By Robin James, Insurance Practice Lead at FusionExperience

Through their requirements and directives, financial regulators set a framework of good business practice which they see as the foundation for any sound business. As a result many are now expecting organisations to be able to understand exactly what it is they are demanding and for the organisation to be able to demonstrate that it is meeting these requirements.

However, this is not easy to do. The rule makers are using vaguer language and broad brush examples. Gone are the days when instructions were precise and easily followed.

There has increasingly been an assumption that firms should understand the nuances behind the regulator’s demands and implement policies and procedures that reflect the spirit of the regulation rather than just the letter of the law. Moreover, the same directives apply regardless of the type of business so carriers, intermediaries or retail focused organisations are all expected to comply with the same framework in the execution of their business.

Think compliance

It seems that the insurance sector in particular is set to fall under the regulatory microscope even though many would argue it did not experience the same degree of problems during the recent global financial downturn as its counterparts in banking.

For example The Financial Services Authority’s (FSA) unnecessarily complicated approach may result in insurance firms employing ‘interpreters’ to help them understand its complex language. A holistic approach to business is required to enable insurance companies to capture enough data so that they can produce the information that helps them to demonstrate that they are compliant with the regulator’s wishes.

All firms must expect the FSA to modify its interpretation of overarching regulation and what it sees as acceptable demonstration of compliance. Hence, systems needed to support the regulatory disclosure have to be agile, available and capable of being configured in hours and days, not months and years.

As an example, part of TC4 covers non-financial resources which include processes, systems and people. The regulatory body will expect organisations to be able to demonstrate that systems can be aligned to changing business requirements concurrently to their evolution.

By demonstrating that organisations have an agile systems architecture that can react quickly to change, they are likely to score well on the risk assessment which may be reflected positively when considering the alignment of risk with the business for the calculation of its Solvency II position.

The Answer is in the Cloud

By moving towards cloud based architecture, insurance firms will be able to take advantage of the cloud to deliver secure, safe, agile, sophisticated solutions that can be rapidly tweaked to meet changing business imperatives.

These can range from straight forward point solutions for things such as ‘skills and knowledge’ measurement right up to a full blown enterprise solution. These are based on robust solution sets and secure data repositories which reduce the risk factors reviewed by the regulator.

Moreover, by moving into the cloud, insurance companies make the regulation processes easier. Regulation is a growing presence in all aspects of business life and will become even more intrusive as ever more sophisticated Government imperatives are acted out through the FSA and the Bank of England. All organisations will be expected to respond to this regulator’s view of best practices.

This will require a much more dynamic type of organisation capable of evolving in time scales that seem impossible today. By using a cloud based approach to outsourcing IT, organisations will be taking a significant step forward to becoming ready for business in the 21st century.

Despite this the insurance industry, amongst others, has been instinctively reluctant to move into the cloud and also to win the benefits to be gained by business process outsourcing. Companies are wary of stepping into the unknown.

However the Cloud, far from being an ethereal unattainable dream, has many very real proven benefits. It is, for a start, considerably cheaper than running an in-house IT department and cheaper than traditional conventional outsourcing.

The cloud offers the opportunity to not only outsource infrastructure, but software and other services as well. This can be done in a cost effective, capital friendly manner and also reduce power usage for reporting as part of CRC Energy Efficiency — another looming Government intrusion.

The cloud is also standards based and thus allows for a more sophisticated model of usage. Insurance companies are able to isolate and select the most appropriate components rather than whole solutions, enabling companies to change components as and when change is needed. This will prove crucial to responding efficiently to either business imperatives or regulatory stimulus.

Insurance companies that have moved into the cloud have found that it gives back control to the owning organisation in ways that traditional outsourcing never has. This ensures that organisations are responsible for managing their business, an essential requirement of managing risk in a regulated environment.