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PwC "2019 State of Compliance Study"—Implications for Captives

Business Technology Internet Networking-SF
April 15, 2019

One of the benefits of serving as a board member for a commercial property-casualty insurance company is having access to new and informative studies and white papers from audit consulting firms and the brokerage community, according to editor John Foehl. In the past, Mr. Foehl has written about PwC's work in the risk management and compliance fields; in this article, he looks at two recent PwC studies (2019 State of Compliance Study and 2019 Risk in Review Study) and their implications for captive insurance companies.

The Question of Compliance and Ethics

Compliance on the Forefront: Setting the Pace for Innovation—2019 State of Compliance Study opens with the following comment: "We are in a new era—one in which the convergence of technology and data makes it possible for compliance and ethics programs to pursue radically different ways of operating. And demand is growing that they do so."

PwC also notes that "overregulation" was identified as the top threat by CEOs interviewed for its 22nd Annual Global CEO Survey. While captive insurance owners may not list this threat as high on their own list of concerns, it certainly is a possibility, as we noted in a recent article on the demise of Spirit Commercial Auto Risk Retention Group.

The first question we pose to captive owners and board members is, How often do compliance and ethics discussions make their way onto board agendas? We suspect that it's not very often. As the PwC study notes, "Compliance failures can cause organizations to suffer reputational damage, customer churn and costly fines. In fact, the impact of noncompliance is greater than ever before. A 2018 report by the Ponemon Institute estimates noncompliance costs to be 2.7 times the costs of maintaining or meeting compliance requirements—and up 45 percent since 2011."

The Question of Digital Fitness

The companion PwC risk study, Being a Smarter Risk Taker through Digital Transformation—2019 Risk in Review Study, identifies three groups of so-called digitally fit organizations: dynamics, actives, and beginners. The study ranks the three groups into quartiles (beginners occupy the third and fourth quartiles) based on their responses to questions about how they handle risks across five dimensions. The five dimensions include the following.

  • Vision and Road Map: Alignment between the organization's digital vision and its plan for "digital transformation" of is risk functions
  • Ways of Working: Risk functions are adequately equipped with skills and tools for an agile defense
  • Operations: Risk functions use data and emerging technologies to streamline operations
  • Services Model: Risk function services are created, and information is delivered digitally, to support the organization's efforts to be more digital
  • Stakeholder Engagement: Risk functions effectively communicate with the organization's leaders about their digital initiatives

Our second question for captive insurers is, Where would your organization fall on PwC's digitally fit spectrum? The implication for captive insurers, if you believe the thesis of the study, is that those entities scoring higher on the digitally fit scale are starting to enjoy significant benefits. As we have commented before, the growing use of data and artificial intelligence in the insurance industry is basically transforming the way the industry does business. For captive insurance companies, especially group captives, this transformation is eroding their competitive advantages in a market when pricing continues to be under pressure.

Can you afford to participate in this digitally fit endeavor? A better question may be, Can you afford not to? The compliance implication is that, if in an attempt to be competitive you are not pricing your risks properly, you are potentially headed toward a meeting with the regulators.

At the conclusion of the compliance report, PwC asserts as follows.

As the pace of change continues to accelerate, compliance and ethics programs have to become strategic partners to their organizations. With the right technology enablement, they can truly be the ones that enable the company's digital transformation. But compliance and ethics programs are at a critical juncture: they've never been more needed, yet they are often afterthoughts.

The opening sentence should be seen as a clarion call to captive insurers. There is a phrase heard on many occasions in multiple captive boardrooms: "We want to be fast followers" (i.e., "We are content to play catch-up"). The problem with this strategy, as the PwC report highlights, is that the pace of change is relentless and becoming faster. Therefore, for those seeking to replicate what the front-runners have done, delivery time and room for error become critical variables. If your "catch-up" strategy doesn't succeed the first time, you run the risk of falling further behind the curve. This then increases the probability of more failures down the road as people try to recover. And it can also lead to increased compliance and ethical lapses as management and staff feel pressure to cut corners to deliver.

Those who are successful will look for innovative ways of achieving the digital transformation PwC talks about. If these discussions are not part of your boardroom currently, they should be.

Copyright © 2019, International Risk Management Institute, Inc.

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