XBRL offers the opportunity to enhance fundamentally the way financial reporting is done and opens up a myriad of opportunities for exchange of information and sophisticated analytics. When an investor, regulator, peer company, financial professional, or stockholder has the ability to import data directly from a quarterly statement or annual report, the potential for data use is virtually unlimited. While XBRL may not do all the work, it is the enabler to financial reporting and information exchange freedom.

Plethora of Opportunities
The current state of insurance financial data processing leaves much room for improvement.

Regulatory reporting. With the layers of regulatory reporting requirements in the insurance industry, a method to improve the automation of the process is extremely attractive. Regulators are requiring more information and are evolving to the point of mandating the data be submitted in an electronic format. The good news is the e-format guidelines tend to be described by the NAIC and enforce uniformity in data format; but the bad news is the e-format is not conducive to enabling insurers to exchange information readily among their peers and themselves. However, this is not the case with XBRL.

Currently, the usability of the data is limited by the one set of data, one financial report design. In the common case where Insurer A also owns subsidiary Insurers B, C, D, and E, each reports its own financial information as a stand-alone entity. Any effort to combine the financial statements to view the enterprise as a whole is extremely time-consuming, requiring reentering and mapping across entities to create some data commonality. XBRL enables standardization and facilitates consolidation, taking the process from virtually impossible to doable.

Capital markets reporting. This audience tends to be most interested in the financial statements with an analysis that is more earnings driven to assess the insurers ability to enhance stock value and the value of the overall enterprise. Unfortunately, this reporting is not as rigidly prescribed as regulatory reporting, leaving the insurer to summarize its financials based on the nature of its business. For example, some may choose to report financials based on their lines of business, while others may choose to report based on their geographic alignment. Individually, each insurer has fulfilled the reporting requirement, but any analytics or comparison is virtually impossible due to the reporting inconsistency.

In the case of Insurer A referenced earlier, with todays financial reporting process, the ability for a financial analyst to view the entity as a whole is limited. When there is a considerable amount of interenterprise activity, it is not currently possible to track the financial impact of these activities. For example, if one of Insurer As subsidiaries is a reinsurer, it may not be mitigating risk, but merely diverting it. Analyzing entities separately would not uncover this risk shell game. XBRL offers the data format consistency to allow for the desired consolidation and analyses of the multiple entities.

Peer analysis. Since current financial data formats dont allow insurers to exchange information easily with their peers for effective peer analysis, the industry essentially has opted for intermediaries such as NAIC or A.M. Best to hold the data. While insurers readily provide their financial data, they essentially buy it back along with peer information to perform their analytics. In the current scenario, NAIC and A.M. Best provide the consistency and common format for the data but at an additional cost to the insurer.

With XBRL, insurers could Web post the XBRL-formatted financial information they are willing and able to share. Peer organizations, shareholders, financial analysts, etc., could download the XBRL data and import it into the financial analysis tool of their choice for further analysis, manipulation, or comparison.

Reporting flexibility. Considering the cost and time burden associated with todays reporting requirements, there is little focus on additional reporting or analytical opportunities. But with XBRL-tagged financial information, data can be captured and analyzed in greater detail and more efficiently than today. The XBRL common set of data standards would enable an insurer to analyze its business better by line of business or other business segments.
Reduced costs and higher-quality reporting. While the business-analysis potential is tremendous, the dollars-and-cents argument alone makes XBRL an attractive standard. The ability to produce efficiently and accurately the required financial reports and then easily repurpose the data without reentry eliminates significant cost and time while ensuring consistency in the quality of the data.

Even without the hard-to-measure benefits of the new reporting and analytics capabilities enabled by XBRL, the ROI of implementing XBRL most likely can be achieved through a traditional measurement of improved process efficiency. And since XBRL is a freely licensable and royalty-free open-technology standard, the costs to implement are limited to the manpower resources involved.

Insurance Adoption of XBRL
The insurance-specific XBRL standard still is evolving, and XBRL, in general, still is in its adoption infancy. However, the advantages are clear. Like most new technologies or standards, the insurance industry will tend to greet XBRL with a bit of skepticism, and broad adoption still may be a few years in coming. While the inefficiencies of current financial reporting processes are well recognized, the fear of the perceived XBRL unknown will cause many to tread lightly until an insurance early adopter takes the lead and demonstrates the XBRL value in a real-world implementation.

As industry and trade associations begin to evaluate and commit to XBRL and as software vendors work XBRL into their products, the insurance industry more willingly will accept the new standard. Once the industry is over the initial adoption hump and begins to see the benefits of XBRL, the adoption rate will accelerate significantly.

Getting Started With XBRL
Even if an insurer is not yet ready to jump on the XBRL bandwagon, it should at least begin its XBRL education and understand the potential the standard can offer and the opportunities for enhanced financial reporting. Some forward-thinking insurance industry players, such as IASA with its new X-Fire statutory reporting database, already are participating in the implementation of the new XBRL standard. Those insurers willing to take the XBRL leap may realize early competitive advantage along with the economic benefits.

For those insurers that currently are reexamining financial reporting processes, controls, and tools, now might be the time to initiate an XBRL pilot project within the organization. Walking before running will enable the IT staff to become proficient in the XBRL standard and work with the software vendors to assess the vendors application XBRL readiness and the vendors plans for XBRL adoption.

As the industry inevitably migrates from the old paper methodology to make financial information easily e-accessible and reusable, XBRL stands ready to be the standard. Industry participation and support can make XBRL an effective and cost-efficient tool for financial reporting.

Alan Close is the director of accounting policy at Northwestern Mutual Life Insurance Company, Milwaukee, Wis. He can be reached at [email protected].

The views and opinions expressed are those of the author and not necessarily those of The Northwestern Mutual Life Insurance Company or Tech Decisions.