The Case for Modernizing Insurance

Several drivers of change are compelling insurance companies to re-evaluate and modernize all aspects of their business model and operations. These drivers include new and rigorous expectations from regulators and standards, increasing demands for more relevant and useful information, improvements in analytics and the need for operational transformation. The modernization creates considerable expectations for finance, risk and actuarial functions, and potentially significant impacts to business strategy, investor education, internal controls, valuation models and the processes and systems underlying each – as well as other fundamental aspects of the insurance business. Accordingly, insurers need more sophisticated financial reporting, risk management and actuarial analysis to address complex measurement and disclosure changes, regulatory requirements and market expectations. Three key areas to look at: Regulation and reporting Changes in regulatory and reporting requirements will place greater demands on finance, risk and actuarial functions. Issues include:

• Changing global and federal regulation (e.g., Federal Insurance Office, Federal Reserve oversight)
• ComFrame, a common framework for international supervision.
• Principle-based reserving
• Own Risk and Solvency Assessment (ORSA), the Solvency II initiative that defines a set of processes for decision-making and strategic analysis
• Solvency reporting measures
• Insurance contract accounting

Information and analytics Stakeholders are demanding more information, and boards and the C-suite need new and more relevant metrics to manage their businesses. Issues include:

• Economic capital
• Embedded value
• Customer analysis and behavioral simulation
• New product and changing underwriting parameters

Operational transformation Those in charge of governance are demanding that the data they use to manage risk and make decisions be more reliable and economical. Issues include:

• Updated target operating models
• Centers of excellence
• Enterprise risk management (ERM), model risk management and governance
• New framework from the Committee of Sponsoring Organizations (COSO), a joint initiative of five private-sector organizations that provides thought leadership on ERM, internal controls and fraud deterrence
• Optimization of controls, and efficiency studies

These drivers of change, which affect every facet of the business -- from processes, systems and controls to employees and investor relations -- have significant overlaps, and insurers cannot deal with them in isolation. To meet emerging challenges and requirements, simply adding processes or making one-off, isolated changes will not work. Systems, data and modeling will have to improve, and the finance, actuarial and risk functions will need to work together more closely and effectively than they ever have before to meet new demands both individually and as a whole. Moreover, all of this change is imminent: Over the next five years, leading companies will separate themselves from their competitors by fully developing and implementing consistent data, process, technology and human resource strategies that enable them to meet these new requirements and better adapt to changing market conditions. The insurers that wind up ahead of the game will excel at creating timely, relevant and reliable management information that will provide them a strategic advantage. Legacy processes and systems will not be sufficient to address pending regulatory and reporting changes or respond to market opportunities, competitive threats, economic pressures and stakeholder expectations. Companies that do not respond effectively will struggle with sub-par operating models, higher capital costs, compliance challenges and an overall lack of competitiveness. In subsequent articles, we will take a closer look at those leaders/business units that need to modernize.  Eric Trowbridge, a senior manager, contributed to this article.