Regulation Driving Big Tech Changes at Insurance Companies: Studies

The transformative effect of latest-generation technologies is shaking up the insurance industry on several levels. But there is one force that's strong enough to shape technology itself: regulation.

That's according to the findings of two surveys released today from Towers Watson and State Street, which independently found that the pressures of regulation are dominating the near-term strategy for insurers, including within the technology organization.

Both surveys -- Towers Watson's 2013 Insurance Megatrends Survey of 533 insurance executives, and State Street's 307-respondent Vision paper -- found that capital management is top of mind for most insurers. Sixty-six percent of Towers Watson respondents said "Capital management challenges resulting from sustained low interest rates and volatile investment environment" would "have the most significant impact on your business in the next two years," while "proactively managing capital to improve return on investment" was the third-most common "top strategic priority" for global insurers.

But regulatory challenges came in a close second -- 61% -- on Towers Watson's "significant impact" scale, and a third of the State Street respondents said regulation presented "a major challenge" to their organization. State Street SVP and managing director Tom Forrester says that the search for better compliance solutions is actually driving many insurers' technology efforts.

"Solvency II, for example, has a pretty heavy requirement around exposure and transparency. Insurers must be more transparent and disclose much more information than they have in the past," he says. "Those companies are going to need technology to provide effective governance and risk management."

[4 insurance industry issues identified by the Federal Insurance Office]

But Towers Watson senior consultant Stephen Lowe says that the focus on regulation and capital management can distract some smaller insurers from the bigger picture of the disruptive role technology has on the insurance industry. That leaves the door open for bigger companies to innovate and grab market share

"In the long term, you have to shift your focus from the day-to-day things that are immediate to broader trends that can have long-term impacts on your business, and we do think that in the longer term these tech trends are going to, quite frankly, be game changers," Lowe says.

The end result could be consolidation, Lowe posits. Smaller insurers that aren't able to keep up with innovations in big data, analytics, telematics and social media that large insurers take on might have little choice but to sell themselves.

"There may very well still be room for medium-size companies that are specialists in particular products like D&O. But for the mainstream insurance -- life, home, auto, worker's comp -- I think the larger companies will develop a competitive advantage through technology, data and analytics that will make it really difficult for smaller companies to compete effectively," he explains. "It's hard to keep up with the big boys in a technology arms race. The bigger companies have more data and they have the ability to access that data."

Consolidation isn't the only existential solution to compliance and market pressures. State Street's research finds that more companies are considering or have already divested themselves of certain business lines -- especially on the life insurance side. Inadequate technology to meet the changing market realities was cited as a reason.

"Many firms have decide to divest the annuity business because they couldn't make it work in today's interest rate climate," said State Street EVP Scott FitzGerald. "Because of the legacy platforms these companies have in place, they're not fully integrated, so 58% of the respondents felt that they would consider transforming their middle and or back office operations around the back office."

Nathan Golia is senior editor of Insurance & Technology. He joined the publication in 2010 as associate editor and covers all aspects of the nexus between insurance and information technology, including mobility, distribution, core systems, customer interaction, and risk ... View Full Bio