The London Reform Group just released their review of 2009 and plans for 2010. The key theme of the letter to CEOs from Chairman Barnabus Hurst-Bannister, is that progress has been made on key reform matters, but that “We are now engaged in the sort of continuous improvement exercise that all markets must pursue or risk being left behind by their competitors.”
The thing about market reform is that it needs a great deal of quiet persuasion and work behind the scenes to move firms forward – so these things take time.
Solvency II, an EU statute, has a different effect. While reform tends to be non-mandatory, Solvency II will hit the industry hard with fines and worse, loading to capital if a firm fails to provide the relevant controls and cross-checks demanded. So every CEO, CFO and COO is going to have to make sure their organization is up to the job.
Make no mistake; Solvency II will get priority when it comes to demands on managers. But there are a number of requirements embedded in the legislation, especially in the Operational Risk area, which will not only hold good for the “solvency inspectors” but also provide impetus to the Market Reform program.
Let’s look where this overlap may occur. Essentially, insurance is the promise to pay the valid claim of an insured when covered by the policy documentation. The reputation of a firm can be tarnished when claims payment records are poor or slow. As noted by Hurst-Bannister, progress has been made by London in speeding up claims payments but there is still more to do in ensuring that the wordings that represent the promise to pay, are what all parties thought they were agreeing.
From an Operational Risk perspective, is the price of the risk that was agreed actually represented by the final policy document? Time and effort is spent by brokers and carriers to ensure the alignment of price with risk and then represent that in wording that will stand up to legal scrutiny. BUT whereas the Market has improved the way underlying risk data is transmitted electronically utilizing ACORD standards, the actual final documentation is invariably handled in word processing that leaves it open to mistakes, typos and other failings.
So what can be done to improve this potential operational risk? A major step forward is to introduce a smarter approach to documentation. What if you could combine the best of all worlds – take the data and the words and represent them in a re-usable and ordered manner? You can, using XML, better known as the underlying “language” of the ACORD message set.
Imagine being able to capture all the changes to clauses, coverages and data in a policy and be able to report on who changed what and when. Brokers can flag changes to market clauses, so compliance officers can look at exceptions rather than every risk. Underwriters could receive an ACORD message with all the structured data AND a message containing the tagged text from the slip enabling them to handle exceptions in a more granular way.
Even if a carrier was relying on word processing to reflect changes back to the Broker, document assembly systems could reconvert the Word document and highlight changes to continue the process back in a controlled fashion.
And when the inevitable claim comes in – a quick scan of the record would indicate any non- standard clauses and route the claim through a different track for handling, leaving the standard policies to go through fast track claims processing. Once documents are created in XML, this type of process improvement is easy.
So why not add a review of your documentation processes to this year’s plan and tackle both Market Reform issues and position yourself for the Operational Risk aspects of Solvency II?