When Regulation Knocks, Innovation AnswersNew insurance regulations offer opportunities for improvement January 2021
“Let’s walk down Sansom Street. I heard some restaurants have pretty cool outdoor seating options.” During a mild weekend in October, as my fiancee, Abbey, and I strolled down Sansom Street, home to many of Philadelphia’s busiest, most popular restaurants and bars, we didn’t hear the typical discordant car horn “melody” of Ubers, Lyfts and taxis. Rather than being relegated to the sidewalk as cars lay claim to the road, we entered a stretch of city blocks guarded by a “closed to traffic” sign and covered with tables, chairs and heat lamps. It looked less like a street in a city whose restaurants were hit hard by the COVID-19 pandemic and more like a bustling, quaint avenue in a city like Paris or Barcelona.
As we walked past occupied table after occupied table, Abbey and I both had the same thought: “Why haven’t they always done this?” The obvious response is, “Because they never had to … until now.” This summer, Philadelphia restaurants were barred from offering indoor eating options, and now they can offer indoor seating only at a reduced capacity.1 As such, they were forced to think outside the box and maximize outdoor dining options.
Just as restaurants in Philadelphia—and countless other industries throughout the country and the world—were forced to innovate due to new pandemic-driven rules, the insurance industry has adapted, is adapting and will continue to adapt to new rules in the form of new regulations. As a consultant, I’ve witnessed how different players in the industry react differently to these rules. For instance, I recently helped our clients prepare for Long Duration Targeted Improvements (LDTI), a set of focused changes to improve, simplify and enhance aspects of accounting for long-duration contracts generally issued by life and annuity companies.2 This change in U.S. generally accepted accounting principles (GAAP) reporting is proving to be one of the most disruptive rules to hit our industry in the past 40 years.
Much like the restaurants on Sansom Street, many industry players are reacting to these new rules in different ways, from treating them as an inconvenience that further complicates processes, to a catalyst for innovation and improvement:
- Some consulting firms see the new standard as an all-encompassing change with product, investor, systems and data implications while others place emphasis on the accounting and modeling impacts.
- Some actuarial vendors consider LDTI an impetus for creating end-to-end actuarial process solutions while others focus more on supporting calculations themselves.
- Some companies treat complying with LDTI as the perfect excuse to modernize their end-to-end process—from pursuing administration system consolidations and transformations to model conversions and new reporting and visualizations solutions—while others elect to maintain archaic, “black-box” solutions that require extensive manual intervention and introduce high levels of risk.
For the restaurants on Sansom Street, a pandemic that introduces disruptive rules comes around once every 100 years. But for the insurance industry, regulation is constant, and so is the expectation that regulation will continue to evolve. The decision to treat regulation as an inconvenience is a tempting one, and sometimes it might feel like the only possible response. Companies don’t (and can’t!) comply with new regulation overnight. A new regulatory development can impact an insurer in a variety of ways, from claims processing and pricing to valuation and financial reporting, and across its investments and asset portfolio. Despite the inconveniences, however, we need regulation, as the policyholders our industry ultimately serves and protects rely on it to maintain their confidence and trust in the products they purchase. Given this reality, I encourage you to read through this collection of articles not to further understand a supposed hindrance, but rather to reorient your perspective on this impetus for improvement.
These articles serve as useful tools in deriving opportunity from regulation. To adapt to new regulation, we, as actuaries, first need to grasp how regulation comes about and how we, as industry experts, might appropriately influence this regulation.
- In Regulatory Conversations, members of the National Association of Insurance Commissioners (NAIC), Federal Reserve and Financial Accounting Standards Board (FASB) provide their perspectives on the current state of insurance and regulation and how actuaries can influence it going forward.
- In Ummm, Errr, What Is UMR? and Preparing for the Cessation of LIBOR, Silver Zhou, FSA, and Cynthia Meyn add clarity to the topics of uncleared margin rules and the exit of LIBOR, and they explain the topics’ relevance to our actuarial practice.
- In Actuaries and Regulators: Successful Collaborators, John Lloyd, FSA, and Dave Tuomala, FSA, FCA, MAAA, remind us that to move forward, we must learn from the past. They explore past successes and failures of health insurance regulation.
- Moving forward, Ailen Okharedia, FSA, MAAA, provides his thoughts and suggestions on how to innovate in our regulated environment in Achieving Innovation in a Regulated Industry.
- Ying Zhao, FSA, MAAA, and Rebecca Wang, MBA, take a deep dive into project management in The Science of Project Management, and Katie K. Smith, FSA, MAAA, CERA, and Christopher Halloran, ASA, explore model governance in their article, Assumption Governance. These are two areas that are critical in large-scale projects driven by or related to regulation.
My co-contributing editor, Kelly Hennigan, FSA, CFA, and I hope you enjoy this regulatory-themed collection of articles. We hope this content helps you better understand the regulation that impacts our industry today, the roles we play as actuaries and the opportunities it introduces.
So, while this is a virtual magazine rather than a favorite meal or beverage, as they say on Sansom Street, “Bon appétit!”
Copyright © 2021 by the Society of Actuaries, Schaumburg, Illinois.