Insurance has always been a highly regulated industry and change is nothing new. Yet the implementation demands and strategic influence on insurers are now reaching an unprecedented level of intensity as regulation such as Solvency II, the US Solvency Modernization Initiative, G-SII controls and ComFrame, becomes increasingly globalised, politicised and centralised.
In Asia Pacific, insurers are also dealing with numerous regulatory developments in solvency regulation, AML, Common Reporting Standards and enhanced conduct regulation generally. Risk-Based Capital is a particularly hot topic with changes in Australia, Singapore, and China to name a few. ComFrame affects all internationally active insurance groups and whilst the G-SII designation covers only a few large insurers, many more groups will likely be brought into the net as regional and national supervisors adopt comparable provisions.
To emerge stronger from this, insurers need to develop a detailed understanding of how these changes will affect their organisations and determine the steps needed to embrace them.
1. Steering the response
The ideal basis determining an appropriate strategic response is the creation of a dedicated global regulatory team, with strong leadership and direct communication with the board and other functions. This includes identifying interdependencies and conflicts between the different regulations and how they impact on wider market developments and strategic plans (see diagram). It would include looking ahead to what kind of regulatory environment would work best for the group, rather than simply reacting to developments.
This integrated oversight helps to identify the synergies between different regulatory requirements and avoid needless duplication. It also allows for closer co-ordination between local, regional and global initiatives on the one side and between regulatory and business-driven change on the other. Among the key benefits, as already seen by some banks, is the ability to look beyond regulation as a burden to identify areas where it might deliver competitive advantage.
2. Shaping the debate
It will be important for the industry to come together and develop viable alternatives to proposals that may be difficult to apply or have potentially unintended consequences. The better your business understands the implications, the more effective will be its ability to participate in and shape the debate.
3. Gearing up your business
Capital efficiency is going to be a key determinant of cost competiveness, pricing and returns in this new landscape. Forward-looking businesses are already reviewing and adjusting domiciles and operational structures to improve capital efficiency. Beginning now will make sure you have enough time to carry out the necessary heavy lifting and realise the advantages once the regulatory changes go live.
Reinsurance, asset portfolios, hedging arrangements and asset-liability matching strategies will also need to be reviewed and adjusted to take account of the planned changes.
4. Seeing the bigger picture
The prudential overhaul is part of a much wider shake-up in regulation worldwide, embracing areas ranging from consumer protection to tax, financial reporting and AML. It will be important to look at how these changes interact with the solvency developments and how this will affect decisions over strategy, operations and domiciles. It will also be important to make the most of the synergies in areas such as the data sourcing and modelling requirements for IFRS and Solvency II. The need to bring all these strands together underlines the value of a dedicated global regulatory team.