201301 Nolan QNL: Compliance Driven Change

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Discussion of the impacts of increased regulation and the cost of compliance on insurance companies that already face expense management challenges. Is it worth it, how do insurers adjust? Strategies and impacts reviewed.

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201301 Nolan QNL: Compliance Driven Change

  1. 1. The Nolan NewsletterPeople, Process, and TechnologyFirst Quarter 2013 Volume 40, Number 1
  2. 2. Nolan is an operations and technology consulting rm specializing inthe insurance, healthcare, and banking industries. We help companiesredesign processes and apply technology to improve service, quality,productivity, and costs. Our consultants are senior industry experts,each with over 15 years of specialized experience. Visit our Website atwww.renolan.com to download articles, client success stories, andindustry studies.Through The Nolan Newsletter, we share with our readers:•Updatesonindustry,business,andtechnologytrends•Clientcasestudies•Informationonspeakingengagements,conferences,andwebseminars92 Hopmeadow StreetSimsbury, Connecticut 06089(860) 658-1941(860) 651-3465 fax17746 Preston RoadDallas, Texas 75252(972) 248-3727(972) 733-1427 faxToll-free (877) 736-6526www.renolan.comCOPYRIGHT © 2013 THE NOLAN COMPANY
  3. 3. The Nolan NewsletterPeople, Process, and TechnologyTable of ContentsRegulation, Risk, and Responsibility...............................................................2Todays Regulatory Changes: Are You Ready?................................................3Is Your Organization Ready for Healthcare Insurance Exchanges?.............4Hidden Costs of Compliance Offer New Challengesand a Mandate to Banks Large and Small.........................................................7Compliance Driven Change: An Opportunity for Optimization.................9Healthcare Change is atHistory Highs: How will Your Organization Adapt?..................................12Compliance Provides Opportunitiesfor Financial Organizations of $2-10 Billion.................................................14StephenConnorJoinsTheNolanCompany.....................................................16First, Fly the Airplane.........................................................................................17Sign Up Now for the Annual Bank Performance Study..............................18Nolan Events........................................................................................................19First Quarter 2013Vol. 40 No. 1
  4. 4. 9Steve CallahanPractice DirectorSteve_Callahan@renolan.comDeliveringshareholderreturnsintoday’slowinterestrateeconomy requires a great deal more than strong leadership,good products, focused marketing and continuousoperations improvements. Innovation has become aprevalent theme, as has transformation, with industry pundits proclaiming theneed for game-changing leaps forward. As proactive leaders struggle to findand implement these game-changers, new or revised regulatory and compliancechanges demand immediate attention and sometimes overpower the benefitsof improvements realized elsewhere. Consider the following list of pendingand“hot”compliancerelatedchangesthatwilldrivestructuralchange,capitalinvestments and costs over time:• Dodd-Frank(FIOoversightandbankafliations)• Suitability(amplied review of variable annuities)• SolvencyII(maybe2014)andIFRS(limitedprogress)• PrincipleBasedReserves(administrationandsystemsimpact)• AG38(newproductimpactonsecondaryguaranteesandlongtermdeath benets)• NFOandCashValuepricing(sustainedlowratesbelowpricingguarantees)• RMORSA(newoperationalriskmanagementframeworkandreportingby 2015)• FATCA(forcompaniesinvolvedwithforeignbasedparentcompaniesorsubsidiaries)The list represents only some of the changes heading towards the insuranceindustry, yet the impact of each could be dramatic. Financial reporting isaffected along with products, systems, distribution and operations. And if therollout process is consistent with the past, definitions will undergo revisions upuntil the last moment, leading to a rush to comply.Consider one of the decades more well-known, and controversial, regulations:Sarbanes-Oxley (SOX). When SOX was first being implemented, insuranceoperated at better interest rates and a larger margin than today. This left roomfor absorbing some of the inherent redundancies and additional layers of control
  5. 5. 10that had to be put in place to comply. Companies engaged in reviews, set upparallel units, put in additional check points, and then audited themselves toensure compliance. As the industry now attempts to address the aforementionedchanges in a much tighter economic environment, a look back at SOX providesan early warning of difficulties:• ResearchpublishedbyUniversityofRochester’sIvyXiyingZhangestimatesSOX’snetprivatecostat$1.4trillion.• AnFEIstudyindicatedthatcompaniescomplyingwithSOXendeduppaying on average $2.4 million more for audits.• Anumberofnon-AmericancompetitivecompaniesdelistedfromtheAmerican Stock Exchange due to SOX costs.• AccordingtoProtiviti,byyear4,mostcompaniesarespending$100kto $500k more per year in compliance costs.• Mostcompaniessignicantly reduced SOX-based process and entitylevel controls by 2011, showing wasted effort.• Approximately½ofallcompaniesimplementingSOXbelievedthatthecosts outweighed the benets.Most importantly, despite all the care and planning companies invested inimplementing SOX, hindsight reviews have disclosed a number of opportunitiesforprocess improvement, organizationaloptimization,andqualityenhancement.Unfortunately, the discovery of inefficiencies comes several years after theimplementation.The net result is that the inefficiencies created in implementing SOX nowrepresent opportunities to reduce costs by optimizing processes. The typicalapproach is usually fragmented by business or functional area with each doingtheir piece;• Draftingupfuturerequirements,• Reviewingwithateam(hereusuallymanagement),• Implementingchangesaspossibleand• Creating“toppriority”systemsticketsfortechnicalchanges.The above would occur separately in each business area with rarely anenterpriselevelholisticview.Wouldn’tthebetterapproachbetodesigntheoptimal process as part of the implementation? Especially given the tightmargins, limited capital and drive for profitability?That has proven to be the case for a number of our clients. In assistingwith fast-paced operational change driven by external factors like regulatory

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