The insurance industry faces a number of challenges and opportunities in 2007. Among the issues likely to garner the immediate attention of the industry are the needs to comply with new regulations; leverage technology, standards, and process improvement to drive straight-through processing (STP); and create a new-business model for retirement income products to take advantage of changing customer demographics.

"2007 is shaping up to be a busy year for the industry," said Lana Macumber, DTCC director of Relationship Management, Insurance Services. "There are a number of initiatives under way that will be key to how the industry does business now and in the future."

Macumber cited three initiatives that will be front and center for the insurance marketplace in the coming year.

• Rule 22c-2 Compliance
  Adopted by the Securities and Exchange Commission (SEC) in 2006, the rule requires insurance carriers and other intermediaries to enter into shareholder agreements with mutual fund companies and provide customer information held within omnibus accounts so the funds can evaluate trading patterns for possible market-timing and frequent-trading activity. According to the SEC, the rule affects almost 200 insurance companies.
  
  To help carriers comply with this new regulation, DTCC, the Investment Company Institute (ICI), and the National Association for Variable Annuities (NAVA) have joined forces to explore the feasibility of using a DTCC service called Networking for Standardized Data Reporting (SDR). The service - which was created by DTCC's National Securities Clearing Corporation subsidiary for the mutual fund industry - gives funds the ability to request and obtain information that will allow them to more easily track and record shareholder-level activity and enforce their redemption-fee policies, if applicable.
  
  "SDR gives us an excellent platform to build upon and address the specific needs of insurance carriers," said Jeanann Smith, DTCC senior relationship manager, Insurance Services. "With much of what we need already in place, we're working to identify enhancements to the system to capture insurance-based transactions. It's a substantial effort, but faster than developing a solution from scratch. And speed is critical, since the rule's reporting requirements go into effect soon."
  
  The deadline for completed agreements between carriers and funds is April 16, 2007. The deadline for when carriers must be able to supply customer-level information under those agreements is October 16, 2007.
  
  
• STP Standards for Annuities
  Championed by NAVA, with support from DTCC, the STP Standards Initiative seeks to create a common language and vocabulary for conducting new annuity business electronically.
  
  A key driver behind the initiative, which is being targeted for rollout over the next year, is the recognition that the industry so far has had mixed results in automating annuity processing. There are about 2 million new annuity sales per year, representing more than $200 billion in premium investment. But out of those sales, only 12% to 15% go through an electronic platform.
  
  By leveraging STP to mainstream annuities, similar to how automation contributed to the rise in mutual funds, the industry can generate significant cost efficiencies and growth.
  
  "If you go back to 1986 when DTCC introduced Fund/SERV, our automated solution for processing mutual fund transactions, the price was 50 cents a trade, and assets under management totaled about $700 billion," explained John Ziambras, DTCC managing director, Insurance Services. "In 20 years, the cost of a trade has dropped to 11 cents, while the market has grown dramatically to $10 trillion in assets. Can the same be done for annuities? Absolutely."
  
  The NAVA initiative is taking into account all distribution channels and all types of annuities. Among the project's objectives are to create a set of "trusted" operational processes, a document identification and management system, and a compliance framework that includes standard interpretations of all state and federal regulations.
  
  Two new solutions under development by Insurance Services are part of the NAVA initiative. The first is Attachments, which will support the electronic transfer of imaged documents, signatures and forms, and is due out by year-end, subject to regulatory approval. The second service is Replacements. Scheduled for piloting in early 2008, this service will automate and standardize transfers of annuity and life insurance assets from one insurance carrier to another. (See "Gartner Study: Replacements".)
  
  In addition to those services, the STP initiative will leverage other Insurance Services' solutions, including Applications & Subsequent Premiums, Money Settlement, and Licensing & Appointments.
  
  
• Mainstreaming Retirement Income Products
  Recognizing the enormous opportunity to provide retirement income to the country's aging population, the industry has embarked on a project to create a business model for mainstreaming retirement income products.
  
  The project - called the Retirement Income Standardization Initiative - is a joint undertaking by NAVA and the Securities Industry and Financial Markets Association (SIFMA), with support from carriers and distributors, vendors, research firms, the ICI, and DTCC. It focuses on addressing industry issues and opportunities surrounding the growing retirement income marketplace.
  
  A strategic focus of the NAVA/SIFMA initiative is to look at ways of integrating new carrier products within mainstream retail distribution channels. Among these new products are annuities with enhanced payout features, stand-alone income products such as unbundled immediate annuities, and riders for healthcare and assisted-living protection.
  
  In addition to focusing on new product integration, the initiative seeks to establish standards governing such things as sales order entry, commission payments, client statements, income payments and money settlement. Specific questions that need to be addressed include how to integrate income payments into consolidated statements and how to define appropriate disclosures for commuted values.
  
  Although the NAVA/SIFMA initiative is in it early stages, with members meeting for the first time in January, the task group aims to deliver actionable industry recommendations in 2007.