For insurers across the sector, 2013 is proving to be another year of significant challenge and uncertainty around regulatory and commercial change. Although equity markets are currently at levels not seen before the financial crisis, the economic recovery continues at a slow pace. The potential implications for insurance business models due to evolving global and domestic regulatory changes present significant and complex challenges for US insurance companies, according to a report from KPMG.
In its third annual report, KPMG's "Evolving Insurance Regulation--A New Dawn" provides detailed insights into international and country-specific regulatory issues, as well as an increasingly wide range of insurance-related regulatory drivers. Initiatives such as systemic risk, the International Association of Insurance Supervisors' (IAIS) Insurance Core Principles (ICPs) and the European Union's Solvency II Directive remain key areas of focus for many insurers and regulators. As more jurisdictions begin to implement the ICPs, assessing how best to accommodate multi-jurisdictional compliance and reporting requirements becomes a growing strategic challenge.
"Insurers need to review their business strategies against these unprecedented regulatory changes. Prudential standards are at the forefront of recent developments, while consumer protection has often been the poor relation," said David Sherwood, KPMG's US head of the Insurance Regulatory practice. "Going forward, you can expect a continued focus on risk management, solvency standards and enhancements to consumer protection, followed by increased enforcement where consumer failings or detriment occur."
Across the Americas, the impact of IAIS's ICPs serves as the main driver of regulatory policy development, consultation and implementation. Since the inception of ICPs in October 2011, insurers and regulators in these markets have wrestled with a staggering influx of new regulations. Insurers who wish to understand the regional implications would do well to consider the ICPs as adopted as a template for future regulatory requirements.
Along with ICPs, insurers in the US continue to address regulatory pressures on three fronts; international, federal and statutory. From an international perspective, US insurers and regulators continue the tough task of balancing the requirements set forth by Solvency II. While the EU regime takes a more rules-based approach, with quantitative and qualitative checkpoints, the US regime relies on its National Association of Insurance Commissioners (NAIC) to enforce adherence.
On a federal level, enhancements to the Dodd-Frank Act have insurers with other lines of businesses answering to numerous regulatory bodies, varying agendas and requirements. American insurers are also anticipating news on Global Systemically Important Insurer(G-SII) or a Domestic Systemically Important Financial Institution(D-SIFI) classification.
Locally, the adoption of Own Risk and Solvency Assessment (ORSA) has required insurers to continue developing enterprise-wide risk management programmes across all risk types. Insurers believe that ORSA will help streamline risk management operations, reporting requirements and governance arrangements.
"2013 will prove to be a transformative year in the insurance industry, driven by the recognition that the rapid, unpredictable, and profound changes we are witnessing in the industry are structural- not cyclical," added Laura Hay, national leader of KPMG's US insurance practice. "Successful insurers must find ways to balance the current regulatory challenges and, simultaneously, develop and employ strategies that promote profitability, reduce cost and risk, and create positive value to their customers."
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