Celent Warns U.S. Insurers To Prepare For Solvency Regulation

NU Online News Service, Jan. 15, 2:39 p.m. EST

U.S. insurers should be proactive in developing improved solvency practices given the expected change in the regulatory landscape, said Donald Light, senior analyst for Celent insurance group.

Speaking at a webinar in a presentation called "The Future of Insurance Solvency Regulation and Technology in the U.S.," Mr. Light said even though the insurance industry for the most part escaped the brunt of the recession, it will not escape the regulatory consequences.

Both in the U.S. and in Europe, the regulatory environment is changing, and Mr. Light said the results in the U.S. will probably take on a similar look and feel to the Solvency II regulatory initiative in Europe.

On the federal level, he said, there is a "much more proactive and regulatory-minded administration and Congress."

While most of the attention is on banking, the capital markets and health care, Mr. Light said, the rest of the insurance industry will likely be swept up in the process.

Mr. Light's presentation stated, "While the exact direction and pace of change in U.S. solvency regulation is not certain, insurers cannot wait for complete resolution." He outlined four broad principles U.S. insurers should follow.

U.S. insurers, Mr. Light said, should view solvency requirements as an opportunity. "If insurers have learned nothing else from the financial crisis, they now know that the range and size of risks they face are more difficult to predict than previously thought."

"For most insurers, building better solvency capabilities and practices will take a number of years," But, it would be a mistake to wait for the National Association of Insurance Commissioners, departments of insurance and rating agencies to act first, Mr. Light advised.

He also recommended an enterprise risk management (ERM) framework to embed solvency management in operations.

Three risk management categories in which vendors are providing technology solutions were described: ERM; operational risk management (ORM), which is a bottom-up approach focused on the risk elements inherent in an insurer's operations and core processes; and governance, risk and compliance (GRC), which emphasizes legal/regulatory compliance, audit and oversight.

Of those three frameworks, Mr. Light said ERM is the one most suited for managing solvency risks, as it's comprised of a three-step program of specifying risk appetite, assessing risks and mitigating them.

U.S. insurers should also be deliberate in building what Mr. Light called the solvency technology stack.

The technology stack consists of five layers:

o A base layer of operational and back office applications, such as policy admin, claims, billing, etc.

o At the second layer there is control and integration functionality, which includes forms of integration and connectivity to allow the foundation applications to communicate with each other.

o A middle layer consists of data and data mastery to manage and ensure accessibility of data, an actuarial and modeling layer, including tools for pricing, reserving and modeling catastrophes.

o And at the top layer, monitoring and reporting, comprised of not applications but a variety of reporting modes including reports, dashboards and key risk indicators.

Mr. Light said almost every midsize and larger insurer has some applications and capabilities at each of the five levels of the technology stack, but very few insurers have tuned and configured their application portfolio to meet all the emerging demands of solvency management.

Mr. Light's final recommendation was for insurers to make solvency metrics transparent. "This is partially a technology issue and partially an organizational development issue. The technology aspect requires the creation of appropriate and usable reports at the monitoring and reporting layer."

In terms of organizational development, Mr. Light said many solvency concepts are unfamiliar to many managers and executives, and it takes time and effort to build understanding throughout an organization.