Why compliance should be top-of-mind for insurers

Compliance should be top-of-mind for insurers not just in 2023 but all the time because it is always top-of-mind for regulators. According to the most recent NAIC Insurance Department Resource Report, there are roughly 6,000 domestic insurers in the United States, and in 2021, there were 1,474 financial and market conduct exams conducted by state insurance departments. That means nearly 25% of all carriers were subject to an exam with states collecting nearly $208 million in fines and penalties.

The high cost of non-compliance

The insurance industry as a whole is behind the curve in terms of the modernization of its compliance processes. Frequently, compliance is erroneously viewed as a cost center, with the insurer’s focus on how to reduce expenses rather than on optimizing the function. In some cases, this means foregoing a software or vendor upgrade that can improve compliance. Sometimes the decisions that make the balance sheet look good are not the best for compliance, and generally, insurers do not budget for fines and regulatory penalties.

Non-compliance is a major issue facing the insurance industry today. Too often, insurers rely on manual processes that are prone to mistakes, or on events like appointment or license renewals to trigger compliance checks. These events typically happen every two years, so there is an inherent risk in not monitoring compliance and the tools necessary to improve compliance over the long term.

An example of this risk is a producer who let his license lapse. If the insurer does not have a process in place to verify licensure when policies are written, this producer could be placing business and getting paid commissions when not properly licensed. There may indeed be some fault on the insurer and it could be fined during a market conduct exam. There was no malicious intent, just negligence.

Insurers routinely ask, what “the total cost of compliance” is and how they can be more efficient with their compliance spend. Most insurers consider the total cost of compliance to be the direct spend for things like employees, software and transactions related to compliance. Obviously, these are budgeted and expected costs or costs that the insurer has some control over.

However, something insurers usually don’t consider are the penalties and fines that can occur as a result of non-compliance. These are not budgeted for and directly relate to how focused the insurer is on compliance.

The question regularly arises whether insurers are doing enough to stay on top of current or forthcoming regulations. Speaking from the insurer’s perspective, I believe they feel they are indeed doing everything they can to stay on top of these issues. From the vendor perspective, however, I see far too many processes at carriers that are prone to failure because they are either manual or certain people or departments present a challenge if that individual leaves or departmental responsibilities change.

What, then, can insurers do to overcome some of the complexities of regulation? The obvious answer is to collaborate with solution providers that have experience in dealing with these complexities. While many insurers think they are unique and face complexities that only apply to them, it is simply untrue. Every insurer is subject to the same regulatory requirements as similar insurers. I’m not saying that there are not complexities of regulation, but much of the complexity insurers face is self-inflicted.

For example, there are still hundreds of insurers that require producers to provide license copies to the compliance team. These insurers had to develop a solution to collect, store and retrieve these license copies, which, by the way, is not a regulatory requirement. Insurers are encouraged to use the NIPR Producer Database to verify licensure because it is updated daily by state insurance departments, whereas the license copies the insurer collects and stores are only a reflection of the point in time it was printed.

Automating the compliance process through software can help create efficiencies in everything from onboarding producers, to license verification, to appointing. It also provides an audit trail of everything performed in the program. Important aspects are not overlooked when completing a compliance task with a proven workflow.

Many insurers have multiple legacy solutions to manage compliance. This creates inefficiencies as compliance team members may have to manage multiple logins and processes for a single compliance function. Software can also help streamline processes and increase efficiency within an organization, ultimately lowering the cost of compliance.

Further, there are many ways that software can help ensure compliance information remains current. Any compliance solution should integrate directly with the producer database, which can provide daily updates from state insurance departments related to producers, licenses and appointments, helping ensure that the insurer compliance database matches the states’ data.

Technology has disrupted the compliance industry as we know it. That said, changes in compliance should come from insurers themselves by adopting efficient solutions and utilizing the benefits they offer. If producers make this paradigm shift, and focus on the benefits associated with compliance, the cost will not only be better managed, but the insurer will avoid unplanned fines, become more efficient and have a more informed and accurate view of their business.

Kingston Koser has been in the insurance industry for over two decades, with the past 19 dedicated to improving the insurance regulatory compliance process. As Rhoads vice president of strategic services, Koser seeks to find innovative solutions to complex insurance regulatory problems. For more information on Rhoads, visit www.rhoadsonline.com. Opinions expressed are the author’s.

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