Regulatory bodies, both within the U.S. and internationally, have turned their focus toward expanding their oversight and enforcement activities. With this trend only expected to accelerate, the increase in regulatory changes is creating an industry-wide ripple effect that is expected to impact the majority of insurers.
Already, the industry is predicting a number of new rules and modified requirements that could significantly affect how insurers operate. In order to succeed in this evolving environment, organizations need to stay on top of impending changes and their potential impact, lest they find themselves scurrying to achieve compliance at the eleventh hour.
So what are some of the top regulatory mandates and compliance challenges to be on the lookout for in 2015 and beyond?
- The growth of cyber security risks: With the recent hacks of Anthem, Target and even Sony Pictures, cybercrime is a hot topic. Unfortunately, insurance companies have become an increasingly attractive target for hackers and cyber thieves. According to Deloitte, the expansion toward a mobile and Web presence has opened the industry up to cyber thieves looking to steal valuable customer data. Recognizing the growing risks and understanding the general industry unpreparedness, insurers are working to ramp up their defenses. Already, regulators are raising the bar on cyber security, with the National Association of Insurance Commissioners (NAIC), establishing a Cyber Security Task Force. Moving forward, the industry can expect to see increases in IT and data security investments, as well as a growing focus on data risk assessments.
- The implementation of the Own Risk and Solvency Assessment (ORSA): Developed by the NAIC, the ORSA model went into effect on January 1, 2015. Under this new regulation, certain U.S. insurers are now required to undertake an annual confidential internal assessment. This assessment looks at the risks associated with their current business plans and the sufficiency of their capital to support these risks. Not all insurance companies are affected by the ORSA requirements. However, due to ORSA, the industry as a whole is placing greater emphasis on analyzing the adequacy of their current risk management framework and proactively addressing any weak points.
- A growing push to streamline regulatory standards globally: In today’s increasingly global business environment, the U.S. insurance industry faces growing pressure to adopt international regulatory standards. With international standards having been accepted by more than 120 countries, the International Association of Insurance Supervisors (IAIS) is pushing for the current regulatory framework to become a global reality. For Global Systematically Important Insurers (G-SIIs), changes are already being put into effect with the impact expected to include enhanced supervision, new financial reporting requirements and increased scrutiny. While a complete acceptance of international standards has not been embraced by the entirety of the U.S. industry, insurers may want to review how their current processes may be updated to better align with the global standards.
- Increased industry regulation at both the state and federal level: Historically relegated to individuals states, a new model of insurance industry regulation is emerging, blending together state and federal oversight. While the newly introduced Federal Insurance Office (FIO) is responsible for monitoring the industry, it does not have formal regulatory authority. The industry currently faces an uncertain regulatory environment as the exact roles of the state and federal agencies—including the FIO, the Financial Stability Oversight Council (FSOC), the International Monetary Fund and the Federal Reserve—are still being determined. As a result of this uncertainty, insurers are seeing increased regulatory expectations and growing demands for compliance.
- An industry-wide shift toward principle-based reserving (PBR): The industry remains divided over the best way to calculate reserve requirements for life insurance. Many feel that the traditional, formula-based approach is outdated and is therefore creating excessively high reserve requirements. In response, they propose a shift toward a principle-based approach that is considered more reasonable and fair. Fortunately for those who support PBR, the NAIC agrees and has approved this shift. However, a complete transition to PBR requires approval from a supermajority of states, representing 75 percent of the life premium. While the implementation of PBR remains in the distant future, insurers may want to start considering the impacts of PBR approval. In order to get a jump-start on the competition and ensure their future success, organizations should focus on creating capital plans and developing new life insurance products to capitalize on modified reserve requirements.
The landscape of insurance regulation is changing and 2015 is poised to be a pivotal year. Organizations who want to be prepared for any impending shifts are taking a look inward and examining how their current risk and compliance processes may be updated to fit within an evolving environment. This increased adaptability may be the key to success in the future.
What is your organization doing to prepare for future regulatory updates?