Design and Distribution Obligations an opportunity for insurance

06 May 2020 Consultancy.com.au

In a new report, PwC has highlighted how the new design and distribution obligations (DDO) that are set to take effect in April next year could be an opportunity rather than an obstacle for insurance companies in the country. Compliance efforts could coincide with restructuring to increase customer-centricity.

The new obligations follow a similar framework that was recently enacted in the UK, with the objective of better regulating the insurance sectors. Under the new DDO framework, insurers are required to develop a target market determination (TMD) for every retail product, complete with a review of factors that might deem the TMD inappropriate.

More than just setting the TMDs, insurers are obligated to actively ensure that distribution aligns with the determination, while notifying the Australian Securities and Investments Commission if this alignment is not achieved. Overall, insurers must keep records of their TMD and related distributions, incase the ASIC demands them for a review.

Three implementation options

The new regulations are restrictive, and insurers will have to make significant rearrangements to ensure compliance. Examples from the UK show that failure to comply has potentially harsh consequences, including the removal of retail products from sale if distribution requirements are underestimated.

According to experts at PwC, the new regulations mark an opportunity for insurance companies. Insurers are obligated to restructure their operations, at a time when most consumers are seeking customer-centric capabilities, and can therefore use the opportunity to better align their products with ever-evolving customer demands.

Becoming DDO proof

Going forth, insurers have three approaches when it comes to restructuring according to PwC. The first is a focus solely on risk management and compliance, which means having TMDs in place by April 2021, when the DDO comes into play. PwC argues that TMDs will not be effective and will generate problems at a later stage if their development is not accompanied by changes in products.

Targe Market Determination development“A lesson from the UK experience in preparing for DDO is that waiting until the last minute increases the cost, risk and disruption of the change. Such a strategy is also prime for disruption by competitors who have started preparing for and understanding the new environment sooner,” states the report.

The second approach is the more holistic one recommended by PwC, wherein DDO implementation efforts align with customer-centricity and product simplification, which is expected to reduce work for insurers at a later stage. The third approach, which PwC deems the most effective, is to integrate a customer-centric restructuring plan within the DDO implementation efforts.

“An approach that puts customers at the centre of the change, helping create new experiences for them and value for the industry, and provides a foundation for efficient and effective compliance with the new obligations, will be the basis of winning organisations of tomorrow,” state PwC’s experts led by insurance practice leader Bernadette Howlett and partners Christa Marjoribanks, Ashish Sharma and Sarah Hofman.

A customer-led and holistic approach to DDO

Collaboration is a crucial component when taking either of the latter two approaches. Professionals from various walks of the organisation will have to agree on a common set of principles that will inform the TMD development process. This includes regulatory specialists, as well as professionals working in compliance, products, customer services, technology and marketing.

PwC’s comprehensive recommendations come at a time when customer-centricity is becoming a premium commodity amid a sea of digitalised and increasingly uniform insurance and financial services offerings. Businesses are on the lookout for innovative ways to meet customer demands, and the latest regulatory obligations offer a golden opportunity for insurance companies.

In a report released last month, Boston Consulting Group (BCG) and Salesforce put forward that there also is a clear business case for customer experience in the government sector, with mature digital services leading to higher overall trust in the government.


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