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Report: NAIC Meeting's Emphasis on Solvency Will Drive Insurance IT Spend

The NAIC's Solvency Modernization Initiative will drive regulation that supports global regulatory transparency and necessitate risk management and reporting technology modernization, according to Deloitte.

The topic of solvency modernization within a global context dominated the National Association of Insurance Commissioners (NAIC) annual spring meeting, held this year in Denver, March 25 " 28, according to Deloitte's (New York) NAIC Update Spring 2010 report. The regulators' emphasis on its ongoing Solvency Modernization Initiative (SMI) has profound implications for insurance technology budgets, according to Deloitte.

In addition to the NAIC's SMI, the Deloitte report covered the Commissioners' resolution to "iron out" details of healthcare reform; their pursuit of an "international agenda" that emphasized an increasingly global insurance market and its challenges; a discussion to "shore up" annuities suitability questions, with an emphasis on consumer protection; and the Association's "abrupt turnabout" on climate risk disclosure, whereby a vote was taken ahead of the original timetable, resulting in the weakening of the measure.

Solvency, and SMI specifically, was the overarching issue of the conference, according to Howard Mills, director and chief advisor of Deloitte's Insurance Industry Group. "The solvency question represents the U.S. regulatory community trying to align itself with the rest of the world, not necessarily to adopt [European solvency regulation] Solvency II, but to get the U.S. to a point that the rest of the world finds an acceptable basis for supporting global commerce," he comments.

The NAIC's focus on solvency at the meeting represents an emphasis on the topic related to ongoing industry and regulatory interest in international accounting standards and the emergence of the Solvency II standard, a process which Mills acknowledges has been accelerated by the financial crisis.

"The key is that regulators in one jurisdiction need to be able to communicate with their counterparts in other jurisdictions about what constitute adequate reserves," Mills explains. "What we learned from the financial crisis is that subsidiaries and operations of companies in other jurisdictions can, in a 'perfect storm' scenario bring a company down. Furthermore, if you have a large enough company you have systemic risk."

The technology implications of NAIC's emphasis on solvency include the likelihood of sharing insights into the management of data held by regulators. NAIC officials have reported that European regulators feel that they are behind U.S. standards in this respect and admire the databases that the NAIC maintains, according to Mills.

In terms of the impact of the NAIC's SMI on carrier IT spending, Mills asserts that most insurers lag in their ability to support coming regulatory reporting requirements for solvency purposes. "We have been advising clients, whether they are looking to comply with Solvency II or modernization from a U.S.-based perspective, that they underestimate the lead time need to implement many of the mechanical changes that will be required," he says. "Much of that comes down to legacy issues and IT infrastructure modernization — they need a common platform where all systems communicate." The NAIC's solvency interest parallels that of raters who are increasingly seeking more comprehensive enterprise risk management reporting capabilities, according to Mills. "There is pressure from regulators, raters and the investor community," he reports. "It's no longer a request to see an ERM flow chart; now they want to see performance, including history of losses and other problems, and evidence that risk management is fully embedded in company culture, from top to bottom, without silos, throughout the organization. IT has a major role to play in meeting these expectations."

The NAIC meeting's discussion on annuity suitability was in tune with public concern about consumer protection, Mills says. To the extent that the topic had a place of pride on the agenda, it was a nod to ongoing debate in Congress over financial reform, he adds. "A consumer protection agency is something that will almost certainly be in the financial reform regulation," Mills comments. Senate Baking Committee Chairman Christopher Dodd has emphasized that the debate is still very "liquid" with regard to the final shape of final reform, Mills asserts. However, he adds, "One thing Dodd is not flexible on is the consumer protection agency."

Anthony O'Donnell has covered technology in the insurance industry since 2000, when he joined the editorial staff of Insurance & Technology. As an editor and reporter for I&T and the InformationWeek Financial Services of TechWeb he has written on all areas of information ... View Full Bio

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