The Importance of Regulatory Compliance in Strategy for Insurers
Regulatory compliance is a difficult process for insurance companies to manage. The regulatory framework for insurance companies in the United States is primarily state-based, with federal components intersecting, based on specific product niches that insurance companies underwrite. The National Association of Insurance Commissioners (NAIC) is the primary body, comprised of the chief insurance commissioners from the fifty states, that recommends and promotes insurance regulation and best practices. The mandate for regulation, no matter what the industry, is to protect the customer, and consideration for the business itself is often secondary. As such, the primary considerations for insurance regulation are to:
- Regulate the insurance industry through specific licensing and compliance requirements;
- Ensure that policies and procedures are standardized so that consumers are protected and well informed;
- Examine market conduct of the company, and ensure that customers are not misinformed or mislead; and
- Monitor the solvency of the insurer
Such a regulatory framework is complex by its very nature; even a small insurance company might have to comply with multiple state regulations. Companies face an uphill task in ensuring regulatory compliance. Therefore, regulatory compliance becomes a critical consideration in strategic planning, and a key consideration in all facets of operations and with their stakeholders. Insurers of all sizes find themselves dealing with regulatory compliance violations. Examples are where certain life insurers were considered not to have used the appropriate search criteria in identifying insurance policy holders whose beneficiaries were owed life insurance proceeds, or where insurers did not use the proper policy language or underwriting rates.
The costs of such violations are considerable. They can impact an insurer’s reputation and its ability to underwrite, and often entail costly fines and additional monitoring from the state regulator and independent auditors. Therefore, regulatory risk mitigation should always be a consideration in corporate strategy.
Addressing regulatory compliance starts with establishing key monitoring procedures and a framework for changing regulation. An insurer needs to actively monitor the regulatory requirements on a daily basis to immediately address any changes in the framework; often, insurers do not pursue such a strategy, and can find their forms and filings to be in violation of the current compliance statutes. Smaller and mid-size insurers should consider outsourcing such a function. There needs an established process with ownership within the company regarding reading and digesting the information and disseminating the information to the rest of the firm. The insurer also needs to implement internal controls to confirm compliance with the regulations and changes in regulation. We will explore this controls framework in detail, in the next blog.