ORSA May Be the Next Big Tech Test
Insurance Experts' Forum, March 27, 2014
Is your information system ready for the demands posed by new regulatory standards? The closest hurdle is the adoption of the Own Risk and Solvency Assessment by insurance regulators, with the first reports due in 2015. But the ORSA is merely the first of many regulatory drivers for increasing data demand for which your shop needs to be fully prepared.
ORSA is of course the biggest and most urgent. It will affect most insurers and insurance groups directly, and even though proportionality is a guiding principle behind current insurance regulation, I can’t help but think there will be a trickle-down effect from regulators, rating agencies and investors. This may turn ORSA requirements into de facto best practices that even smaller insurers exempt from filing under current regulations will need to adopt in principle.
ORSA, to vastly oversimplify, is essentially a feedback loop driven by real-time, actionable information with a forward-looking bias. It moves the emphasis from rigid decision-making triggers (e.g., an RBC level) to continuous refinement and improvement, where decision-making power is embedded throughout the structure and enterprise risk management an integral part of all decision-making.
Let’s focus on a few key words here: real-time, actionable and forward-looking.
In the world of insurance regulation, this is a revolutionary concept. Insurers used to having to respond years later to the results of more or less standardized in-depth examinations conducted every three to five years now will have to look at their own systems, their own risk profiles, and their own risk statuses not in the rear view mirror, but in light of their plans and capital requirements for the upcoming few years. That changes the basic information requirements from relatively straightforward reporting and reconciliation to complex modeling, scenario planning and forecasting.
This will have a significant impact throughout most insurance companies, but few will be affected as strongly or be as important to the change as those responsible for IT.
Organizations with unlimited budgets for technology and talent spend probably are already set, but in the real world where most us need to make tradeoffs between costs and capabilities, both small and large insurer IT departments need to consider how to prepare for the upcoming day of reckoning.
While there may be commonalities, the challenges may be different. Most insurers have a good track record with reporting, even if their tools aren’t optimal. Large companies may have been able to make things work with spit and glue holding together myriad legacy systems that had to be subject to enhanced interrogation techniques in order to provide the needed information. Smaller companies may have been able to get by with spreadsheets and brilliant minds burning the midnight oil, substituting brainpower and time for tech systems.
That probably won’t work for long. I have spoken to many companies now contemplating major IT spends and talent transformation over the next few years in response to ORSA and other regulatory requirements.
For ORSA, IT will be required to develop the robust systems and data environment to perform and analyze risk metrics in tight time frames. “Tight time frames” may well refer to what any IT organization that hasn’t already started deploying, testing and refining its systems may be faced with.
If your department is not well on its way, that may be cause for concern. There’s a regulatory train coming, and IT needs to stay ahead of it.
Numerous other regulatory changes are on the horizon that will affect IT, some of which have not been prominently addressed in light of more immediate challenges. For example, not even on most insurers’ radar yet is the Office of Financial Research (OFR), an arm of the federal Department of the Treasury established under Dodd-Frank “to improve the quality of financial data available to policymakers and to facilitate more robust and sophisticated analysis of the financial system.”
OFR has been particularly concerned with banks as it gets going, but now says it “is ramping up its services to the Financial Stability Oversight Council (Council), Council member agencies and the public by working to improve the quality and scope of financial data available to policymakers and to conduct and foster sophisticated analysis of the financial system.”
Sounds like that train’s about to pull in.
But we can explore that at another time. For now, CIOs probably have more than enough on their plates. After all, in addition to ORSA there is still the routine stuff IT has to deal with…cyber risk, analytics, the meaning of life.
Such an exciting time to be in tech!
Howard Mills is director and chief advisor for the Insurance Industry Group at Deloitte LLP and a former Superintendent of the NY Insurance Department.
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