As regulation gets tougher, re/insurers should demand more detailed information - such as risk location - says Michael Bartlett
The Financial Services Authority (FSA) in the UK has recently taken its first major enforcement action against senior insurance managers by placing a ban on six former company directors of Chiyoda Europe over their role in distorting their company's financial results. Insurers will now be under much closer scrutiny, with the FSA making it clear that it can, and will, make the buck stop with someone.
The imposition of new regulations for the general insurance industry heralds a time of panic and despair to those who have relied on withholding adequate risk details in order to control their business. And these practices are not limited to small to medium sized organisations; the shockwaves will impact the entire insurance community.
The significance of the recent action taken by the UK's financial watchdog cannot be over-emphasised, since the FSA has considerable influence beyond the shores of the UK. The European Union (EU) looks to the FSA as a guide for industry behaviours, so almost inevitably, the UK regulator's more robust approach is likely to be duplicated throughout EU member states.
In the US, such levels of regulation are routine and accepted as such.
Each state imposes its own regulations across every aspect of daily life - insurance, tax, legal and administration, to mention a few. And this is in spite of - not specifically because of - scandals such as the Enron collapse.
So what lessons can be learned and where should attention be focused?
The devil's in the detail
Within the UK general insurance community, detail is often overlooked by those who should know better. Ask too many questions as an underwriter and a broker is likely to transfer his business to a less inquisitive insurer. So brokers and insurers alike have developed a culture that pays little attention to risk detail in order to transact ever larger quantities of business. But now among the issues in the minds of insurance company executives are the corporate and personal penalties being handed down to those deemed responsible for non-compliance.
Location is the one variable that is fundamental to the vast majority of insurance transactions. Knowing the exact address of each risk insured can have specific relevance to most types of insurance policy.
Obtaining risk location information should be the easiest job a broker has to do. Yet most insurers (and reinsurers) frequently claim it's a battle to obtain this basic information. Thus so the culture of 'knowledge is power' is introduced at the point of supply. If insurance companies can readily locate and assess risk accumulations against known and projected peril scenarios, they will be able to negotiate reinsurance protection at prices that more directly reflect the composition and management of their risk portfolios. Ultimately, the buyer should benefit from improved premiums and coverage as the insurance industry becomes smarter and makes informed decisions based on the true complexion of their company's performance.
It is time for insurers to insist on a minimum level of information for every submission. After all, instantaneous advice of the risk location is delivered with the claim notification.
Many brokers fear that by divulging too much risk information they will be losing control, and that by accepting the status quo insurance companies will have given up the opportunity to make intelligent decisions about the management and content of their portfolios.
In recent years, some brokers have paid lip service to greater client transparency, but apart from a few major account instances of insurer and buyer talking directly, most insurers still have very limited risk details on file.
Underwriters have to make fast decisions about accepting an enormous variety of risk types. So what tools can help to quickly deliver reliable information concerning levels of risk?
'Geographical Information Systems' (GISs) can instantaneously find the location of an insured property and enable underwriters to determine the relationship of risk to peril. GIS technology is already being used routinely by many other industries and organisations, as well as by many insurers of multinational risks.
Insurers will be most receptive to those brokers who serve up business propositions in a pre-formatted fashion that complies with best practice.
The exact shape and design of that format will depend on those brokers and insurers who are aware of the benefits of being early developers of business-enabling systems. It is they who will set the standard.
The building blocks from which a format is constructed are familiar, including name(s) of assured, full address and postcode of every location to insurer, occupation details in full, construction of buildings, building values and suchlike.
Not surprisingly, there is nothing new in this list. In fact many players in the insurance market, jaded by years of service in the industry, may see these as simply the boring details of the job we do. But they are as vital to the well-being of an insurer as a blood sample is to a doctor in ensuring the accurate diagnosis of a patient. If you fail to collect and analyse these details it will be impossible to detect threats to your survival.
The way forward
In recent years, the insurance community in general has recognised that its IT infrastructure is in need of dramatic improvement. Whilst focusing on the problems associated with re-engineering legacy systems inherited during mergers, business managers within the insurance sector have often failed to recognise the benefits of developing capabilities such as GIS, which is now a fundamental application across a host of other industries.
For instance, GISs have made dramatic advances over the last few years, and yet many insurers and brokers are slow to realise the significant benefits that can be obtained by integrating these tools into their own management information systems, although their worth has already been proven in the public sector. The advent of e-government initiatives has driven the development of new tools that can be accessed through intranet services within all strata of government. Such initiatives have ensured that prices are keen enough to comply with the strict budgets imposed by our civil service.
Underwriting managers and broking directors can now have access to a range of capabilities that enable them to respond instantaneously to accumulation queries and account overviews, allowing the development of marketing strategies.
These tools can also deliver a host of reporting functions for management and ensure compliance with the regulatory requirements of the FSA.
In summary ...
Many companies in the insurance community are either suffering from initiative overload or the lack of it. The danger is that those who fail to adopt reasonable business practices will have regulatory penalties imposed upon them in the very near future.
If insurance companies want to improve their bottom lines by enhancing their ability to evaluate risk, it must be recognised that the starting point is to obtain basic risk details. The FSA will not permit another insurance company to collapse in the spectacular fashion of Independent Insurance back in 2001. To this end, regulation must empower all participants involved in the insurance policy chain to expect equal and optimum standards of excellence.
The very stark reality of regulation is that bad practices will be outed.
Those who rail against the regulators would do better to turn their energies to exhibiting compliant capabilities, as those in the life and pensions sector will surely confirm. You may not like the environment, but get used to it before you are barred from trading.
- Michael Bartlett is the head of the insurance practice at GDC, a London-based company specialising in geographically intelligent solutions.