Compass's Julian Jackman outlines the best route to market for insurers after CP166.
The recent FSA consultation papers, aimed at polarisation reform, herald significant changes in the industry. Given that financial institutions' sales and distribution strategies currently rely upon intermediaries to cater for some 60% of their market, insurance companies face an important decision-making process to maintain and enhance their route to market. They will need to deal with this in as proactive a manner as possible.
The impending FSA regulations have arisen through a combination of market pressures and consumer demand. A downturn in consumer confidence followed high-profile failures such as Equitable Life and equity markets have fallen with severe impact on insurance companies' asset bases, along with ever tightening margins and need for cost transparency. The impact of 9/11 has also altered the approach to risk of both private and corporate investors.
The FSA has progressed on its journey to the new regulatory environment with the consultation paper, CP166: "Reforming Polarisation: Removing the barriers to choice". This paper (following CP121) sets out the draft rules designed to effect the changes.
Given the impact these changes will create in insurance, particularly within the area of sales, there is a need to act now in preparation rather than simply wait for the regulation to come into force. By starting now, insurance companies can be one step ahead, not only in terms of meeting regulatory requirements but also in defending their market position.
But where should insurance companies start? In the past, whenever new regulations were put in place this often involved heavy investment to ensure compliance, whether it was through new IT systems, new departments or new internal processes. As more and more regulations evolved, companies followed a `bolt-on' approach whereby more was added to the business process in order to comply and this, over time, resulted in inefficient processes. Analysis conducted by Compass Management Consulting has found that only 30% of the cost of delivering compliance is typically within a specific Compliance Department, 70% is actually within the wider business processes.
CP166 will affect the sales and distribution side of the business and fundamentally change the landscape of financial services sales. There is no doubt that internal change is required to meet the FSA's impending regulation. Insurance companies can gain competitive advantage by viewing the need to change as an opportunity to analyse the cost base of the business to reduce inefficiencies generated in the past.
Analysis of the cost base within the distribution function is a good place to start. How cost is spread can be assessed through two key views: product and channel. In each of these views the costs involved must be analysed across the key contained processes. Whilst it is essential to ensure compliance is being delivered, this approach allows commercial assessment of the options for route to market.
Overall, the key to achieving compliance, whilst sustaining a competitive business in a weak economy, is to ensure that the processes necessary for compliance are also optimised for the benefit of the entire business.
Insurance companies face many challenges in achieving these twin goals (alignment of compliance and commercial drivers) and need to make informed decisions based on fact rather than theory. Often the assurance of a trusted third party with an independent view and clear understanding of leading practice can help to identify the best route to ensure continuous improvement.
The impending FSA regulation requires some serious decision-making in the very important area of sales and distribution. Successful strategies will stake a claim on the financial advice market, reduce unnecessary costs through analysis of key sales processes and ultimately rise above the competition.
