An Oracle Strategy Brief February Auto Enrolment: A Catalyst for Insurance Industry Change, Growth and Agility

Transcription

1 An Oracle Strategy Brief February 2012 Auto Enrolment: A Catalyst for Insurance Industry Change, Growth and Agility

2 Executive Overview... 2 The Industry Context... 3 Employer Pain Points... 3 How Insurers Can Help... 4 Risks of Doing Nothing... 4 Benefits of Offering a Solution... 5 The Options... 6 Conclusion... 7 About Oracle Insurance... 8

3 Executive Overview Over the course of the next few years, all employing organisations in the UK will find themselves faced with the challenge of Auto Enrolment. Employers will become responsible for the automatic enrolment of all eligible employees into company contracted schemes, occupational schemes, or the state-established NEST (National Employment Savings Trust) by October While there is no direct impact on insurers from Auto Enrolment, the legislation provides a tantalising prospect of a much-broadened pension marketplace, encompassing many more end investors. This presents clear business possibilities for insurers if there are many more possible investors, how many of these could be channelled away from the default NEST option to create profitable new lines of business? This paper argues that Auto Enrolment not only presents a business opportunity for insurers, but could act as a catalyst for some important and positive business benefits in the future. It outlines the benefits that insurers could realize by offering an Auto Enrolment solution; the potential risks of failing to seize the opportunity; and examines some preliminary options for technological solutions to the business challenge. 2

4 The Industry Context The insurance industry is suffering from a barrage of regulatory changes which shows no sign of abating. Regulators are demanding the utmost in transparency and ever tighter corporate governance; Solvency II is creating new financial pressures; the Retail Distribution Review (RDR) is forcing fundamental change to business, financial and distribution models alike. All of these changes have created new demands upon often creaking and complicated IT systems, which usually include too many different software solutions on too many pieces of hardware with too many customisations for comfort. Meanwhile, the market itself has changed. Life offices in particular have seen the goalposts moved several times. Of most importance, perhaps, is the macroeconomic environment which is putting enormous pressure on companies to become more efficient, be cheaper to run, reduce their risk, be more flexible and agile, and ultimately be more stable and profitable. Customers have changed too; their expectations have been raised and they require ever more technologically-enabled access to their portfolio or to customer services (such as self-service through a Web portal or mobile browser). Often, customers want to deal directly with the insurance provider, rather than work through an independent financial advisor (IFA). The need to become less productcentric and more customer-centric has become clear. Auto Enrolment could easily be seen as less impactful than some of these other changes, or as just another headache. Treating it as such, however, may be a mistake because the very changes that will enable insurers to better manage Auto Enrolment for their customers can directly support all of the above needs as well. Employer Pain Points Let us look at what the main issues of Auto Enrolment are likely to be. Management burden: The reality facing all employers is the sheer impossibility of running a compliant Auto Enrolment service manually. There is a requirement for constant review of all staff, every month. Every newly eligible employee will be put through a process of automatic enrolment in their scheme of choice (even if it is only for them to withdraw again). For smaller firms, this will be a huge burden, and although larger enterprises will have the funds and resources to manage aspects of Auto Enrolment internally, the vast majority of SMEs will not. New processes: The advent of Auto Enrolment brings with it the prospect of creating multiple new processes which did not previously exist. These include processes for reviewing all staff on a constant and calendared basis, as well as identifying and then following through on all necessary actions. Such processes, and the software solutions to manage them, currently exist neither within employers nor within the insurance companies which provide company schemes, either directly or via pension consultancies and IFAs. New data challenges: Neither employer HR systems, nor insurance policy administration systems, currently classify individuals in a manner which meets Auto Enrolment requirements. These systems 3

5 have no way to manage information about potential or future investors. At the moment, they handle only currently active scheme members and policy holders; yet, in the future, they will require information such as whether an individual is: Eligible for the first time; Eligible if they wish but not automatically; Non-eligible at present, but may become eligible in the future; Eligible and enrolled automatically or voluntarily and then opted out, and will become eligible again at a future date. Economic concerns: Employers will face higher operational costs through being forced to introduce or raise an employer-funded contribution to each staff member s scheme. A few concerns are being voiced around pension reform in general and Auto Enrolment in particular. Given the current economic environment there is some discussion of whether Auto Enrolment could discourage recruitment, and whether businesses will be able to cope with additional costs and other requirements. 1 Relationship concerns: Employers are concerned about the changed position this places them in relative to employees 2 ; they are nervous about what will happen when employees are forced to accept a sum deducted from their much-needed pay-packet in these difficult times. A revolving door concern is emerging, with the worry that employees will un-enrol each time they are automatically enrolled. How Insurers Can Help Insurance companies have a number of options in deciding how to provide services to their corporate pension customers. They can choose to do nothing a risky proposition, since a competitor will likely step in to fill the void. They can deliver an end to end service which takes the entire burden of Auto Enrolment away from the employer. Or they can offer a partial service, supporting some pieces of Auto Enrolment but not others. Risks of Doing Nothing Insurance companies that sell into the SME marketplace directly or through the IFA channel already manage a wide range of company schemes of varying sizes, with members numbering in the tens, hundreds or the low thousands. SMEs are the most likely to have a problem managing Auto Enrolment in-house; it is these firms which will either require a complete service to remove the compliance burden or who will be most attracted to offerings from competitors. 1 Pension Reform: Limiting the Squeeze on Business, British Chambers of Commerce, Ibid. 4

6 Competition may not only come from within the insurance industry. There is a logical dilemma facing businesses, rooted in whether Auto Enrolment sits most naturally with Payroll in the Finance organisation or within the Human Resources function. Within the payroll and financial services sector there are several organisations, including global players such as Xafinity Paymaster or NorthgateArinso, which might potentially create and start marketing Auto Enrolment pension management services. Although the policies themselves will remain inside the insurance organisations, it is quite possible that a third-party services layer could emerge and sit forever between insurance companies and their corporate customers. This may be particularly true when employers are making decisions based on cost; NEST will be designed to be a simple, low-cost model and this along with the value-added turnkey services that some third parties may decide to launch could be a highly attractive proposition for cash-strapped smaller firms. Lack of considered action may help your direct competitors or other commercial concerns to gain a foothold with your best customers. The industry is already seeing a stronger intermediated market of financial consultancies and platforms which are packaging up lucrative value- added services to the end customer, sometimes leaving the insurance provider with only the annuities portion. Auto Enrolment provides an opportunity to create such valuable services for a very profitable business audience, while keeping it close to home. Even if you choose not to offer an employer solution, you as a carrier will feel the impact. The compliance requirements will be stringent, requiring copious and complete record-keeping and reporting. Employers must confirm that they have done their duty by each and every eligible employee and are continuing to do so ad infinitum. Any insurance company which operates in this market must be prepared for new demands from its existing business customers. Employers (or companies which take on Auto Enrolment on their behalf) will have to make new, frequent and specific information demands of the insurance policy provider. They will require data exchanges based on as-yetunpublished Auto Enrolment data standards. They will, inevitably, complicate your life and servicing this complication is likely to require an IT-enabled, automated solution. Benefits of Offering a Solution There are many reasons why insurance companies would find that offering an Auto Enrolment service is beneficial. The first is competitive nearly all insurance companies servicing the life and pensions sector in the UK are currently examining and making decisions around this area. Faced with the daunting prospect of managing pensions much more closely, employers are likely to welcome new services to help make the challenge manageable. Additionally, there is an opportunity for insurers to make decisions which could have far wider benefits and implications. Market growth: Firstly, there is the insurance market itself to consider. There are many more SMEs than major corporations, and these represent a vast number of potential scheme members. Also, as new young workers enter the job market, they will become active market candidates in a way that has never been the case before which could significantly grow the number of pension investments overall. The Auto Enrolment process presents a major potential channel to reach this market and, if 5

7 insurers do not actively engage with employing organisations in new ways, they may simply allow the market to drift towards NEST investments by default. Improved efficiency: Operational efficiencies and other benefits could easily be driven through Auto Enrolment investment. With the introduction of essential new systems to support Auto Enrolment will come opportunities to streamline existing processes which share similar attributes: for example, on-boarding of new corporate schemes, of new members into existing schemes, or of new retail customers. Insurers also should be alert to other possible cost and operational efficiencies; investment in systems to deliver Auto Enrolment support may create the opportunity to kill off further swathes of paper and reduce the associated document handling costs. Remove legacy headaches: Auto Enrolment will affect all existing company pension schemes, and within many insurance providers those systems may reside on several different servers and be administered by a variety of policy administration systems. If it is to be made feasible, Auto Enrolment processing will demand a single, integrated set of processes and a single integrated interface in effect, reducing legacy back end systems to servers which deliver up information when required. Increasing your use of newer systems, and decreasing dependence on legacy systems, should create downward pressure on the costs of legacy system maintenance. The mapping of a potential benefit cascade should be part of the decision-making process. The Options There are several directions insurance companies could take. First and foremost is the decision to build or buy : Internal IT organisations are often highly capable, but many of the aspects required by Auto Enrolment are entirely new to the industry such as the data management around potential scheme members. This entails a learning curve which will demand extra cost and time. Because of the compliance burden placed on employers, the services provided to them would need to be utterly unassailable, as well as meet strict corporate requirements for security. This level of risk from an experimental in-house development process is, we believe, unacceptable. Existing and proven solutions from established enterprise vendors (such as Oracle) offer a more predictable and less risky route. A solution based upon established technologies that have been proven in the enterprise marketplace such as Oracle Insurance Policy Administration would allow insurers to immediately support their corporate customers needs, making rapid changes as regulations are redefined and clarified. Insurance companies could support their customers stringent compliance needs fully from day one, as well as maximise the business opportunity that may arise from Auto Enrolment. The opportunity exists for insurers to use Auto Enrolment as a catalyst for change. This kind of strategic investment can take carriers beyond finding solutions to current problems, to positioning themselves to take advantage of future opportunities. It enables them to create a services model enabled by technology which is highly adaptable and can be repurposed for new needs as they arise. 6

8 Some advice to consider: Plan your response in good time for the staging deadlines of your customer base. Inform them well ahead of deadline that you are stepping in to provide support. Pick a solution that will help you address legacy challenges, not just a quick fix for Auto Enrolment. Create a financially viable business model for Auto Enrolment. If you provide the service, make sure the costs of running it are not disproportionate either to you or to your business customers. Decide if you will build or buy. Building may be more costly and riskier than buying, and any solution must run with low costs and high efficiency. Avoid locking out choices for the future. Ensure that adaptability is inherent in anything you create or buy. Look towards the future flexibility of your business. What value proposition could you create for Auto Enrolment which would also enable up-sell, cross-sell and future business growth? Conclusion Insurance organisations have a decision to make. They may either choose to work with employers and support Auto Enrolment on-boarding and ongoing, constant management of pension scheme members; or they may decide that intermediaries or specialist service providers are best placed to offer this service. In either case, insurers must figure out how to deal with the new types of data, new information demands, and delivery of pensions to the employer market in the future. Many life offices do not have IT systems which are able to cope with these new demands. We believe that with strategic investment in open, flexible, standards-based architectures that deliver the services for Auto Enrolment, insurers can take an additional and significant step towards resolving their long-term legacy IT challenges. In doing this they can not only serve their business customers better, but offer services which can rival third-party service providers. Using Auto Enrolment as a catalyst, insurers can modernize their IT systems to control maintenance costs, develop better insurance products, and improve risk management now and into the future. 7

9 About Oracle Insurance Oracle believes that insurers should be able to leverage technology to help transform their business. Oracle Insurance provides adaptive, rules-driven systems that let insurance companies easily change business processes as their business needs change. These systems position insurers to become more adaptive themselves, ready to respond to dynamic market conditions and take advantage of new opportunities as they arise. Engineered to work together, Oracle s solutions support the entire insurance lifecycle from product development, to marketing and sales, to customer service and support, to management and compliance. Oracle Insurance can assist you in finding the solution to emerging challenges such as Auto Enrolment and associated issues like RDR; creating the right new direction for your business needs and based around your architecture. Oracle has an unparalleled portfolio of enterprise class applications, solutions and platforms to deploy in adaptive, flexible ways to suit customers needs, including: Oracle Insurance Policy Administration Oracle Fusion Middleware Oracle Documaker Enterprise Edition Oracle Fusion Human Capital Management Oracle Human Resources PeopleSoft HCM and CRM Oracle e-business Suite For more information on Oracle Insurance, please visit oracle.com/insurance, contact us by at insurance_ww@oracle.com or call +44 (0) to speak to an Oracle Insurance representative. 8

10 Auto Enrolment: A Catalyst for Insurance Industry Change, Growth and Agility February 2012 Oracle Corporation World Headquarters 500 Oracle Parkway Redwood Shores, CA U.S.A. Worldwide Inquiries: Phone: Fax: Copyright 2012, Oracle and/or its affiliates. All rights reserved. This document is provided for information purposes only and the contents hereof are subject to change without notice. This document is not warranted to be error-free, nor subject to any other warranties or conditions, whether expressed orally or implied in law, including implied warranties and conditions of merchantability or fitness for a particular purpose. We specifically disclaim any liability with respect to this document and no contractual obligations are formed either directly or indirectly by this document. This document may not be reproduced or transmitted in any form or by any means, electronic or mechanical, for any purpose, without our prior written permission. Oracle and Java are registered trademarks of Oracle and/or its affiliates. Other names may be trademarks of their respective owners. AMD, Opteron, the AMD logo, and the AMD Opteron logo are trademarks or registered trademarks of Advanced Micro Devices. Intel and Intel Xeon are trademarks or registered trademarks of Intel Corporation. All SPARC trademarks are used under license and are trademarks or registered trademarks of SPARC International, Inc. UNIX is a registered trademark licensed through X/Open Company, Ltd. 0212