Regulation a pressing concern for the insurance industry

Regulation - A Pressing Concern for the Insurance Industry August, 2013 BLOG POST

Industry’s greatest risks are seen to come from regulation Globally, over the past few years, regulatory changes have changed the environment in which insurers work and perhaps because the emerging markets are still in their evolving stage, it appears that more changes might be on the horizon.

The most pressing concerns for the global insurance industry As per a survey by the International Insurance Society, competitive price/adequate profitability was the top issue for 31% of respondents, while for 18% it was asset/liability management.

Multiple/inconsistent regulatory standards were third on the list at 14%. Regulatory challenges were the greatest threat for 30%, followed by capital constraints for 20%. Focusing on non-life company concerns and risk management/enterprise risk management remained a significant concern for 27% of the respondents.

Regulation and reporting requirements and catastrophe loss trends tracked high-up on the carrier’s list of concerns.

Another insurance survey by the Centre for the Study of Financial Innovation has found that the wave of new regulations governing issues such as solvency and market conduct could swamp long-term insurers with costs and compliance problems.

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Top Regulatory Issues Facing the Insurance Industry

The EU’s Solvency II regulation topped the regulatory risk agenda. This is because even though the regulation is being designed for the EU, other jurisdictions are using its model for their own solvency regimes.

Carriers of all sizes should closely follow the newly created Federal Insurance Office (FIO), which was created by the Dodd-Frank Wall Street Reform and Consumer Protection Act. Though it is not a regulatory body, it has the ability to “request information” from the market and is intended to advise the Federal government on major domestic and international insurance policy issues.

Insurers will also need to prepare for new capital requirements, including any changes to risk-based capital (RBC) levels and the introduction of new methods for determining regulatory capital such as those calculated using economic capital and ORSA. Carriers should begin looking at the NAIC’s SMI Task Force and Group Solvency Issues Working Group’s recently adopted ORSA Guidance Manual to begin to evaluate how they will align with the procedures contained in the manual.

From an accounting perspective, the incorporation of International Financial Reporting Standards (IFRS) into Statutory Accounting Principles (Stat) would require a number of changes in insurance company accounting and annual financial statements. Such changes may take significant time to implement, thus companies should consider how they will address changes to financial reporting. The definition and how to account for insurance contracts under the new standards are among the many concerns for insurance companies.

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Ironically the industry’s greatest risks are perceived to come from regulation, which is expected to reduce risk, at a time when operating and underwriting conditions are also very hard. Need of the hour is an intelligent response to managing regulatory risks and experts believe and suggest that the following proactive approach to managing regulatory risks is the need of the hour.

The first step for insurers to manage regulatory risk is acquaint themselves with the best practices around the globe and adopt them for the benefits of the customer and ultimately for their own benefit.

This solves the double purpose of pre-empting regulation before it arises and also of denying the regulator a reason to introduce it in first place.

Maintaining regular communications with the regulator also helps to ensure that regulators are familiar with the realities of the business world. It also helps to reassure the regulator that management is on top of issues that might otherwise require regulation.

Source: Propertycasualty360, PR Newswire, Corporate Compliance insights, www.actuaries.org, International Insurance Society, Centre for the Study of Financial Innovation

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