Article Synopsis :
The insurance industry faces increasing regulatory risks and challenges driven primarily by the rising incidence of cyber-attacks, the growing importance of consumer-centric governance, and disruptive new business models from InsurTechs.
KPMG’s report “Key Regulatory Challenges” provides analysis and insight on nine specific regulatory risks, as follows:
- Achieving Equivalence and Covered Agreements: In January 2017, the US and EU mutually negotiated and signed an agreement to create a level playing ground for both EU and US insurers. This agreement is intended to provide more opportunities for insurers and more choices for consumers.
- Challenges from innovators and new market entrants: The rise of InsurTechs poses unique and interesting challenges to existing regulatory frameworks. Will these new business models flourish? Insurers that think so may benefit collaborating with them, as opportunities exist for increased personalisation, and improvements in underwriting and claims management.
- Expanding the use of Big Data – benefits, risks and challenges: Leveraging personal data for insights has created a lot of buzz in the industry and regulators are focusing on protecting consumer privacy. Going forward, insurers will have to balance the potential commercial value of Big Data with corresponding privacy, legal and reputational risks arising from data collection. New regulatory technologies (RegTech) can help predict compliance failures and enhance business coordination.
- Increased emphasis on corporate governance: The adoption of the Corporate Governance Annual Disclosure Model Act (CGAD) across the US will create a uniform regulatory disclosure and assessment process across the US. The Act makes it mandatory to disclose corporate governance frameworks and structures. Relevant to this, at an international level, the International Association of Insurance Supervisors (IAIS) has articulated four Insurance Core Principles (ICP’s) dedicated to corporate governance.
- Ongoing development of capital frameworks: Progress on Risk Based Capital (RBC) aggregation continues under the leadership of the NAIC with expected implementation in 2020. The Federal Reserve Board continues to consider proposals on a dual capital framework for insurers. At an international level, the IAIS is moving forward with plans to converge global regulatory capital standards and continued support for market-based valuation for assets and liabilities.
- Regulatory reporting reform: Regulators are increasing their focus on a common reporting framework for all multinationals, which means, among other things, integration of the Common Framework of Supervision of Internationally Active Insurers (ComFrame) into local entity requirements as it moves through the legislative process into individual jurisdictions. At an international level, the IAIS is scheduled to formally adopt a version of ComFrame for public reporting in 2019. These reporting changes will trickle down to local domestic players as well.
- Cybersecurity and consumer data privacy: The NAIC is drafting a third version of the Insurance Data Security Model Law (IDS) to further bolster cybersecurity. Standards are expected to prioritize protection from data breaches followed by timely notification and investigation protocols. Several federal and state initiatives are planned to tackle growing cybersecurity concerns.
- Principle based reserving (PBR) implementation: Implementation of PBR is ongoing with a small number of insurers planning to value at least one product under PBR during 2017. PBR will be made fully mandatory on 1st Jan 2020. Insurers will have to ensure proper systems and processes in place for the new valuation method.
- Repeal of the Affordable Care Act (ACA): With ACA remaining in effect, the Trump administration is expected to integrate some form of adjustment to the Act which will no doubt have some impact on health insurance companies. Uncertainty levels are very high, with repeal and replace legislation changing by the day. As it stands, insurers will have to decide on their ACA participation in 2018, including a review of products and services and potential new offerings. Additionally, given loss histories under the ACA, insurers will have to consider increased cushions and reserves.
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Digital Insurer's CommentsInsurance is one of the most heavily regulated industries in the developed world. Many incumbent insurers rely on this heavy regulatory regime as a form of defense against digital upstarts.
While regulatory compliance is indeed a high wall for digital invaders to surmount in pursuit of new insurance customers, look no further than Uber, Airbnb, and even Amazon for examples of ‘sell first and seek permission (from regulators) later.’ Regulatory compliance, for incumbents, is indeed a mission-critical function. But it’s not the moat guarding the castle it once was.
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