By Nick Stammers
Much media attention has focused on the regulatory challenges faced by the banking industry over the last few years, but it is clear that the insurance industry has many of the same sort of challenges. This message came out loud and clear at the recent RiskMinds Insurance conference in Amsterdam.
CMC Insurance Solutions, which was established at the beginning of this year, was one of the event sponsors and I had the good fortune to be able to chair a discussion group on the theme, Is regulatory change and uncertainty one of the leading risks to a business? We had a very distinguished panel, comprising: Andrew Pryde, chief risk officer of Beazley; Marcia Cantor-Grable, group risk director, emerging risk and regulatory developments, Prudential plc; and Ronan Davit, group chief risk officer with Euler-Hermes.
It shouldn’t come as a surprise that the panel and the audience were overwhelmingly in agreement that regulatory change – and the uncertainty that comes with it – are, indeed, business risks and that they need to be tackled, head-on. In fact, in an electronic poll, 79% agreed with that proposition.
Who doesn’t think regulatory change is a risk?
What about the other 21%, you may ask? Almost all of the people we meet are very open and honest and acknowledge that they have challenges, risks and concerns. Of course, a few organisations within that 21% will be world class operators and completely on top of the shifting agenda – or as much as it’s possible to be. I worry, however, that quite a few may believe that they are mastering the issues – or that they aren’t so difficult to deal with – but that in reality they are not fully cognisant of the scale of the hurdles they face.
For most people, however, regulatory change is very high on their agenda and has been identified as being in their top three or four risks. In another of our discussion group electronic polls, three-quarters of the audience said that all financial services organisations should be forced to have a chief risk officer, with almost all saying that this should be a board-level or executive-level position. This indicates the importance of the issue and the need for it to be managed by someone who has the seniority and authority to do so.
But it’s not easy. One of the problems is that much regulation is principles-based rather than rules-based and so trying to get a really firm handle on what that means is a slippery challenge – and one that is evolving and changing all the time. Draft rules change as they go through the legislative process – and we never know what’s going to come over the horizon.
Over the past year, the industry in the UK has been acclimatising to the new regulatory regime which saw the Financial Services Authority split into two: the Financial Conduct Authority (which is largely concerned with products, competition and other consumer issues) and the Prudential Regulation Authority (which looks predominantly at firms’ business models, risk and financial strength). These new regulators are developing their own style and approaches, and the industry has had to work at building a new set of relationships. It has also, some say, created a problem of having ‘two masters’.
Having multiple regulators becomes even more of a problem for insurers operating in more than one jurisdiction with each country having its own regulatory and solvency regime. Overlay onto that the European and other international rule makers. The largest firms, for example, have the additional burden of complying with the G-SII rules for globally-systemically important insurers.
In our discussion group we talked about whether regulatory conflict – where one regulator wants one thing, another regulator perhaps isn’t yet sure if it wants something different – was a problem that insurers had actually experienced or whether it was a theoretical fear. Again, our panel members and our audience poll showed that this is a real issue, not a hypothetical one. It appears, at least, that regulators are starting to recognise the problem and the need for regulatory convergence, but while almost everyone believes that this would be a positive development, we obviously don’t expect any developments on that front overnight.
Better data: regulatory challenge, business investment
With time, the issues change. Take Pillar 3 reporting under Solvency II, for example. Two or three years ago it was top of the agenda in insurance companies and everyone was working hard to get the right systems and procedures in place. When it became apparent that deadlines were going to be missed by the industry and by the European law-makers – who still had some unfinished work to do – the deadline was pushed back two years. Insurers quite rightly deprioritised their work on Pillar 3 for a while – but now it is right back on the agenda again, with a vengeance. The urgency is no less than it was before.
Pillar 3 offers a good example of how the industry should be proceeding, however. In order to comply, insurers are having to produce a lot more reports than ever before and they have got to do so within fairly exacting time scales – and at a much greater level of detail. In order to do that they simply must have high-quality data, to be able to extract that data from their systems, and to be able to use that extracted data to produce those reports.
Data quality is, for many insurers, the biggest challenge they face. That’s the overriding message I got from everyone in our discussion group and at the conference. But data quality doesn’t just impact the solvency reporting requirements: it has an impact right across the entire business. One of the messages that we try to convey is this: everybody acknowledges that regulation is a costly overhead – but think about it as making an investment. Once you’ve solved the problem so as to satisfy the regulators then that will have a very positive bearing on the rest of the business.
Nick Stammers is director of CMC Insurance Solutions