• Cognizant 20-20 InsightsRetail Distribution Review:Preparing Insurance IT for Compliance and StrategicChanges to the Dis...
Attitude of Customers    How would you prefer to pay when seeking professional advice for    investment products?         ...
Advice Channels Post-RDR Models                         Independent Advice                               Restricted Advice...
direct sales and servicing, particularly as the                         Transparent disclosure of fees and charges        ...
CIOs will need to get the delicate balancing act                                                           increasingly mo...
Cognizant’s RDR Readiness Framework                                                                                       ...
About the AuthorsMohan Babu is a Senior Insurance Analyst who heads Cognizant’s Life & Annuity Consulting unit withinthe I...
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Retail Distribution Review: Preparing Insurance IT for Compliance and Strategic Changes to the Distribution Landscape


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The Retail Distribution Review offers a significant compliance challenge for UK insurers and advisors. CIOs must prepare by ensuring they have the right enabling technologies to support changing distribution strategies.

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Retail Distribution Review: Preparing Insurance IT for Compliance and Strategic Changes to the Distribution Landscape

  1. 1. • Cognizant 20-20 InsightsRetail Distribution Review:Preparing Insurance IT for Compliance and StrategicChanges to the Distribution Landscape Executive Summary Our RDR Readiness Analysis offering can help insurers assess their preparedness for RDR The Retail Distribution Review (RDR) offers a compliance, as well as their maturity in the key significant compliance challenge for UK insurers technology areas critical for success in the and advisors. While the regulatory changes will, post-RDR era. on balance, be good for the industry, the new regulatory environment has the potential to sig- Background to the Retail nificantly alter the distribution landscape, an Distribution Review eventuality for which all insurers must aggressive- ly plan. For instance, the RDR’s regulatory impact In the UK life, pensions and investments sector, will likely drive growth in direct and bancassur- the vast majority of products are sold through ance channels, but it will also require insurers to intermediaries; hence, insurers tend to compete create a platform-like experience for advisors via for intermediaries rather than customers. As a existing extranets. result, the recommendations provided to custom- ers by some intermediaries may be open to the CIOs must prepare by ensuring they have the right enabling technologies to support changing distribution strategies. The mature use of The lack of awareness even among key technology enablers will distinguish sophisticated investors about how successful providers from the pack, as the much they currently pay for advice industry transitions to the post-RDR world. These technologies include: rich user interfaces and — as well as a lack of understanding portal frameworks, decision support, customer of the different parties involved and relationship management (CRM), master data their roles — has led to declining trust management (MDM), analytics and flexible inte- gration built on multi-channel integration archi- by customers in the current financial tectures. Modern contract platforms will be advice regime and an increase in needed to support speed to market with simpler complaints to the FSA. products. Agile delivery and testing methods across the business and IT will also become influence of commission considerations. Further- increasingly necessary post-RDR, as — more than more, the lack of awareness even among sophis- ever — insurers will need to react to changes in ticated investors about how much they currently the marketplace and continuously update their pay for advice — as well as a lack of understand- products and distribution interfaces accordingly. ing of the different parties involved and their cognizant 20-20 insights | june 2011
  2. 2. Attitude of Customers How would you prefer to pay when seeking professional advice for investment products? 14% � Company I invest with pays advisor commission 6% 31% � I would prefer to pay a separate flat fee directly to advisor � I would prefer to pay an hourly fee directly to advisor 19% � Other 30% � Not sure Base: 914Source: Harris Poll Omnibus, August 2010Figure 1roles — has led to declining trust by customers involved in producing or distributing retailin the current financial advice regime and an investment products and services, including banks,increase in complaints to the Financial Services building societies, insurers, wealth managers andAuthority (FSA). financial advisors. The FSA believes its proposals will provide greater clarity to firms, consumersNearly one-third of customers are not sure how and supervisors about what it means to offer inde-they would like to pay for professional advice, and pendent advice. Moreover, RDR will help ensurevery few have definite opinions on their preferred that the FSA’s rules are better equipped to keepmethod of payment. pace with developments in the retail investment product market.The need for increased transparency aroundfees, as well as a desire to ensure that advice is RDR is based on three main tenets:perceived as free from considerations regardingcommission, has led the FSA to conduct the Retail • Improve the clarity with which firms describeDistribution Review. their services.What is the Retail Distribution Review? • Address the potential for advisor remunera- tion to distort consumer outcomes.The FSA is seeking to build upon its TreatingCustomers Fairly initiative to restore trust. The • Increase the professional standards ofRDR will make regulatory changes to address the advisors.lack of consumer confidence related to perceived The FSA is looking to segregate retail distribu-factors, such as: tion into various advice channels according to the• Providers offering significant commissions to extent of analysis carried out by the advisor and secure sales from advisors. the number of needs for which it provides advice. Figure 2 describes the four main types of advice• Advisor firms preferring to recommend channels recommended by FSA. products that pay better commissions.• Product providers determining the charges for RDR’s Financial Implications investment advice, without customers having a clear understanding of the charge process The regulations specified in RDR are expected and amounts. to incur significant financial overlay on all stake- holders. The one-off compliance cost with RDR isComing into effect at the end of 2012, RDR will projected to total about £430m, with a furtherimpact all regulated financial organizations £40m annual bill for the industry moving forward. cognizant 20-20 insights 2
  3. 3. Advice Channels Post-RDR Models Independent Advice Restricted Advice • Products from the entire market • Simplified advice process (guided sales) • Charging structure to be established • Limited number of products • Higher professional standards • Higher professional standards to be obtained to be obtained Execution Only Basic Advice • The customer chooses the • Limited to basic financial needs product without any advice • Nominal fees to be charged • Processing fee to be charged • Higher professional standards • Higher professional standards not required not requiredFigure 2Figure 3 shows the breakdown of the most signifi- their business works. Customers, too, will have tocant costs. change their approach toward the evaluation and purchase of insurance products.Even though the costs associated with RDR aresignificant, the rules should be positive for the Smaller firms may have to wind down due tooverall industry in the long run. Advisors will be increased capital requirements related to trainingbetter qualified, and customers will develop more and certifications. A significant proportion ofconfidence in them, as well as providers. However, older advisors is expected to retire rather thansmall providers and IFA firms will find it difficult to undertake the training and examinations requiredmeet these costs. The capital adequacy ratio for to attain the new minimum qualifications. RDR isthe industry is also increasing, which could lead also expected to trigger large-scale consolidationto mergers and the closure of smaller IFA firms. of independent financial services (IFS) firms, as well as forward integration of providers and inde-RDR Market Implications pendent financial advisor (IFA) firms.The policies outlined in the RDR are expected torevamp the UK insurance distribution landscape. We expect IFAs to maintain a dominant position,All market players will have to change the way although there will undoubtedly be growth inOne-Time vs. Ongoing Costs One-Time Costs Ongoing Costs The cost for The ongoing ensuring clarity costs per advisor The ongoing The IT/systems of services per for independence costs per advisor cost per advisor internal advisor is and additional search for IT/systems is is £523 £168, and the external costs is expected expected to be £500 cost is £1,000 to be £303 The ongoing costs The ongoing costs per per advisor for advisor for process, remuneration and disclosure and The average cost of explaining charging explanation of status professional qualifications basis is expected is expected to be per advisor is £2,100 to be £303 £448 The one-time cost to firms of complying with The annual ongoing incremental cost of RDR will total about £430m. compliance is expected to be about £40m.Figure 3 cognizant 20-20 insights 3
  4. 4. direct sales and servicing, particularly as the Transparent disclosure of fees and charges cost of advice becomes more transparent. As will lead to improved customer perception and the commission lever disappears, insurers will confidence. Higher professional standards can increasingly need to differentiate themselves with only be a good thing, while the removal of pro- their advisor base through their servicing propo- vider-controlled commission should also help sition. In particular, advisor extranets will need to reinforce customer trust. It remains important for provide the diminished number of advisors with a independent advisors to review the marketplace platform-like experience across all their products in which they provide guidance in order to deliver (not just Wrap), with online tooling and self- genuinely independent advice. It will be possible service to support ease to provide independent advice even if a firm Advisor extranets of doing business. The specializes in a narrow and distinct field, such as direct channel will need retirement planning. will need to provide to support customers the diminished with help and guidance, IT: A Key Enabler Beyond number of advisors simplified advice capa- RDR Compliance bilities and targeted CIOs will need to ensure their IT platform(s) across with a platform-like cross-sell/up-sell, as well distribution channels are not only capable of the experience across all as self-service. changes required for basic compliance but are their products (not Bancassurers are expected also sufficient for the potentially larger impact of the post-RDR landscape. From the discussion just Wrap), with online to be the biggest gainers above, it should be clear that insurers need theirtooling and self-service in the new regulatory envi- IT platforms to be ready to meet the key expected ronment. Sales through the to support ease of bancassurance channel are changes in the market: doing business. expected to increase, as • B2C: Growth in direct sales and servicing, help these players are best posi- and guidance in cross-sell, up-sell. tioned to offer all kinds of advice in the new regime. They are expected to especially make inroads into • B2B: Differentiation through self-service and platform experience. the guided sales and execution-only revenue cat- egories. Moreover, these firms possess the main • Ease of integration with third parties, ingredients that are required to succeed in the post especially bancassurance. RDR world — a huge supply of capital and the scale • Architecture and processes aligned to Agile to operate all types of advice processes. delivery. Changes in Distribution Post-RDR Direct becomes Many advisors may exit the market. Advisor more important Growth of bancassurance opportunities servicing becomes a stronger differentiator. Customers Integrated Partners All Other Advisors, (direct) (eg, bancassurance) Including IFAs Advisor Platforms and Productivity Aggregator Advisor Back Office Portals Platforms Direct Partner Messaging Advisor Direct Sales Extranet Extranet Servicing Product Providers Help and guidance, simplified advice, Platform-like experience for advisors and partners; segmentation/targeting high degree of back-office integration Figure 4 cognizant 20-20 insights 4
  5. 5. CIOs will need to get the delicate balancing act increasingly mobile flavor. For customers, thisright for all channels, using as much common needs to be intuitive and include sufficient helpIT capability across them as possible (to control and guidance. For advisors, this needs to becosts and promote re-use), while preparing for task-oriented, with tools and services helpingthe differing pace of change across channels and them perform their jobs more effectively.the need to be agile and responsive to developingbusiness strategies. Providers that align their • Decision-support technology and analytics will be crucial for simplified advice models andbusiness and channels to RDR proactively and personalized marketing.swiftly will be able to steal a march over theircompetition. This could turn RDR into an oppor- • Modern contract platforms will come into their own that are more tuned to simplifiedtunity to build brand and increase market share. products, with configuration rather thanThe high-level reference architecture in Figure 5 coding to provide speed to market.highlights the key technologies for successful dis- Cognizant’s RDR Consulting Offering:tribution strategies post-RDR. RDR Readiness AnalysisThe flexible use of key technology enablers Our RDR Assessment Framework provides a com-(post-RDR) will distinguish successful providers prehensive assessment of the RDR readiness offrom unsuccessful ones. These include: life insurers. The framework performs an analysis from two perspectives: operational and strategic.• An understanding of the customer and great customer service, achieved through MDM The operational analysis measures RDR and CRM technology, together with business compliance, while the strategic analysis helps the process management. provider derive competitive advantage from:• A great user experience with self-service • An assessment of the organization’s maturity capability on both advisor and direct channels. in key technologies that will be used in the This will be primarily Web-based but with an post-RDR world.Key Technologies for Distribution Post-RDR Advisor: Task-oriented, platform- Customer, Advisor and Internal Access Increasing self-service will require like UI. Supports advisors’ work Telephony robust identity and access Advisor Direct Contact Aggregator Advisor with rich tooling, tracking and Consumer Center Partners Portals Back-Office management coupled with maximizing self-service. Paper-in anti-fraud measures. Direct consumer: Customer- User Interaction centric Web and mobile interaction BPM enables increasing operational built on strong self-service security. efficiency while at the same time Web and mobile presentation Identity and Simplified advice, guidance, B2B Messaging being ready to manage the (B2B, B2C, B2B2C, Internal) Access Management maximum on-line self-service for unknowns in the changing sales new business and servicing. and servicing demands of post-RDR Transformational Technologies products and distribution channels. Rules-based decision support: Business Process Management Key enabler for post-RDR, simplified advice and next best Build-once/deploy-many: Business action (sell, cross-sell, up-sell). Decision Management Multi-Channel Service-Based Integration services / processes reusable across channels for maximum value. Analytics and BI Services MDM and CRM Drives decision management, business strategy and Single view of customer, and great value-added data services to relationship management crucial to providing the post-RDR customer advisors. Core Back-Office Systems and Data experience for both direct and Underwriting Quotes Engine Payments and Agency Third-Party advisor channels. Develop simplified products to Commission Management Data Services appeal to direct channel. Sales LOB Contract Platform(s) and Online self-service access to Data Warehouses Document Production process can be more readily Peripheral Systems historic policy documents, automated end-to-end. and Archive statements, etc. Pensions Protection Finance Strategy for legacy platforms: Financial Accounting Investments Annuities Marketing and Actuarial Systems Combining speed-to-market for Either migrate or modernize to post-RDR deployments with enable self-service, process rigorous governance requirements. automation and faster speed to Governance and Agility market for new products. Seek to combine with product Available, high-performance configurators. Technical Services: Monitoring, alerting, security, audit and responsive e-business back-end.Figure 5 cognizant 20-20 insights 5
  6. 6. Cognizant’s RDR Readiness Framework RDR Analysis RDR Compliance RDR Strategic Analysis Analysis Charging Advisor Products Business Business Drivers IT Maturity Structures Compliance Test Compliance Test Options Pair Wise Analysis Matrix Evaluation Pair Wise Matrix of Enabling Evaluation Technologies Payment Tariffs Product Client Factoring Separation Advisor Advisor Minimum Advisor Product Commission Option and Fees Neutrality Instructions Removal of Product Charging Disclosure Qualifications Ethics Change Advised Sales Flexibility Content Test Validation Test and Advice Applicability Test Test Test Management Linkages Disclosure Charges TestFigure 6• A quick and efficient implementation of the changes, such as increased direct proposi- regulation. tions, online self-service and agile delivery.• More streamlined business and IT processes. • A roadmap for IT landscape post-RDR compliance.This analysis is carried out through a series oftests to the business processes, policies, organiza- Moving Forwardtional structures and IT systems. The end result: RDR is expected to significantly alter the distri-Generation of an RDR compliance implementation bution landscape of the UK insurance industry.dashboard with a detailed roadmap to ensure RDR This includes the way distributors are trained,compliance, as well as a future business map and give advice, provide services and are paid, as wella strategic options dashboard to provide market as the relationships they have with the suppliersadvantage from an RDR perspective. of financial products. Customer behaviors areBenefits to the insurer include: likely to change, and the service proposition that insurers offer advisors will need to be stronger.• External guidance in the still-evolving RDR compliance landscape. To take advantage of these changes, insurers and distributors require an IT platform across distri-• Metrics-driven assessment within budgetary bution channels that is capable of supporting and other organizational constraints. self-service, simplified advice and products, as• Enterprise-wide clarity with better insight into well as responding rapidly to changing market the probabilistic impact of RDR regulation. requirements.• An IT readiness assessment for post-RDRReferencehttp://www.fsa.gov.uk/pages/About/What/rdr/index.shtmlHarris Poll Omnibus cognizant 20-20 insights 6
  7. 7. About the AuthorsMohan Babu is a Senior Insurance Analyst who heads Cognizant’s Life & Annuity Consulting unit withinthe Insurance Practice. He has over 16 years of experience in insurance, IT and consulting and has ledseveral consulting engagements for leading insurers globally, in the areas of legacy modernization, policyadministration, systems migration strategy, portal and Web strategy, operational efficiency improve-ments, business process outsourcing assessment and data standards. He currently leads a team ofbusiness analysts and consultants drawn from top tier business schools across India and abroad focusedon developing domain-related assets, consulting offerings, solution accelerators, business support forglobal IT engagements, as well as competency development and pre-sales strategy and support. He hasan MBA and is a Fellow of the Life Management Institute of LOMA, where he earned associate’s degreesin reinsurance administration and annuity products administration. He can be reached at Mohan.Vinay@cognizant.com.Carl Tutill is a Principal Architect within Cognizant’s UK Insurance Practice. He is a seasoned seniorarchitect, leading transformational change programs within complex IT landscapes, particularly ine-business. His key expertise is in multi-channel e-business architectures, integration, SOA, BPM, MDMand identity and access management. He has worked for and with leading life insurers and has experiencein the banking and engineering domains. Carl’s background includes four years as a Senior EnterpriseArchitect at Aviva UK, where he held numerous consultancy and systems integrator roles. He can bereached at Carl.Tutill@cognizant.com.Taruna Mudiganti is a consultant with over seven years of experience in insurance and IT industries.At Cognizant, Taruna specializes in life, pensions and investments in the UK market. She has extensiveexperience leading consulting assignments focusing on all processes in the life insurance value chain.She has also worked on developing solutions, frameworks and research papers encompassing theinsurance domain, FSA regulations, insurance market trends and players in the UK. She is certifiedby the Chartered Insurance Institute, UK, as well as the Life Management Institute of LOMA. Tarunaalso worked in sales and operations at SBI Life Insurance, the largest bancassurer in India. She can bereached at taruna.m@cognizant.com.About CognizantCognizant (NASDAQ: CTSH) is a leading provider of information technology, consulting, and business process out-sourcing services, dedicated to helping the world’s leading companies build stronger businesses. Headquartered inTeaneck, New Jersey (U.S.), Cognizant combines a passion for client satisfaction, technology innovation, deep industryand business process expertise, and a global, collaborative workforce that embodies the future of work. With over 50delivery centers worldwide and approximately 111,000 employees as of March 31, 2011, Cognizant is a member of theNASDAQ-100, the S&P 500, the Forbes Global 2000, and the Fortune 1000 and is ranked among the top performingand fastest growing companies in the world. Visit us online at www.cognizant.com or follow us on Twitter: Cognizant. World Headquarters European Headquarters India Operations Headquarters 500 Frank W. Burr Blvd. Haymarket House #5/535, Old Mahabalipuram Road Teaneck, NJ 07666 USA 28-29 Haymarket Okkiyam Pettai, Thoraipakkam Phone: +1 201 801 0233 London SW1Y 4SP UK Chennai, 600 096 India Fax: +1 201 801 0243 Phone: +44 (0) 20 7321 4888 Phone: +91 (0) 44 4209 6000 Toll Free: +1 888 937 3277 Fax: +44 (0) 20 7321 4890 Fax: +91 (0) 44 4209 6060 Email: inquiry@cognizant.com Email: infouk@cognizant.com Email: inquiryindia@cognizant.com© Copyright 2011, Cognizant. All rights reserved. No part of this document may be reproduced, stored in a retrieval system, transmitted in any form or by anymeans, electronic, mechanical, photocopying, recording, or otherwise, without the express written permission from Cognizant. The information contained herein issubject to change without notice. All other trademarks mentioned herein are the property of their respective owners.