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Demystifying Compliance Issues in Insurance

Addressing regulatory matters in the insurance industry has never been more challenging than it is today. Regulatory compliance officers of insurance companies know that the more organized their data, rates, forms, rules etc. are from a compliance standpoint, the more confident they will be when there is a company audit. It is also important to stay on the top of current compliance requirements and perform periodic internal audits to ensure high quality products.

Compliance Management Landscape

In the last few years the scope and function of compliance in the insurance industry has been vigorously redefined. Earlier, the typical compliance task required was to just ‘check the box’ and issue policies. Now, this work involves maintaining rates, rules, forms, loss costs etc. assuring that the policy language complies with the latest regulatory and judicial outcomes. Not only this, there are various other areas and processes where the insurance companies have to do a proper setup and substantiation of a control environment via several reviews, against a larger set of rules and regulations.

Compliance remains a proactive means of prudential scrutiny with an aim to avert and minimize regulatory and compliance issues. It calls for continual inspection of regulations, laws, legal requirements, and internal policies. Regulatory compliance is a non-optional capability for all insurance carriers and majority of insurance carriers place it in the top three strategic priorities for their company. Some of the regulatory support organization that focus on compliance standards are- National Association of Insurance Commissioners (NAIC), Insurance Services Office (ISO), The Financial Industry Regulation Authority (FINRA), The Security and Exchange Commission (SEC) etc. A key question therefore is; what kind of regulations should be controlled by the compliance function without producing redundancies or affecting performance control?

As a rule, we may say that the compliance function should set up internal processes to ensure adherence to laws and regulations with a focus on transparency, appropriate behavior toward clients, contractual data, and contracts execution.

Customer-centricity is a focal point for regulators as requirements are now affecting core processes like underwriting, product development, and delivery.

Need for Compliance Function in P&C Insurance

Insurance sector caters to a huge client base. However, maintaining the premium rates and adhering to laws related to insurance is a complicated task. Insurers—even big players—may lack adequate information to arrive at accurate rates and manage their insurance products. There are significant challenges that stop insurance carriers from responding in a timely manner when it comes to compliance.

Novarica and Insurity in one of their recent survey reports have collated some interesting insights on challenges mid-size P&C carriers face in terms of handling ISO compliance. One of these challenges is the timeline and frequency of changes, which creates difficulties in managing the filings, which at times, need coordination with multiple jurisdictions. In order to address these difficulties, insurance carriers not only require thorough analysis and expertise in handling circulars but also need tools for fraud identification and analytics, knowledge of underwriting tools, and awareness about controlling market loss. When it comes to assessing how well carriers can respond to regulatory changes, many struggle, particularly with product compliance.

The insurance sector is facing compliance challenges from past many years. At a time when operating and market conditions are exceptionally tough for the insurance industry, the significantly high costs of compliance pose a barrier in the way of ensuring fair treatment of customers and protecting their personal information. The pace of regulatory obligations and compliance complexity has been onerous to regulate the financial and insurance sectors. Managing complexity of regulations and meeting compliance deadlines remain challenging. Moreover, cost of compliance is high and is expected to continuously grow.

Onerous regulation is a serious risk to the industry and its competitiveness. However, these risks also provide opportunities for growth in that the best-prepared companies will be the ones that manage their vulnerabilities and can gain the advantage over their opposition in terms of overall efficiencies and even time-to-market with new products.

Majority of insurance carriers are ISO compliant for most lines of business they underwrite. However, only 20% of carriers are current on ISO while majority of carriers are doing ISO filings that are 2-5 years behind.

P&C insurance in the US is regulated at the state level. Ideally, the regulators use their resources to make sure that insurance rates are high enough to provide for losses so that insurance companies stay in sound financial health and can pay covered claims fully. Another vital regulatory duty is to see that insurance providers remain solvent, which implies they have enough capital to pay policyholders for losses as they become due.

As the business of financial institutions grows increasingly complex, the regulations that govern them also get complex. Compliance is another key cost of doing business. However, it needs to be managed to do the analysis of the regulatory implications ahead of the competition, and position business to capitalize on new opportunities.

Key Stumbling Blocks for Compliance Teams

Chief Compliance Officers and senior insurance executives today face a variety of unforeseen compliance challenges emerging from a changing regulatory environment. These include:

  • Need for an overhaul of actuarial and underwriting processes as changing customer expectations keep making ‘current’ rating methodologies redundant
  • Need for better risk management processes for changing nature of coverage
  • Need to adapt to fast changing regulations
  • Competing in an unfamiliar market
  • Need to get accustomed to technology in transforming IT landscapes
  • Need to avoid a fragmented technology approach, which results in data silos or duplicate, irrelevant, and incompatible data

Roadmap Ahead

In a fast-changing environment, insurance carriers must have a roadmap for a strategic makeover in line with new consumer imperatives. It is not enough to refine legacy applications and approaches. What they need is a new outside-in methodology that begins with their customer and extends to IT trends and market changes, both inside and outside the insurance industry.

Insurance carriers need to develop insurance programs that are not only current but also competitive along with meeting state insurance requirements; they need better ways to manage data, product development, and the state filing processes that come with compliance. They must drive their product development process with an enterprise-wide automation solution. It should be able to address product development as also the compliance challenges.

Good compliance is about identifying regulatory challenges that might lead to future issues, and then taking action to mitigate those risks. Together with support of various regulatory authorities like ISO, NAIC, FINRA, SEC for process re-engineering, statistical and actuarial services (in developing insurance programs), technology can be a useful solution for insurance companies to improve their operations and stay compliant to state and federal compliance regulations. This can be achieved by transforming compliance activities from a reactive task to a proactive process.

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