Statutory compliance is not to be forgotten – as previous blogs have focused on core customer facing insurance business processes around distribution, pricing and claims, this article outlines key regulator transparency demands. While on the surface these requirements appear solely as a nuisance, they are rich opportunities to repurpose investments in compliance for strategic advantage.
At the federal and state levels, insurance regulators intercede on behalf of the general public to ensure fair pricing, financial solvency and equitable treatment of consumers. To play this role of watchman presiding over the complexities of the insurance business, regulators require data and lots of it.
As insurers internally leverage core operations data to enrich customer experiences, improve pricing and streamline claims operations, regulators utilize the same data to fulfill their mission, which includes:
- Defining and enforcing appropriate sales tactics
- Ensuring that pricing is not discriminatory
- Monitoring insurers’ ability to pay current and future claims
- Protecting consumer privacy
The good news is that these regulatory objectives can actually create a competitive advantage.
Let’s start with compliant sales tactics. An increasingly relevant topic in the sales arena is how investment-oriented insurance products, such as annuities and permanent life insurance, are marketed and positioned to consumers. As more stringent measures like favoring fiduciary standards over laxer suitability standards move into regulators’ crosshairs, consumers themselves are getting smarter and demanding greater impartiality in the sales process. While being compliant is nice, the smart move is to recognize the simultaneous opportunity to drive favor with existing and prospective clients.
Second is smart pricing, which is not only required by law, it’s required for survival. Rate filings are the bane of existence for many a product management function and carry the dual weight of regulatory compliance and strategic implications for product pricing. Compliance is composed of two layers; to do business in a given state or province, an insurance carrier must tell the regulatory body what it is selling and how it will charge for it, and the insurer’s rate plan is subjected to scrutiny around fairness to would-be purchasers. Insurers must meet these requirements to legally operate, so developing rates plans is no less critical to survival due to the extreme ramifications of getting pricing wrong, which leads either adverse selection or a loss of business.
Next, more robust accounting leads to more efficient capital deployment. Effective in 2023, both International Financial Reporting Standard (IFRS) 17 and Long Duration Targeted Improvements (LDTI) confront insurers with a myriad of technical accounting changes to how revenues, losses and profits are realized. These changes are rooted in technical accounting, but the strategic ramifications are broad. Solvency requirements governing how much business an insurer can write have always existed, but the mandate of more granular and frequent cash flow projections enables carriers to be more precise with capital deployment. Instead of holding back the distribution machine because of overly conservative claim loss projections, insurers will be nimbler in business expansion and identifying emerging hotspots within the portfolio.
Finally, “Knowing your Customer” is crucial to staying out of the headlines and in the lead. Sweeping legislation such as GDPR (General Data Protection Regulation) in Europe and CCPA (California Consumer Privacy Act) place a tremendous responsibility on insurers to safeguard consumer data and at individuals’ request, inform that requester of how their information is being used. These requests to know processes are the immediate reaction to regulation, but closely mirror the needs of internal stakeholders charged with driving marketing and sales outcomes. As consumers increasingly expect “Amazon-like” purchase and servicing experiences, the ability to “know your customers” is vital on the competitive battlefield regardless of the associated regulatory strings.
PWC estimates that total industry spend on LDTI to be
$2 billion. Aflac alone expects to spend
$60 million. This is serious money, and insurers are naturally looking for ways to decrease that financial hit. This will require a delicate straddling between internal accounting and actuarial functions with customer facing marketing, sales, underwriting and claims functions. A top-down directive is essential to make this type of coordination happen. Insurers that align the broad data needs of revenue-generating and customer-facing C-suite stakeholders with compliance-driven investments in technology are best positioned to deliver the most total value.
Insurance is critical for risk mitigation. Regulators are compelled to act on the purchaser’s behalf to prevent exploitation of the “little guy.” In other words, buying insurance should not lead to
additional risk like identity theft, paying for high-expense investment products or unpaid claims. While regulators intercede with new statutory requirements to prevent such outcomes, compliance also presents insurers with data and insights required to compete in the open market. Carriers that understand transparency is the central link to navigating the demand for trust among internal decision makers, customers and regulators are better positioned to deliver sustained value to their policyholders and investors.
The bottom-line question is are you going to keep on looking at regulations as a cost or are you going to see them as an opportunity?
