Now more than ever before, it is vital that insurers collect and consolidate data across the business. Compliance is a key driver, with requirements such as continuous monitoring of capital adequacy and the control of every risk written (including those written by cover-holders on binding authority agreements). Many firms have to invest in new or enhanced systems and processes to meet these requirements but they do have a choice. Do as much as is necessary to comply and treat the process as a cost of compliance, or use this as an opportunity to improve the performance of the business. The issue is whether the additional investment provides a business return on investment (ROI).
Capital Requirements
One of the issues driving capital adequacy has been the comparatively high rate of failure of insurance companies in the London market. As a result, the UK Financial Services Authority (FSA) decided to substantially increase minimum capital requirements for insurers. This has left insurers with the option of reassessing their capital requirements or pulling out of certain lines of business. While the FSA does not prescribe calculations for the amount or quality of capital required by individual companies, it does specify the risk factors that firms should consider and the assessments they should carry out in evaluating capital needs. To assess the risks, insurers need to know all of the business written in each class of business across all channels, requiring them to collect and consolidate data.
To further complicate matters, a firm must show that its capital requirements are met at all times and not just at the time of publishing the accounts. This means that companies must actively manage capital as business develops which, in order for it to be efficient, suggests a high degree of automation in the collection and consolidation of data. It is interesting to note that a firm could show that it needs less capital, due to its approach to risk management, thus saving money and helping to justify the investment.
Complexity of Data Consolidation
Many companies have difficulty in collecting and consolidating data efficiently from their business systems. In the past this was an issue mainly for those companies that have grown through acquisitions and mergers, where firms acquire a variety of legacy systems leading to issues with data quality and therefore consolidation. But now it is also becoming an issue for other types of insurer, such as those who write binding authority contracts, because of the new requirements to understand and control all risks written on behalf of the carrier rather than just the aggregate figures. The new requirements are addressed by collecting much more detailed bordereaux (forms providing premium or loss data with respect to identified specific risks) on a regular basis from cover-holders and third party administrators. This significantly increases the volume of data that must be processed and requires much greater flexibility to accept data from different sources.
All of the above has an impact on the IT strategy of insurers. It is no longer practical to treat each transaction system as a separate silo, even if a delegated authority or third party administrator operates it. One has to consolidate the data into a single view of the business.
Benefits of Effective Consolidation
Collecting and consolidating data from every system is a significant task, especially when it has to be an ongoing activity requiring a high degree of automation. However, while individual circumstances vary there are many common themes. Insurers need an IT software solution, which handles the insurance data structures and enables the automation of key processes, while providing them with the flexibility to integrate with their own transaction systems easily. Today’s systems need to offer insurers the opportunity to implement a proven solution cheaper and at lower risk than building from scratch, and reap the benefits more quickly.
For example, once the solution has been implemented underwriters should be able to analyze and compare profitability, e.g. by class of business, broker or territory. This may lead to adjustments in the terms of business for specific contracts at renewal (e.g. rates versus deductibles), focused development of profitable products or territories, or even the complete withdrawal from a particular sector where losses may have been masked by profits from other sectors.
In terms of capital adequacy, this data consolidation provides the basis for meeting a number of regulatory requirements, such as back-testing the capital allocation and also scenario and stress testing to enable the firm to model different assumptions about market conditions, unforeseen events, etc. Analyzing business and capital requirements in this manner can also assist companies to improve business performance through better understanding of their tolerance to key variables. Another advantage is the ability to understand the risk-adjusted return on capital.
Summary
The collection and consolidation of an organization’s data are necessary to achieve compliance, but the real advantage is to help companies set more profitable underwriting strategies. It is this improved business performance that can now be used to help justify the IT investment, as well as the need for compliance. This change in how compliance issues can be addressed leads to a change in the way projects are managed and hence to an improvement in the business results that are delivered. Compliance presents an opportunity to improve the return on IT investment and add value as well as gain competitive edge.