A New Principle-Based World
July 18, 2012| Von Jeremy Starr | L/H General Industry | English
In “A Man for All Seasons” Sir Thomas More stated, "When a man takes an oath, he’s holding his own self in his hands. Like water." He cups his hands. "And if he opens his fingers then - he needn’t hope to find himself again…”
Principles are very much on the mind of worldwide insurance regulators and accounting standard setters. In our case, however, it is the opposite situation from Sir Thomas More. We will finally be closing our fingers so that we may catch new opportunities for growth in the new principle-based world. This new world will be affecting standards for U.S. Statutory, U.S. GAAP, ERM and most likely solvency requirements.
What should insurers be doing now to prepare for this new world? I believe that there are several steps that can be taken even before the standards are finalized. All of the upcoming changes involve developing a robust method of modeling not only assets and liabilities, but also other risks (e.g., more efficient administration system….). In addition, it will require creating a new risk culture. One way to hit the ground running when the new standards take effect is to model how current products look under both current and new accounting systems. Becoming familiar with how existing products will be accounted for under the new system can form a basis for understanding the differences between the current and the proposed standards. It will also shed light on specific requirements that will have to be considered as new products are developed. In addition, this modeling will highlight where the existing accounting and reporting systems will need to be changed in order to meet the new standards.
Next, what opportunities does this new regulatory world provide? New reserve requirements may make new types of policies or policies with enhanced benefits, such as Critical Illness, possible. Making necessary software changes will allow for the building of more sophisticated systems with improved data mining and predictive analytic capabilities. Another part of this new world will be the elevated visibility of the risk management process. The Own Risk and Solvency Assessment (ORSA), that will be a requirement under the new systems, will delve into how a company is managing its risks and demonstrates the adequacy of its capital to meet those risks. Standard & Poor’s has long had its own version of ORSA as part of its rating process. Recently, S&P has permitted companies that have credible ERM processes in place to hold less capital. The ERM process will have to be integrated with how the company is managed and comprehensive enough to encompass a wide variety of potential risks. Developing an effective ERM process will be well worth the challenge. It will allow management to have insight into how the company functions under different scenarios and thus allow it to retain only the level of risk that it feels is prudent.
Let’s keep our eye on this new world of evolving principle-based rules and the opportunities and challenges they will present as we go forward, changing our business model to comply with the regulations.