Regulation compliance: a cloud with a silver lining
Increased regulation is one result of the fallout from the financial crisis, but compliance is not cheap. Insurers should look at long-term solutions.
With Solvency II regulations closing in, 2014 is already a critical year for EU insurers. In coming years, finance and actuarial functions will be dealing with an unprecedented amount of change, Solvency and IFRS regulations requiring ever more sophisticated financial reporting, risk management and analysis. Without it, companies will be unable to address complex measurements and disclosures, regulatory requirements and market expectations.
The problem is, not only do these requirements come in at different times, but also their final form has yet to be defined. Companies must be prepared to develop thoughtful, proactive implementation strategies in order to avoid costly reworking from having to make further rounds of changes.
After issuing the exposure drafts that outlined the upcoming regulations, the regulators (IASB and FASB) received feedback from over 150 insurers about the likely complexity and cost of their implementation, as well as the ongoing reporting burden.
With IT budgets under heavy pressure – combined with the perception that ‘regulation is merely a must’ – the risk is there that insurers will make short-term choices that will likely need to be reconsidered before too long. A recent analysis by the Economist Intelligence Unit showed insurers predict the average price for change – for IFRS 4 only – to be US$25 million-50 million. A sharp increase compared to the same question in the survey one year earlier (US$10 million–14 million).
The complexity and unpredictability of all of these developments give software vendors an opportunity to offer standardized models, content and solutions, to shoulder the ongoing IT burden for insurers. SAP provides insurers with a set of solid solutions that not only takes care of the data aspects, but also supports the associated processes and reporting requirements. Over 150 banks already use this IT infrastructure, and some leading insurers are now following in their tracks.
Having a vision and following a thoughtful process in this transformation will only make it easier for an insurer to cope with upcoming changes. As a bonus it will also serve to make finance, accounting, risk and actuarial functions more relevant to the business overall, better able to communicate the value of the business of the company.
Companies are understandably reluctant to transform in case they lose business, but the benefits make it more than a must, in fact it brings clear benefits. With a good financial perspective on their customers and their risk profiles, they are also better able to understand risk and how to direct products to the market place. Finance, therefore, can play a key role in what customers they target and how.
What insurers would like is to be more predictive, to be able to simulate what risks there are and to say what their customer strategy should be. That’s the dream. First, though, they have to balance the books and be more proactive. Those who effectively address these issues will have a competitive advantage over their peers; those that do not are likely to struggle – and may not survive.
What do you think about the issues discussed here? Continue the conversation in the comments below and on Twitter @SAPforInsurance.
– Marleen Verhaag, Insurance Industry Director, EMEA Industry Value Engineering