It's no secret that insurance carriers spend much of their compliance lives in the circular lane. Here's what happens:
Pressured by institutional investors, public insurance carriers want to grow beyond their home states, or branch out and sell new products in addition to the three or four lines of insurance they're selling. So far so good. But pushing into other states and other lines means following new rules. More rules mean new layers of complexity. More complexity hinders growth.
Just in case readers need reminding, the federal laws governing carriers have become seared into the minds of insurance compliance departments. They include the Sarbanes-Oxley Act, the Gramm-Leach-Bliley Act and the USA PATRIOT Act, mighty documents all.
State regulators, of course, require carriers to abide by their own set of rules. Thus, a Wisconsin-based carrier writing general liability, for example, looking to push into Minnesota, Illinois and Michigan, needs to follow the requirements in three other states. If that same carrier wants to begin writing workers' comp or commercial auto, it's going to mean yet more requirements.
"The more lines of business you're writing, the more states you're writing it in, the difficulty compounds," says Donald Light, an industry analyst with the consulting firm Celent Communications Inc.
Carriers covering, say, medical malpractice risks in Minnesota have only to worry about regulatory changes in one line of business in one state. "But if you're writing 10 lines in 15 states, you've got 15 different places where something can jump out at you," he says.
Add to that the merger of an insurance holding company beholden to requirements imposed by Sarbanes-Oxley, with a broker-dealer that must follow rules imposed by the Securities and Exchange Commission and the National Association of Securities Dealers, and the rule books look daunting indeed.
Ironically, the liberalization of financial regulatory laws has turned compliance, once merely a nuisance, into a massive headache. Sure, the new laws have encouraged merger activity in the financial services sector. Banks, for example, looked to sell insurance by buying agencies. For their part, some insurance companies have moved into the securities marketplace.
The new, larger companies, however, now have insurance divisions required to follow state insurance rules and brokerage units required to follow federal securities industry rules. Is it any surprise that it's become astronomically expensive for the new companies to comply?
Smaller carriers, those writing $150 million in annual premium with, say, 10 lines in four states, suffer more than top-tier carriers. "Their compliance burden is basically the same as if they had $1.5 billion in premium," says Light. "If you're out of compliance, you're out of compliance. It doesn't matter what your premium level is."
Auditors aren't taking their jobs lightly either, after the drubbing they received in the wake of the Arthur Andersen-Enron fiasco.
"In the past auditors may have been looking at a higher level," says David Zell, a project manager with XL Insurance in Hartford. "Now they are looking at much more detail."
He adds, "They are coming in with microscopes and looking at things with a fine-tooth comb." This has forced XL to shore up its information-technology staff. "There's a go-to man just for FIC (Framework for Internal Control) procedures."
That federal and state compliance burdens don't exactly give insurance carriers much incentive to grow has, by now, almost become a truism. That is all the more reason why carriers need information-technology departments to get it right when building the correct compliance software model.
Some insurance carriers have scored against what must at times appear as a beastly medusa writhing in all directions. In a report titled "Compliance & Technology: Best Practices for Insurers," Light writes that Hartford Life, Humana Inc. and Allianz Life have scored a victory or two in retooling their technology platforms to comply with federal mandates.
Hartford Life, a unit of The Hartford Financial Services Group Inc., a diversified player with a broker-dealer unit, a mutual-funds unit, and business groups in property/casualty and life, built its tool to fight money laundering.
The project allowed the company's business unit to extract data from 35 different systems to make the data more consistent and comply with requirements imposed by the Office of Foreign Assets Control.
"They've made a big investment in people resources, process and communication infrastructure," says Light.
In the case of health benefits provider Humana, the insurer was processing claims from 100 different classes of health providers, from doctors to hospitals to pharmacies, through three different claims platforms.
Retooling each platform to comply with the federal Heath Insurance Portability and Accountability Act was not feasible. Instead, the company developed "e-HUB," one platform that receives all claims, whether in paper or electronic format, and routes them to one of Humana's three legacy claims platforms, according to Light. With the regulatory burdens on carriers getting heavier in the wake of aggressive crackdowns by state prosecutors, collaboration and project management software designed to connect users between distant points and make workflows more efficient is more important than in the past.
In addition, the new dynamics of today's marketplace require carriers to bring their products to the marketplace much quicker than in the past. "What's changed is the whole speed to market and the number of iterations," says Light. In the past policy forms typically would not change for three, five or even six years. Today a policy form in some product categories like variable annuities might change twice a year.
But in order for disparate departments within carriers to approve new product launches before competing insurers launch a similar product, carriers need a new generation of collaboration software.
Light calls the transition by carriers to more advanced collaboration applications "an unfolding story."
Many carriers still use IBM's Lotus Notes. However, this application is more than a decade old, Light says, and it was not really designed to manage modern document-management processes.
These processes require carriers to move thousands of documents back and forth between a half-dozen internal departments, and externally between the carrier and outside state regulators.
"A lot of carriers I talked to were either using Lotus Notes or something comparable to it, something like an Excel spreadsheet," he says. "But it's a generic kind of tool, and you have to do a lot of tweaking to really track this."
Other insurance carriers use Microsoft Project and Computer Associates' Clarity software to manage projects that require extensive collaboration. Sooner or later, given the increasing regulatory burdens, every carrier will be forced to rethink its collaboration applications.
If carriers don't rethink their collaboration software suites by choice, they'll be forced to do it by necessity, as profits get harder and harder to come by due partly to the long-term decline of corporate profitability, according to consultant John Hagel 3rd.
Growth is indeed good. Who can argue with that? But it's harder to come by and it's never, ever free. "When you have the ambition of growing, which is a good ambition to have, this is the kind of luggage that comes along for the ride," says Light.
is managing editor of Risk & Insurance®.
August 1, 2006
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