Delivering shareholder returns in today’s low interest rate economy requires a great deal more than strong leadership, good products, focused marketing and continuous operations improvements.  Innovation has become a prevalent theme, as has transformation, with industry pundits proclaiming the need for game-changing leaps forward.  As proactive leaders struggle to find and implement these game-changers, new or revised regulatory and compliance changes demand immediate attention and sometimes overpower the benefits of improvements realized elsewhere.  Consider the following list of pending and “hot” compliance related changes that will drive structural change, capital investments and costs over time:

  • Dodd-Frank (FIO oversight and bank affiliations)
  • Suitability (amplified review of variable annuities)
  • Solvency II (maybe 2014) and IFRS (limited progress)
  • Principle Based Reserves (administration and systems impact)
  • AG38 (new product impact on secondary guarantees and long term death benefits)
  • NFO and Cash Value pricing (sustained low rates below pricing guarantees)
  • RMORSA (new operational risk management framework and reporting by 2015)
  • FATCA (for companies involved with foreign based parent companies or subsidiaries)

The list represents only some of the changes heading towards the insurance industry, yet the impact of each could be dramatic.  Financial reporting is affected along with products, systems, distribution and operations.  And if the rollout process is consistent with the past, definitions will undergo revisions up until the last moment, leading to a rush to comply.

Consider one of the decades more well-known, and controversial, regulations: Sarbanes-Oxley (SOX). When SOX was first being implemented, insurance operated at better interest rates and a larger margin than today. This left room for absorbing some of the inherent redundancies and additional layers of control that had to be put in place to comply.  Companies engaged in reviews, set up parallel units, put in additional check points, and then audited themselves to ensure compliance.  As the industry now attempts to address the aforementioned changes in a much tighter economic environment, a look back at SOX provides an early warning of difficulties:

  • Research published by University of Rochester’s Ivy Xiying Zhang estimates SOX’s net private cost at $1.4 trillion.
  • An FEI study indicated that companies complying with SOX ended up paying on average $2.4 million more for audits.
  • A number of non-American competitive companies delisted from the American Stock Exchange due to SOX costs.
  • According to Protiviti, by year 4, most companies are spending $100k to $500k more per year in compliance costs.
  • Most companies significantly reduced SOX-based process and entity level controls by 2011, showing wasted effort.
  • Approximately ½ of all companies implementing SOX believed that the costs outweighed the benefits.

Most importantly, despite all the care and planning companies invested in implementing SOX, hindsight reviews have disclosed a number of opportunities for process improvement, organizational optimization, and quality enhancement.  Unfortunately, the discovery of inefficiencies comes several years after the implementation.

The net result is that the inefficiencies created in implementing SOX now represent opportunities to reduce costs by optimizing processes.   The typical approach is usually fragmented by business or functional area with each doing their piece;

  • Drafting up future requirements,
  • Reviewing with a team (here usually management),
  • Implementing changes as possible and
  • Creating “top priority” systems tickets for technical changes.

The above would occur separately in each business area with rarely an enterprise level holistic view.  Wouldn’t the better approach be to design the optimal process as part of the implementation?  Especially given the tight margins, limited capital and drive for profitability?

That has proven to be the case for a number of our clients.  In assisting with fast-paced operational change driven by external factors like regulatory changes, competitive pressures, or market shifts, the most successful results have been achieved using a blending of Lean Six Sigma Optimization (LSSO) with Operations Team Workshops and Value Analysis. Using these blended practices to create a plan to drive “once and done” compliance implementations results in the following outline of key tasks:

  1. Evaluate across the enterprise all of the business areas impacted.
  2. Clearly define the requirements by impacted area.
  3. Map out current state processes for each impacted business area.
  4. Integrate additional requirements into the present state maps to create a conceptual compliant process model.
  5. Conduct workshops with front line staff to determine value added by each step.
  6. Draft optimized future process
  7. Review and Refine future processes with workshop team
  8. Develop an implementation plan weighing near term, smaller deliveries over larger ones where possible.

There are major advantages to this approach. It provides an enterprise view of the required changes and helps to prioritize resources across the project areas for expertise reusability. As it is designed to be collaborative, experienced front line staff drive process reviews. Process optimization is incorporated into the process review and change from the beginning. Finally, it allows for developing expertise with new processes and with basis for changes with front line staff.