Spotlight: Insurance’s regulatory burden – are we to blame?

The insurance industry is under immense pressure from an increasing regulatory burden, but to what extent are firms themselves to blame for failing to adopt modern technology and processes?

Seemingly relentless waves of regulatory change are battering the insurance sector.

The Insurance Distribution Directive, fair value assessments, General Insurance Pricing Practices and, most recently, Consumer Duty are all ramping up the pressure under the FCA’s long-standing emphasis on Treating Customers Fairly.

Elsewhere, insurers are tackling changes such as the ongoing adjustments to Solvency II and new operational resilience rules.

A recent survey by regtech firm, REG Technologies, highlights the increasing strain the market is under. Nearly seven in 10 general insurance compliance professionals (69%) believe their regulatory burden has increased in the past year, while two-thirds said red tape was slowing down the start of new business relationships – up from 47% in 2021.

Impact of regulatory burdens

The story across the insurance industry is a common one.

Firms are groaning under the volume of regulation they must deal with on a daily basis, both in terms of new processes and additional FCA reporting requirements.

“These have been large, complex pieces of regulation to understand and implement,” says James Clewes, head of regulation at specialist MGA, Avid Insurance.

“They are largely principles-based, which means firms need to consider and interpret how they affect their businesses. This takes time and effort.

“With the frequency and pace of change, substantial new processes and resources have been introduced over the last five years.”

The REG Technologies survey reveals that more than 40% of firms are now struggling with compliance costs.

The substantial increase in the volume of data that must be collected, analysed and reported, places a heavy burden on our industry’s compliance and risk management functions.

Joanne Deveney, Bspoke Group

Adjusting to these new regulatory requirements has involved substantial process overhauls and investment in staff headcount and training.

For some firms it has meant engaging specialist external expertise, such as consultants, accountants and audit firms.

Significantly increased operating costs and reduced profitability have been major adverse regulatory impacts.

Research commissioned by BIBA shows that by late 2019, more than one in four (26%) full time equivalent staff at small brokers were employed to attend to regulatory requirements.

“If you think about a small firm with four employees, you have lost a quarter of your staff just to follow procedures,” says David Sparkes, regulation director at BIBA.

“That has a turnover impact, but it also affects the time that brokers can apply to supporting clients.”

According to REG Technologies, ‘difficulties with reporting and documentation’ is one of the biggest challenges in meeting regulatory requirements for almost 45% of insurance practitioners, second only to ‘complex and evolving regulation’.

 

David Allison, head of intermediary consultancy south for Insurance Compliance Services, explains: “When the FCA took over in 2013, there were maybe two reports a year for most broking firms to complete.

“Now there are at least 10. The sheer amount of admin required in reporting to the FCA is significantly increasing the burden.”

Joanne Deveney, legal, risk & compliance director at Bspoke Group agrees.

She says: “The substantial increase in the volume of data that must be collected, analysed and reported, places a heavy burden on our industry’s compliance and risk management functions.”

She believes data management and reporting capabilities are areas that many companies are struggling with, as they grapple with legacy systems and incomplete or unstandardised, siloed data.

Is the industry itself partly to blame?

While supporting the regulatory intent of better outcomes for consumers, companies can be frustrated by what they feel are unnecessary levels of reporting and bureaucracy, along with the blunt or blanket nature of the some of the regulation.

However, insurance firms are arguably using dated processes and tools to handle their regulatory work, resulting in wasted time and loading unnecessary costs onto their bottom lines.

This raises the question, is the industry itself partly to blame for these inefficiencies?

As with many areas of technology adoption, insurance is lagging other areas of financial services.

When it comes to handling regulatory workloads, the REG Technologies survey reveals manual processes and multiple data silos are posing significant challenges to regulatory adherence for 28% of insurance firms, compared with only 10% of financial services firms as a whole.

In addition, less than 20% of insurance firms are using a regtech system to manage their regulatory, legal and compliance risks, instead relying on policy administration and customer relationship management systems.

The survey also reveals that more than one in 10 persist in using paper-based methods for regulatory tasks and 41% use spreadsheets, despite the known risks and propensity for errors.

This figure is reportedly even higher among smaller companies.

Infrequent reviews and manual processes are also prevalent when assessing counterparties and are relied upon by more than 70% of the insurance professionals surveyed.

 

“The industry is using dated processes to handle their regulatory work, and I am not seeing an awful lot of technology being used to aid regulatory burdens,” says Allison.

Regtech solutions and tools can offer more flexible and accurate solutions to navigating the complexities of the current regulatory environment.

The tech has the ability to improve data management, streamline and automate regulatory reporting, simplify processes and enhance compliance.

It begs the question, why are adoption levels so low?

Challenges of regtech adoption

Although insurance firms have started to embrace technology, there appears to be a lack of knowledge and education when it comes to regtech; one-fifth of insurance compliance professionals (20%) are completely unaware of its benefits, and a further 22% feel they don’t know enough about it.

“The reality is that many businesses are also grappling with the integration of new technologies into their existing systems.

“The financial commitment and resource required to update or replace legacy systems is significant and complex,” adds Deveney.

With small firms really struggling with the cost of technology, regtech adoption varies by size of firm and sector.

Sparkes says: “Insurance brokers, particularly small firms, typically use an off-the-shelf IT system and are very much reliant on their software provider to make the relevant compliance changes.

“Larger firms, on the other hand, are more likely to have their own bespoke systems, with bigger budgets and much more control.”

A mixed picture is therefore emerging in the industry. Some firms are making progress and adopting advanced technology and automated processes, while others risk being left behind.

Opportunities for firms ahead of the curve

While the industry may be hoping for a more stable regulatory environment in future, regulatory requirements are unlikely to reduce.

More technology-focused firms and those with newer business models may be at an advantage, but the industry should be proactive in looking to navigate the regulatory landscape more effectively.

“Given the ever-increasing regulatory footprint that we are all operating within, we need to be ahead of the curve, not reacting to it,” advises Clewes.

Compliance expert Allison believes embracing regtech is a big opportunity.

“Some of the regtech solutions that have emerged in the last few years have been quite transformative. They may not be cheap, but they are probably cheaper than employing someone internally to do the job properly.”

It’s clear firms have an opportunity to embrace technology and adopt modern compliance tools and analytics.

The benefits of doing so are numerous: improved operating efficiency; the elimination of decentralised, inefficient and unreliable processes; and being better equipped to manage future changes to regulatory requirements.

Ultimately, it is the customer who will benefit with better service. 

Read the full findings from the REG Technologies research on Insurance Hound 

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