Change on the horizon

Whether you like thinking about it or not, the "comprehensive new framework for insurance supervision and regulation - introducing across the EU a more sophisticated, risk-based approach to supervision and capital assessment", as the Association of British Insurers defines it, will ultimately affect brokers.

However, there are still a lot of significant details to be resolved concerning the European Union's Solvency II Directive and debate will continue before the final rollout in 2012.

With dry data runs scheduled to start in 2011, being aware of Solvency II's content and potential implications, especially for IT systems, will become more important for brokers next year. As Laurence Baxter, head of policy and research at the Chartered Insurance Institute, pointed out: "Solvency II is an important and critical process in the regulation of insurance and is one that every part of the industry should be involved in."

"It is not going to be an Armageddon for brokers but it is going to be a direction of travel," explained Neil Coulson, partner at Littlejohn, an independent firm of chartered accountants and business advisers. He explained that insurers are going to have to prove their data is appropriate and acceptable to use, which means showing "you have good data flowing through from external sources".

In-depth requirements

For brokers, a key source of such information, what has been good enough in the past may not be so in the future. As David Roberts - head of the financial services division at Littlejohn - explained, the information flow will be "more detailed, more data, more granular, more flexible and more controlled, which is a tricky one to balance. That's largely an IT and operational problem."

It is likely that each insurer will seek to achieve a standardised format for the information flow from brokers. However, given that each insurer has its own needs, creating a standard system for the broker to deal with many insurers is a completely different topic.

Roberts said: "If you have a proprietary system that works, that is going to be the most economic way of dealing with this by a mile. Because you are not alone, it will be a primary problem for that software provider to deal with these issues. The individual businesses should not take the cost of doing this if they can avoid it."

The increase in granularity of data is naturally expected to come at a price for brokers. "They might end up with more boxes to fill out because they want more granular data to pass on to the insurer and that's where they'll see it," Coulson added.

Furthermore, proving that the information is correct and that data gained from web sales, phone sales and face-to-face sales has been properly organised could also become an issue. Roberts remarked: "The insurers will want to have a reason for saying we believe that data is correct; it won't just be because you've supplied it, it will be because you've supplied it and we know how you've controlled it all."

The more of an insurer's business a broker is responsible for, the more pressing the issue. Where it might hit first could be managing general agents and those brokers trying to sell new schemes. Those unable to show they can deliver the necessary information are unlikely to be appointed, on the other hand those that can will be in the box seat. Roberts urged: "This is something you are going to have to think about. Talk upstream to find out if there is anything you can do to your commercial advantage within your relationships."

Communication

Talking through the situation with key relationship contacts is a viewpoint supported by Kevin Roberts, sales operations and strategy director (commercial) at RSA. He said: "On a day-to-day basis, Solvency II is likely to affect insurers much more than brokers but it is still important that brokers understand the nature of the legislation."

While there is clearly no need to panic, nobody should confuse the situation with the belief that they will be unaffected. There is no one-size-fits-all solution and, because of the uncertainty about the regulations, individual tailored planning will be key to being best prepared once the issues are finalised.

Coulson concluded: "Have an IT strategy that is constantly reviewed - you cannot not have a plan. That plan has to be investing in your IT, website, people and systems. Any business that wants to survive has to continue to invest but you have to make sure you have enough slack - a bit of money, a bit of time - so you know where you can start."