March 2021 saw the publication of the Prudential Regulation Authority’s Operational Resilience Instrument (ORI).
If you aren’t familiar with it, this new piece of regulation comes into force in March 2022 and mandates that insurance companies demonstrate “the ability to prevent, adapt, respond to, recover, and learn from operational disruptions…”
In a nutshell, it will require the management of insurance firms to:
- Identify “important business services” which if disrupted could impact beyond their own immediate commercial interests
- Set defined time-based tolerances for disruption of these services, and ensure it can remain inside these tolerances for severe but plausible scenarios which can be routinely validated via scenario testing
- Account for additional risks outside of the firm, if the firm is a member of a group
The regulation appears both prophetic and well needed. Up to 87% of surveyed operational staff in the insurance industry stated the disruption from the Covid-19 pandemic had highlighted shortcomings in their company’s digital transformation plans and capabilities.
As well as presenting a formidable test of the insurance firm’s grasp of their operational resilience, it also provides a litmus test for the effectiveness of their digital transformation initiatives. Why? It probably helps to understand what the objectives of a successful digital transformation are.
Routinely dealing with disruption
Digital transformation is not about rolling out a new online insurance service. Digital transformation is about addressing change, but not the kind many organizations have historically been familiar with. It is a far more profound approach, aimed at enabling the enterprise to routinely implement change as an adaptation to “disruption.” It’s about making the enterprise fitter in evolutionary terms.
Disruptions are typically assumed to originate from competitive pressures. But disruption takes many other forms such as regulation, crises in public health and operational interruptions, and all require addressing with a routine approach.
Routinely dealing with disruption requires enterprise scale agility, enabled by three core capabilities:
- Informed decision making
- Speed of execution
An enterprise can only be truly agile if it is aware that critical situations have arisen, is sufficiently informed to identify the correct remedial actions and subsequently execute these quickly to maximize positive business outcomes.
A litmus test
The 2021 ORI is a litmus test for digital transformation because fulfilment of the ORI obligations requires the capabilities that true digital transformation delivers. It requires firms to have hyperawareness of the people, processes, technology and information that are required to deliver important business services and to determine their vulnerabilities. Most importantly, it will require firms to have ongoing operational visibility to detect issues and decide and execute remedial actions on defined timescales.
What’s the catch?
So far so good? Your insurance firm is engaged in digital transformation, so the complying with the 2021 ORI will be a formality, right? Well, maybe not.
For the insurance industry, digital transformation can be a double-edged sword. It can deliver great benefits. But many of the related initiatives adopted by insurance firms such as increasing the number of channels used to reach customers, migration to cloud and growth of partner ecosystems have significantly increased the operational complexity of those firms. For insurance firms, especially those in the throes of digital transformation, the task of wrapping their arms around operational complexity has likely never been harder.
Planning, planning, planning…
So how can Insurance firms ensure that their digital transformation initiatives positively empower and not undermine their operational resilience? It’s all down to “planning”.
Depending on who you ask, up to 70% of digital transformation initiatives fail to meet their objectives. For many, it is because enterprises fail to adequately plan; to understand both where they are going and more importantly, where they are starting from.
From a business process transformation perspective, enterprise management system tools incorporate people, process and data to enable enterprises to comprehensively understand their initial and end states, and the progression between them. This enables effective planning regarding target initiatives such as optimal rationalization of existing processes to reduce operational costs or creating new customer journeys. Furthermore, it enables enterprises to not only plan their transformation, but to also prove performance and conformity with the transformation plan and prevailing regulation, supported by structured process risk controls and governance mechanisms.
But process-oriented planning is only one side of the coin. To augment the overall business design, a more holistic approach would include the complete enterprise architecture, extending the planning to incorporate the technology infrastructure that underpins the business model. Taking such an approach creates transparency between the business and technology functions of the enterprise, yielding a consistent shared understanding of prevailing business objectives and how these are planned and delivered.
The key point is that the planning solutions that deliver primary transformational objectives also create the solid foundation for assessing operational resilience. The transparency these solutions provide might not only enable the enterprise to strip out 20% of operational process costs, improve customer satisfaction by more than 60% or decrease project planning time by over 90%. They also facilitate a clear understanding of the critical dependencies required to deliver “important business services”, enabling the robust definition of service level definitions and subsequent business continuity planning.
If you are interested in understanding how Software AG’s business process transformation solutions can help your insurance company, click below to learn more.