual method for the United States market. In other words, our readers will be able to access our famous US insurance CIO survey report in late January. On the European front, we have decided to get a more focused look at two countries. Indeed, Celent is currently conducting interviews with CIOs in United Kingdom and in France and we will publish a specific report for each country. I am personally dealing with France and so far, the main concerns of French CIOs are the following:
  • Distribution: French CIOs understand that the distribution landscape is changing fast. They have all listed distribution as one of their priorities for 2010 and most of them intend to launch IT initiatives to take advantage of the growing importance of online insurance notably.
  • Regulation: the Solvency II regulation framework affects directly insurers IT investment priorities. As the results of the quantitative impact study 4 launched by the CEIOPS in 2008 tend to demonstrate, there is a growing interest by French insurers in understanding what are the impacts of the new set of prudential regulation not only on their solvency ratios but also on their ability to comply with the other elements of the regulation. Some insurers have already invested in new IT systems for instance capital modeling tools but some others still need to understand what they have to start with and what they need to focus on to be ready in 2012.
  • Improvement of core processes and cost reduction. Even though most of the CIOs interviewed so far clearly mentioned they had not really implemented drastic measures (layoff program, IT investments cancellation, etc.) following the financial crisis and the economic downturn, improvement of core processes leading to cost reduction via a smarter use of IT resources represents a priority for 2010.
Celent pays full attention to insurance and IT trends and having the chance to discuss directly with key players on specific markets makes our job interesting. I hope our clients and readers feel our passion for our research and the insurance industry when they read our reports. I wish to all of you a happy Christmas and a successful new year.

Too Big or not Too Big? That is the Question!

Too Big or not Too Big? That is the Question!
A bit more than one year ago in the middle of the financial crisis, some banks and one big insurer have been saved by governments since their bankruptcy would have put the whole international financial system in great danger. “Too big to fail” is the expression that has been widely used to caracterize this policy. Since then, two G20 summits took place. What came out of these meetings in the general opinion’s mind? Let’s be frank: a lot of good intentions but nothing really concrete! While the first one held in April this year in London was more to demonstrate to the populations that policy makers were aware of the seriousness of the situation, the second one that took place in Philadelphia a few weeks ago gave birth to a consensus regarding traders bonuses, which of course does not solve the big issue. However, some good intentions can sometimes lead to interesting ideas. I personally consider that the creation of the Financial Stability Board (FSB) following the London G20 Summit represents a good step towards a better regulation and consequently an improved protection of the international financial system. Yesterday The Financial Times published a list of 30 financial companies, whose failure could represent a systemic risk worldwide according to the FSB. Insurers are considered to be risky for the system expecially when they start diversifying from insurance into complex financial engineering. This has notably been the case with AIG and SwissRe. Too big or not too big? That is the question and now let’s see what the next steps will be. Normally this list is due “to address the issue of systemically important cross-border financial institutions through the setting up of supervisory colleges” as mentioned in the Financial Times article. Concrete measures will certainly take time but at least there are concrete intentions.

Opportunities for solution vendors in China?

Opportunities for solution vendors in China?
China’s new insurance law will take effect on October 1 2009. The revised law strengthens protection for policyholders, the insured, and beneficiaries. However, it adds operational requirements for insurance companies. For example, the revised law adds a two-year incontestable rule to protect the insured party. It is a very common clause in Western countries, but not in China. The revised law also requires insurance companies to pay or decline a claim within 30 days; if more documentation from the claimant is needed, the insurance company has to inform the claimant about all the documents needed at one time. All these requirements aim to settle the problem of the “easy to apply, hard to claim” environment. I see end customers’ preferences are changing from investment type products to protection type products. A simpler claim environment is crucial for the development of China’s insurance industry. That’s why regulators emphasized claims when revising the insurance law. For insurance companies, I think this is a double-edged sword. Will “easy to claim” lead to “easy to defraud?” It reminds me of my conversation with a local insurance solution vendor. He said that China has a non-trust environment: people do not trust each other, so the risk management function in his company’s solution is very strong. Some of my thoughts are: insurance companies might need to upgrade claim solutions to make filing a claim easier; second, they might need to upgrade underwriting solutions and antifraud tools to strengthen their risk management function. Are these real requirements for insurance companies? I’ll continue to follow the market.

Good Parenting Begins at Home – Financial Services Regulation in 2009

Good Parenting Begins at Home – Financial Services Regulation in 2009

As 2008 draws to a close, so does the world as we know it – at least in terms of insurance regulation. In 2009, the “price” of the public investment in the financial industry will come due and there will be fundamental change to past approaches in oversight.

After a career in the property casualty insurance industry, my mental model draws a sharp distinction between finance and insurance. Certainly, I have never considered investment banking and commercial lines underwriting as siblings – very distant cousins, perhaps, but not in the same immediate family. Like the parents who assume bad debts accumulated by a wayward child, the federal government has stepped in and is about to administer some discipline.

Looking forward, do not expect the public, or members of Congress, to recognize a distinction between Bear Stearns and AIG. Do not expect the patience to understand that the credit default swaps weren’t “real insurance” and that the departments selling these products were not part of the “core” insurance operations. I expect that federal regulatory reform will be at the financial services level, not separate schemes for banking and insurance. The term optional federal charter will lose the “optional” part.

Yes, individual states will object. They have a large vested interest. Yes, there will be much debate and many speeches about federal versus local rights. But, at the end of the day, state governments will have more immediate issues as tax revenue disappears and their attention is drawn to other areas. The path of least resistance will be a dual regulation scheme. Expect a federal scheme to be placed on top of the state process.

Good parenting begins at home. To plan for this now, insurers should anticipate and investment of senior leadership time and energy on crafting a reasonable and effective response to the financial crisis for insurance. Influencing lawmakers from the highest levels will be essential. Industry lobbying and trade groups must guide media discussion by communicating the differences between insurance and other financial institutions. Comparisons on solvency and investment portfolio structures should be made. Information system vendors should enhance and/or build tools which will allow their clients to respond quickly to new regulations. Finally, insurers should review and improve, where necessary, their capabilities in data mastery (see the Celent report Insurance Data Mastery Strategies ).

With one notable exception, insurance companies did not require a bailout because the industry is so tightly regulated. In 2009, there will be the opportunity to improve this oversight. As in effective parenting, positive reinforcement and good guidance are better tools than the rod.

Update to "Bad News on the Street, Insurance IT Strategy and the Financial Crisis"

Update to "Bad News on the Street, Insurance IT Strategy and the Financial Crisis"

Since we published Bad News on the Street, Insurance IT Strategy and the Financial Crisis in early October, the economic roller coaster continues to twist and gyrate. One assumption in that report, that there will be a “mild to moderate” recession, is being severely challenged. The mortgage meltdown morphed into a credit confidence crisis which precipitated a consumer confidence downturn, increasing job losses, accelerated by an auto industry meltdown. Suddenly, a question that seemed ridiculous a short time ago seems prudent: “Is $750 billion enough?”

Strange actions have been seen on the street. “Traditional” insurance companies are courting and marrying tiny banks so that they can meet at the TARP alter. Other insurers are vehemently rejecting any government assistance and the resultant “strings” attached. Foreign-owned insurers are directly petitioning the US government for assistance.

Since the report, third quarter numbers have been released and the results are not kind. The third quarter 2008 net income of the largest 25 Property/Casualty and Life/Annuity/Health insurers is 97% below that of last year. (These numbers exclude AIG.)

Discussing the situation with insurers in North America, Celent finds that most are taking a “wait and see” approach to IT budgeting. Strategic projects that are already underway are not being cancelled, but those that were planned to be launched in late 2008 are being delayed. In late October, Celent surveyed CIOs at North American insurance companies about projections for their 2009 budgets. No one reported a decline and 34% said their budgets would remain flat at 2008 levels. When asked to rate this amount against the strategic business and technology objectives they expected, most (75%) characterized this as “adequate”.

Barring economic catastrophe, the next game-changing event will be modifications in regulation. Two central questions loom. First, to what extent will the insurance industry be included in general financial reforms targeted toward banking institutions? Second, which way will the ongoing tug of war between Federal and State oversight go?

A slim ray of optimism exists in rumors that a hard market is coming for commercial Property/Casualty products. We will keep our ears to the ground and our radar on scan for additional developments.