The most significant change has been in Europe. Regulators and standard setters are in the process of introducing a range of new solvency and reporting measures. European Embedded Value and major changes to solvency requirements in the UK are already in place. The next phase of development is now well underway, with Market Consistent Embedded Value (MCEV) and Solvency II due for implementation between now and 2014. These developments are already impacting other geographies and will be followed shortly by IFRS Phase II which will apply globally.
Insurance markets have become increasingly open and price competitive, while at the same time many insurers have had their capital eroded by increased solvency requirements, adverse investment markets and in some cases, poor business decisions. With capital scarce and profitability under pressure, management need more relevant, regular and timely financial information, around actual and planned product and channel profitability and capital requirements. This has proved stretching for many insurers, with business managers not used to working closely with finance functions struggling to cope with systems, data and perhaps most significantly, people.
External stakeholders, principally analysts and rating agencies, are also looking for more robust, more detailed and more consistent information about the performance of insurers. The market has clearly penalised the life sector; in particular for its perceived lack of transparency. The increased focus, to a degree, reflects the change of ownership in the industry and in capital structures, with significantly greater use of debt and other non-equity capital, the effective demise of mutuals and the decreasing prominence of 90:10 funds. Analysts are not just concerned about actual results, they also want reliable forecasts and plans.
There is also increasing pressure on finance to add value in terms of meeting needs, and efficiency. Many insurers have underinvested in finance systems, processes and people, and have dealt with recent change by adapting and extending historic capability. This has led to a labour intensive process and a high cost base for finance, which needs to be addressed.