Navigating Regulatory Complexity in Outwards Reinsurance

Staying compliant with a multitude of regulations has become an increasingly intricate and demanding challenge. Insurers and reinsurers must navigate a complex web of requirements imposed by various governing bodies and industry standards, affecting how business is managed from submission to outwards reinsurance. In this article, we will look at some of the main drivers responsible for causing this complexity before exploring strategies to effectively manage it.

Key drivers of regulatory complexity

Regional reporting requirements: A typical example is of cases where our clients transacting in both the US and Lloyd's markets need to submit different regulatory reinsurance reports for various locations. In these instances, finance functions must use ceded or retroceded data to produce Schedule F and Lloyd’s 710 reports, at different times of the year, on either side of the pond.

Heterogeneous accounting standards: Reinsurers with a diverse global footprint find themselves required to report in multiple formats, including the Generally Accepted Accounting Principles (GAAP) and the International Financial Reporting Standards (IFRS), among others. This diversity amplifies the complexity of reporting processes and increases the risk of being in violation of accounting standards.

Introduction of IFRS 17:
The adoption of this new accounting standard for insurance and reinsurance contracts has ushered in a new era of financial reporting. It involves accounting for outward reinsurance contracts in a more detailed and transparent manner than before, introducing new elements such as reinsurance service margin and risk adjustment. Our clients need to pay specific attention to how fronted deals are reported, including flagging instances of fronting in outward reinsurance systems and processes.

Compliance with GDPR:
Ensuring compliance with the General Data Protection Regulation (GDPR) is one of the latest additions to the long list of regulations for insurers and reinsurers. Handling vast amounts of data, including information on policyholders and claimants, while adhering to strict rules governing cross-border data transfers, presents a significant compliance challenge.

Business impact of managing regulatory complexity

If you're curious about how the compliance process is creating challenges for finance and operations teams on the ground, here are some examples:

  • Cross-functional stakeholders must be mobilised to gather necessary information to build the reports, keeping track of the frequency and timing of submission in different geographies.
  • Various reports require different formats and levels of granularity, often necessitating manual adjustments for compliance.
  • Some reports may need to be created from scratch by collecting data from various systems and consolidating it in Excel.
  • Reporting heavily relies on other functions due to data being scattered across systems with controlled access.
  • Dependency on one or two individuals within the organisation who know how to build the regulatory reports instead of having standardised processes or systems to automate.

How to better manage regulatory complexity

At the organisational level, failure to meet regulatory requirements can have severe consequences. Fines and penalties can erode profits, and incorrect reporting can damage the reputation of the organisation, resulting in a loss of client trust. To avoid such pitfalls, one must take proactive steps. While there is no one-size-fits-all approach, here are some ways to tackle them:

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Increasing amounts of historical data combined with constant changes in regulatory requirements are bound to bring challenges. However, insurers and reinsurers should proactively assess their current capabilities and strategically invest in areas where necessary to not just avoid compliance issues but also to strengthen their competitive position in the market.

We have deep knowledge and expertise in outwards reinsurance that has helped our clients navigate some of the biggest challenges in outwards reinsurance. We will be sharing more insights over the coming weeks. Stay tuned for more updates!

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