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You could argue that the insurance industry has been historically one of the most successful business models in the world. In fact, it has basically existed in its current form for hundreds of years. But today, new market dynamics, new consumer behavior, new risks and new regulations are all placing new pressures on the insurance industry. I don’t believe that the first paragraph will hold true 15 years from now.

In almost every industry, from Music to Banking, from Education to Manufacturing the landscape has radically changed in  the last 2 decades.  Will the insurance industry also transform? In this blog, I wanted to touch on the topic of how the regulator is changing insurance. Insurers are being forced (in part by regulators) to achieve a new level of transparency to remain both compliant and solvent.

How did we get here?

Why is there this sudden influx of new regulations? You can trace some of it back to the financial crisis, where it became clear that banks needed more control and better regulation. They also needed better transparency to make sure they met capital requirements. Even though it was quieter on the insurance side, the financial meltdown was a wakeup call to the industry and especially the regulator. Insurance companies had to look at themselves and make sure they weren’t heading down a similar path.

What they found was a disconnect between finance and operations. The CFO in most insurance companies operates in a different way than in say a manufacturer. When a CFO at a large manufacturer wants to explore a particular number, he just drills-down to every level of detail he/she needs all the way to a goods movement on a factory floor in Brazil.

The Insurance CFO is usually not so lucky. Due to the enormous amounts of data in an insurance company, it is often quite a challenge to decipher the meaning of summarized and aggregated data. Without being able to drill down to a specific level of detail and to make assumptions based on aggregation, regulators were concerned that this created  the same lack of transparency that contributed to the financial crisis. In banking, CFOs were also unable to fully understand the risk of individual loans that were bundled together, and so we ended up with the subprime mortgage  crisis.  Insurance is also bundled risk!

There’s another problem: the capital markets are no longer as easily lucrative as they used to be. In the past, insurance companies didn't mind taking a loss on their core business because they made so much money on the investment side. That's no longer so easy, forcing insurers to look at their data in a new way in order to ensure profitability in their core business.

New expectations for transparency

In the past, transparency was more of an  internal consideration, rather than a regulatory requirement. But now, the regulators are forcing more transparency.

In terms of solvency, regulators are  looking for more than just sufficient capital. Rather, they want to ensure that a series of individual cash flows cover specific risks. Or if they don’t, an explanation for how the risk will be covered.  (Had we done this  in mortgage lending, we probably would not have had the financial crisis.)  Auditing is no longer just checking to see if you’re in compliance; regulators mandate how you connect finance to operations to capital at a detailed level.

Not Big Data, Huge Data

The main challenge for insurance company CFOs is getting to the detail-level data in a manageable way. That’s a big proposition, when you consider that we’re not talking about Big Data, we’re  talking about extremely huge data. Companies that want to process that data in a meaningful way are looking for new ways of using in-memory technologies in conjunction with new accounting valuation systems.

In order to handle this challenge, companies need to take the most powerful financial systems, the most powerful analytic systems, and the most powerful real-time technologies, and connect them to their  core systems so they’ll be in a better position to handle the challenges that are ahead. In the end this will benefit not only the carrier, but also the insured whose premiums will match more closely their underlying risk.