By Frank Carr, Director at Financial Risk Solutions Limited (FRS)
Yet while many leading names are undoubtedly investing heavily in technology, insurers as a body are still failing to gain maximum benefit from electronic platforms. And this is increasing their costs and their risks at just the time when Solvency II is expecting them to operate more efficiently and to carry less risk. So what’s a major factor in this? The answer to this is very simple: despite being in an electronic age, many insurance firms are still heavily reliant on paper.
Inherited practice
Financial Risk Solutions recently undertook a survey of life insurance firms, many of which have state-of-the-art technological systems. What we found in many cases is that rather than adjusting their processes to suit these systems, the firms continue to use paper-based processes. For example, they might print off a signed fund valuation and file it away for the auditors to see – even though this is date-stamped, archived and held securely in soft-copy format.
Dependence on paper creates a number of issues for life insurance firms. The most obvious one is the sheer cost in terms of time and money that comes from using paper and physically storing it. A few companies improvise and even use the paper as internal walls and desk dividers at their office! There is also the challenge of accessing paper documents – they are not easily accessible in the way that electronic documents are.
Then there are the risks that come with using paper, particularly if a paper-based process has become embedded in a business. A business may, for example, be working with an out-of-date risk framework and making checks that were important five or six years ago even though products or requirements have since changed.
Why does it matter?
Ultimately it’s up to insurance firms themselves to decide to what extent they want to use paper. It is clear, however, that the arrival of Solvency II next year, and the requirement under Pillar 3 for life insurers to report on their fund assets within six weeks of each quarter end, will quickly flush out those organisations that do not have a firm handle on their processes.
Firms that lack tight processes will find that they are quickly exposed and this will matter in the new environment where regulators expect risks of all kinds to be closely monitored and managed.
This year, the UK life insurance industry is understandably preoccupied with Solvency II. For some the hard work will undoubtedly just be starting when the January 2016 deadline comes round, with these kinds of regulatory projects, the level of work that needs to take place post deadline is often in excess of the work that needs to take place prior to it. As a result, it is likely that many firms will need to continue investing in their systems and processes as far out as 2018.
The situation is made harder by the fact that UK firms are in unchartered water with Solvency II since they do not have frameworks that they can lift from other jurisdictions.
Without doubt, automation is the way of the future in life insurance – as it is in so many other industries. But what will determine the success of UK life insurance businesses over the coming years is not whether they automate – that goes without saying – but how quickly they manage to embed automated processes within their business-as-usual activities. The firms that are best at this will be those that outperform their competitors in our brave new regulatory world.
Paper had its place in the past, of course, but times have changed radically. Rest in peace, paper. Now is the time to bury you, once and for all.
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