Millennium

Technical innovation is driving significant change for the insurance industry, in areas ranging from customer experience, AI, chatbots and machine learning, through to leveraging Cloud computing. Combined with the need to respond to new regulatory challenges, such as IFRS 17, it is clear that now is the time to dramatically reengineer not only the back office but also the front office.

In recent years there has been a flood of new regulation across most industries, with the insurance sector particularly affected. Solvency II had an enormous impact and now IFRS 17 is underway. It’s not only IFRS 17 that affects insurers. They have also been affected by IFRS 15 for revenue recognition, IFRS 9 for financial instruments and IFRS 16 for lease accounting and in the USA life insurers are working through LDTI changes.

If you focus on IFRS 17 compliance, combined with future proofing your organisation, then it’s important to introduce an architecture that meets existing business needs and the new standards, but also considers future challenges. The insurance sector is embarking upon one of the biggest changes it has ever faced in the back-office. New accounting standards combined with the need to innovate, will place significant demands across the whole organisation.

One reason insurers are dependent upon legacy systems is due to the difficulties associated with introducing change. Transforming the insurance sector is virtually impossible whilst running existing business and therefore, a non-disruptive, evolutionary approach is advisable from a technical perspective.

Back office technology within the insurance sector has remained unchanged for many years, with batch-based processes currently feeding high data volumes from policy administration and actuarial based systems, through to the General Ledger. Future innovation and InsurTech requires fast-moving real-time data, therefore, moving the back-office from a traditional, historic, batch basis operating model to real time, fast processing is an important consideration.

Front office innovation needs to be supported by the back office. How should insurance contracts be delivered? Blockchain? How is that dealt with in the back office? How are crypto currencies handled? How is the Internet of Things dealt with in terms of real-time telematics? All those questions need to be factored in when looking at future state architecture, and need to be considered over and above IFRS 17, to ensure that the solutions implemented today are able to meet future demands.

The wave of regulatory change has had a wide-ranging impact, particularly concerning data, actuarial model performance and information processing methods of insurers. Increased volumes and more complex calculations have had an effect on the accounting ecosystem and ultimately reporting, which has become more onerous following the regulatory changes.

Given the monetary cost, complexity and time required, it’s easy to regard regulatory change as a burden. However, regulatory change will benefit policyholders (in terms of security of the insurance industry) and shareholders (transparency of information and understanding company performance). From the firm’s perspective, the benefits are not quite so obvious.

IFRS 17 has provided the opportunity to invest in new finance systems and encouraged the need for transformation. With regulatory change, the best place to start is to consider the data requirements. Data in the insurance industry is often inaccessible, residing in silo-based systems. The data may not be effectively harnessed and there may be quality and availability issues. Regulatory change has exposed and emphasised these data issues and this in turn has driven insurers to start building a more robust technical infrastructure.

The opportunity afforded by new technology to transform finance, requires high quality data. Regulatory change provides the opportunity to lift the lid and address some of those crucial data issues. Insurers are generally constrained by legacy operating models, which impact data quality, actuarial tools and operational processes.

Regulatory compliance requires complex calculations, which rely upon high volumes of granular information. Clunky, old-fashioned mainframe computers and proprietary database systems need to be replaced. Insurance firms have historically relied heavily upon Excel spreadsheets, Access databases and manual processes which are no longer feasible. In order to comply with the regulators and future proof the organisation, insurers need to automate processes. Back office automation investment will enable the deployment of new front office systems leading to the delivery of valuable information concerning business performance.

Automated processing can transform the back-office into less of a data management, calculation entity, delivering more insightful information to ensure front office investment pays off. Regulatory change can therefore be seen as an opportunity to invest in the back office, in areas such as cloud computing, in-memory processing and high-tech, super-fast technology that can crunch huge data volumes which support front office transformation. Regulatory change will not directly help insurers however investment incurred as part of a regulatory change programme can support the long-term digital transformation journey.

One barrier to change is the lack of time available to achieve a comprehensive transformation program. Even allowing for the one-year IFRS 17 delay, most insurers will only be able to achieve a compliance plus approach, putting a technical backbone as a foundation for future transformation. This means they will not necessarily achieve all the benefits immediately but will put the foundations in place for future enhancement.

Another significant barrier relates to the availability of funding. It’s important to consider the overall business case so that when program sponsors raise these topics with the Board and executive committees, they should look beyond simple compliance. They need to factor into the business case the cost of making an incorrect choice, choosing technology that may constrain the organisation in the future. It is essential that insurance companies invest in up to date technology which has a viable long-term future.

Of course, major change is not without risk. One option is to meet compliance needs whilst deciding upon a long-term roadmap. Timing is crucial as IFRS 17 compliance must be in place by January 2021, in order to allow for a year of parallel running and go-live in 2022. Cloud computing can help deliver the solution in line with the tight deadline. The Cloud provides proven technology and a faster way of testing, UAT, development and production rather than traditional on-premise solutions. It is also highly scalable.

Advances in technology, globalization, innovation and the rise of InsurTech have impacted virtually every part of the Insurance ecosystem. Through the rise of InsurTech, smart contracts are now being delivered via Blockchain. In underwriting there have been dramatic changes in the motor insurance market where telematics has been revolutionary. Traditional underwriting factors such as age, occupation, vehicle value etc. whilst still important are now being replaced by real-time data, that provides insight into driving habits, including cornering, compliance with speed limits, driving times (day or night) and the conditions of the roads being driven on. This is significantly changing the underwriting process and providing insurers with a more accurate insight into the risks associated with individual drivers.

Innovation provided by InsurTech requires a change in back office processes to harness competitive advantage. One solution for insurers is to ensure that IFRS 17 compliance projects interact with InsurTech and innovation departments. This will combine compliance with the future vision for what a digital strategy looks like. If insurers embrace the new technologies now available then they will be able to build a future state architecture that could remain operational for the next 15 to 20 years and will be an enabling platform, as well meeting new regulatory demands.

Insurers that combine regulatory compliance with a forward-looking digital strategy will be well placed to meet future market demands, able to compete with new market entrants and take full advantage of the benefits provided by InsurTech.