The Retail Distribution Review offers a significant compliance challenge for UK insurers and advisors. CIOs must prepare by ensuring they have the right enabling technologies to support changing distribution strategies.

1. • Cognizant 20-20 Insights
Retail Distribution Review:
Preparing Insurance IT for Compliance and Strategic
Changes to the Distribution Landscape
Executive Summary Our RDR Readiness Analysis offering can help
insurers assess their preparedness for RDR
The Retail Distribution Review (RDR) offers a
compliance, as well as their maturity in the key
significant compliance challenge for UK insurers
technology areas critical for success in the
and advisors. While the regulatory changes will,
post-RDR era.
on balance, be good for the industry, the new
regulatory environment has the potential to sig-
Background to the Retail
nificantly alter the distribution landscape, an
Distribution Review
eventuality for which all insurers must aggressive-
ly plan. For instance, the RDR’s regulatory impact In the UK life, pensions and investments sector,
will likely drive growth in direct and bancassur- the vast majority of products are sold through
ance channels, but it will also require insurers to intermediaries; hence, insurers tend to compete
create a platform-like experience for advisors via for intermediaries rather than customers. As a
existing extranets. result, the recommendations provided to custom-
ers by some intermediaries may be open to the
CIOs must prepare by ensuring they have the
right enabling technologies to support changing
distribution strategies. The mature use of
The lack of awareness even among
key technology enablers will distinguish sophisticated investors about how
successful providers from the pack, as the much they currently pay for advice
industry transitions to the post-RDR world. These
technologies include: rich user interfaces and
— as well as a lack of understanding
portal frameworks, decision support, customer of the different parties involved and
relationship management (CRM), master data their roles — has led to declining trust
management (MDM), analytics and flexible inte-
gration built on multi-channel integration archi-
by customers in the current financial
tectures. Modern contract platforms will be advice regime and an increase in
needed to support speed to market with simpler complaints to the FSA.
products. Agile delivery and testing methods
across the business and IT will also become influence of commission considerations. Further-
increasingly necessary post-RDR, as — more than more, the lack of awareness even among sophis-
ever — insurers will need to react to changes in ticated investors about how much they currently
the marketplace and continuously update their pay for advice — as well as a lack of understand-
products and distribution interfaces accordingly. ing of the different parties involved and their
cognizant 20-20 insights | june 2011

2. Attitude of Customers
How would you prefer to pay when seeking professional advice for
investment products?
14% � Company I invest with pays advisor commission
6% 31% � I would prefer to pay a separate flat fee directly to advisor
� I would prefer to pay an hourly fee directly to advisor
19%
� Other
30% � Not sure
Base: 914
Source: Harris Poll Omnibus, August 2010
Figure 1
roles — has led to declining trust by customers involved in producing or distributing retail
in the current financial advice regime and an investment products and services, including banks,
increase in complaints to the Financial Services building societies, insurers, wealth managers and
Authority (FSA). financial advisors. The FSA believes its proposals
will provide greater clarity to firms, consumers
Nearly one-third of customers are not sure how and supervisors about what it means to offer inde-
they would like to pay for professional advice, and pendent advice. Moreover, RDR will help ensure
very few have definite opinions on their preferred that the FSA’s rules are better equipped to keep
method of payment. pace with developments in the retail investment
product market.
The need for increased transparency around
fees, as well as a desire to ensure that advice is
RDR is based on three main tenets:
perceived as free from considerations regarding
commission, has led the FSA to conduct the Retail • Improve the clarity with which firms describe
Distribution Review. their services.
What is the Retail Distribution Review? • Address the potential for advisor remunera-
tion to distort consumer outcomes.
The FSA is seeking to build upon its Treating
Customers Fairly initiative to restore trust. The • Increase the professional standards of
RDR will make regulatory changes to address the advisors.
lack of consumer confidence related to perceived
The FSA is looking to segregate retail distribu-
factors, such as:
tion into various advice channels according to the
• Providers offering significant commissions to extent of analysis carried out by the advisor and
secure sales from advisors. the number of needs for which it provides advice.
Figure 2 describes the four main types of advice
• Advisor firms preferring to recommend
channels recommended by FSA.
products that pay better commissions.
• Product providers determining the charges for
RDR’s Financial Implications
investment advice, without customers having
a clear understanding of the charge process The regulations specified in RDR are expected
and amounts. to incur significant financial overlay on all stake-
holders. The one-off compliance cost with RDR is
Coming into effect at the end of 2012, RDR will projected to total about £430m, with a further
impact all regulated financial organizations £40m annual bill for the industry moving forward.
cognizant 20-20 insights 2

3. Advice Channels Post-RDR Models
Independent Advice Restricted Advice
• Products from the entire market • Simplified advice process (guided sales)
• Charging structure to be established • Limited number of products
• Higher professional standards • Higher professional standards
to be obtained to be obtained
Execution Only Basic Advice
• The customer chooses the • Limited to basic financial needs
product without any advice • Nominal fees to be charged
• Processing fee to be charged • Higher professional standards
• Higher professional standards not required not required
Figure 2
Figure 3 shows the breakdown of the most signifi- their business works. Customers, too, will have to
cant costs. change their approach toward the evaluation and
purchase of insurance products.
Even though the costs associated with RDR are
significant, the rules should be positive for the Smaller firms may have to wind down due to
overall industry in the long run. Advisors will be increased capital requirements related to training
better qualified, and customers will develop more and certifications. A significant proportion of
confidence in them, as well as providers. However, older advisors is expected to retire rather than
small providers and IFA firms will find it difficult to undertake the training and examinations required
meet these costs. The capital adequacy ratio for to attain the new minimum qualifications. RDR is
the industry is also increasing, which could lead also expected to trigger large-scale consolidation
to mergers and the closure of smaller IFA firms. of independent financial services (IFS) firms, as
well as forward integration of providers and inde-
RDR Market Implications pendent financial advisor (IFA) firms.
The policies outlined in the RDR are expected to
revamp the UK insurance distribution landscape. We expect IFAs to maintain a dominant position,
All market players will have to change the way although there will undoubtedly be growth in
One-Time vs. Ongoing Costs
One-Time Costs Ongoing Costs
The cost for The ongoing
ensuring clarity costs per advisor The ongoing
The IT/systems
of services per for independence costs per advisor
cost per advisor
internal advisor is and additional search for IT/systems is
is £523
£168, and the external costs is expected expected to be £500
cost is £1,000 to be £303
The ongoing costs The ongoing costs per
per advisor for advisor for process,
remuneration and disclosure and
The average cost of
explaining charging explanation of status
professional qualifications
basis is expected is expected to be
per advisor is £2,100
to be £303 £448
The one-time cost to firms of complying with The annual ongoing incremental cost of
RDR will total about £430m. compliance is expected to be about £40m.
Figure 3
cognizant 20-20 insights 3

4. direct sales and servicing, particularly as the Transparent disclosure of fees and charges
cost of advice becomes more transparent. As will lead to improved customer perception and
the commission lever disappears, insurers will confidence. Higher professional standards can
increasingly need to differentiate themselves with only be a good thing, while the removal of pro-
their advisor base through their servicing propo- vider-controlled commission should also help
sition. In particular, advisor extranets will need to reinforce customer trust. It remains important for
provide the diminished number of advisors with a independent advisors to review the marketplace
platform-like experience across all their products in which they provide guidance in order to deliver
(not just Wrap), with online tooling and self- genuinely independent advice. It will be possible
service to support ease to provide independent advice even if a firm
Advisor extranets of doing business. The specializes in a narrow and distinct field, such as
direct channel will need retirement planning.
will need to provide to support customers
the diminished with help and guidance, IT: A Key Enabler Beyond
number of advisors simplified advice capa- RDR Compliance
bilities and targeted CIOs will need to ensure their IT platform(s) across
with a platform-like cross-sell/up-sell, as well distribution channels are not only capable of the
experience across all as self-service. changes required for basic compliance but are
their products (not Bancassurers are expected
also sufficient for the potentially larger impact
of the post-RDR landscape. From the discussion
just Wrap), with online to be the biggest gainers
above, it should be clear that insurers need their
tooling and self-service in the new regulatory envi-
IT platforms to be ready to meet the key expected
ronment. Sales through the
to support ease of bancassurance channel are
changes in the market:
doing business. expected to increase, as • B2C: Growth in direct sales and servicing, help
these players are best posi- and guidance in cross-sell, up-sell.
tioned to offer all kinds of advice in the new regime.
They are expected to especially make inroads into
• B2B: Differentiation through self-service and
platform experience.
the guided sales and execution-only revenue cat-
egories. Moreover, these firms possess the main • Ease of integration with third parties,
ingredients that are required to succeed in the post especially bancassurance.
RDR world — a huge supply of capital and the scale • Architecture and processes aligned to Agile
to operate all types of advice processes. delivery.
Changes in Distribution Post-RDR
Direct becomes Many advisors may exit the market. Advisor
more important Growth of bancassurance opportunities servicing becomes a stronger differentiator.
Customers Integrated Partners All Other Advisors,
(direct) (eg, bancassurance) Including IFAs
Advisor Platforms and Productivity
Aggregator Advisor
Back Office
Portals Platforms
Direct Partner Messaging Advisor
Direct Sales Extranet Extranet
Servicing
Product Providers
Help and guidance, simplified advice, Platform-like experience for advisors and partners;
segmentation/targeting high degree of back-office integration
Figure 4
cognizant 20-20 insights 4

5. CIOs will need to get the delicate balancing act increasingly mobile flavor. For customers, this
right for all channels, using as much common needs to be intuitive and include sufficient help
IT capability across them as possible (to control and guidance. For advisors, this needs to be
costs and promote re-use), while preparing for task-oriented, with tools and services helping
the differing pace of change across channels and them perform their jobs more effectively.
the need to be agile and responsive to developing
business strategies. Providers that align their
• Decision-support technology and analytics will
be crucial for simplified advice models and
business and channels to RDR proactively and personalized marketing.
swiftly will be able to steal a march over their
competition. This could turn RDR into an oppor- • Modern contract platforms will come into
their own that are more tuned to simplified
tunity to build brand and increase market share.
products, with configuration rather than
The high-level reference architecture in Figure 5 coding to provide speed to market.
highlights the key technologies for successful dis-
Cognizant’s RDR Consulting Offering:
tribution strategies post-RDR.
RDR Readiness Analysis
The flexible use of key technology enablers Our RDR Assessment Framework provides a com-
(post-RDR) will distinguish successful providers prehensive assessment of the RDR readiness of
from unsuccessful ones. These include: life insurers. The framework performs an analysis
from two perspectives: operational and strategic.
• An understanding of the customer and great
customer service, achieved through MDM The operational analysis measures RDR
and CRM technology, together with business compliance, while the strategic analysis helps the
process management. provider derive competitive advantage from:
• A great user experience with self-service • An assessment of the organization’s maturity
capability on both advisor and direct channels. in key technologies that will be used in the
This will be primarily Web-based but with an post-RDR world.
Key Technologies for Distribution Post-RDR
Advisor: Task-oriented, platform- Customer, Advisor and Internal Access Increasing self-service will require
like UI. Supports advisors’ work Telephony robust identity and access
Advisor Direct Contact Aggregator Advisor
with rich tooling, tracking and Consumer Center Partners Portals Back-Office management coupled with
maximizing self-service. Paper-in anti-fraud measures.
Direct consumer: Customer- User Interaction
centric Web and mobile interaction BPM enables increasing operational
built on strong self-service security. efficiency while at the same time
Web and mobile presentation Identity and
Simplified advice, guidance, B2B Messaging being ready to manage the
(B2B, B2C, B2B2C, Internal) Access Management
maximum on-line self-service for unknowns in the changing sales
new business and servicing. and servicing demands of post-RDR
Transformational Technologies products and distribution channels.
Rules-based decision support: Business Process Management
Key enabler for post-RDR,
simplified advice and next best Build-once/deploy-many: Business
action (sell, cross-sell, up-sell). Decision Management Multi-Channel Service-Based Integration services / processes reusable across
channels for maximum value.
Analytics and BI Services MDM and CRM
Drives decision management,
business strategy and Single view of customer, and great
value-added data services to relationship management crucial to
providing the post-RDR customer
advisors. Core Back-Office Systems and Data experience for both direct and
Underwriting Quotes Engine Payments and Agency Third-Party advisor channels.
Develop simplified products to Commission Management Data Services
appeal to direct channel. Sales LOB Contract Platform(s) and Online self-service access to
Data Warehouses Document Production
process can be more readily Peripheral Systems historic policy documents,
automated end-to-end. and Archive statements, etc.
Pensions Protection Finance
Strategy for legacy platforms: Financial Accounting
Investments Annuities Marketing and Actuarial Systems Combining speed-to-market for
Either migrate or modernize to
post-RDR deployments with
enable self-service, process
rigorous governance requirements.
automation and faster speed to
Governance and Agility
market for new products. Seek
to combine with product Available, high-performance
configurators. Technical Services: Monitoring, alerting, security, audit and responsive e-business
back-end.
Figure 5
cognizant 20-20 insights 5

6. Cognizant’s RDR Readiness Framework
RDR Analysis
RDR Compliance RDR Strategic
Analysis Analysis
Charging Advisor Products Business
Business Drivers IT Maturity
Structures Compliance Test Compliance Test Options
Pair Wise Analysis
Matrix Evaluation Pair Wise
Matrix of Enabling
Evaluation Technologies
Payment Tariffs Product Client Factoring Separation Advisor Advisor Minimum Advisor Product Commission
Option and Fees Neutrality Instructions Removal of Product Charging Disclosure Qualifications Ethics Change Advised Sales
Flexibility Content Test Validation Test and Advice Applicability Test Test Test Management Linkages
Disclosure Charges
Test
Figure 6
• A quick and efficient implementation of the changes, such as increased direct proposi-
regulation. tions, online self-service and agile delivery.
• More streamlined business and IT processes. • A roadmap for IT landscape post-RDR
compliance.
This analysis is carried out through a series of
tests to the business processes, policies, organiza- Moving Forward
tional structures and IT systems. The end result:
RDR is expected to significantly alter the distri-
Generation of an RDR compliance implementation
bution landscape of the UK insurance industry.
dashboard with a detailed roadmap to ensure RDR
This includes the way distributors are trained,
compliance, as well as a future business map and
give advice, provide services and are paid, as well
a strategic options dashboard to provide market
as the relationships they have with the suppliers
advantage from an RDR perspective.
of financial products. Customer behaviors are
Benefits to the insurer include: likely to change, and the service proposition that
insurers offer advisors will need to be stronger.
• External guidance in the still-evolving RDR
compliance landscape. To take advantage of these changes, insurers and
distributors require an IT platform across distri-
• Metrics-driven assessment within budgetary
bution channels that is capable of supporting
and other organizational constraints.
self-service, simplified advice and products, as
• Enterprise-wide clarity with better insight into well as responding rapidly to changing market
the probabilistic impact of RDR regulation. requirements.
• An IT readiness assessment for post-RDR
Reference
http://www.fsa.gov.uk/pages/About/What/rdr/index.shtml
Harris Poll Omnibus
cognizant 20-20 insights 6

7. About the Authors
Mohan Babu is a Senior Insurance Analyst who heads Cognizant’s Life & Annuity Consulting unit within
the Insurance Practice. He has over 16 years of experience in insurance, IT and consulting and has led
several consulting engagements for leading insurers globally, in the areas of legacy modernization, policy
administration, systems migration strategy, portal and Web strategy, operational efficiency improve-
ments, business process outsourcing assessment and data standards. He currently leads a team of
business analysts and consultants drawn from top tier business schools across India and abroad focused
on developing domain-related assets, consulting offerings, solution accelerators, business support for
global IT engagements, as well as competency development and pre-sales strategy and support. He has
an MBA and is a Fellow of the Life Management Institute of LOMA, where he earned associate’s degrees
in reinsurance administration and annuity products administration. He can be reached at Mohan.Vinay@
cognizant.com.
Carl Tutill is a Principal Architect within Cognizant’s UK Insurance Practice. He is a seasoned senior
architect, leading transformational change programs within complex IT landscapes, particularly in
e-business. His key expertise is in multi-channel e-business architectures, integration, SOA, BPM, MDM
and identity and access management. He has worked for and with leading life insurers and has experience
in the banking and engineering domains. Carl’s background includes four years as a Senior Enterprise
Architect at Aviva UK, where he held numerous consultancy and systems integrator roles. He can be
reached at Carl.Tutill@cognizant.com.
Taruna Mudiganti is a consultant with over seven years of experience in insurance and IT industries.
At Cognizant, Taruna specializes in life, pensions and investments in the UK market. She has extensive
experience leading consulting assignments focusing on all processes in the life insurance value chain.
She has also worked on developing solutions, frameworks and research papers encompassing the
insurance domain, FSA regulations, insurance market trends and players in the UK. She is certified
by the Chartered Insurance Institute, UK, as well as the Life Management Institute of LOMA. Taruna
also worked in sales and operations at SBI Life Insurance, the largest bancassurer in India. She can be
reached at taruna.m@cognizant.com.
About Cognizant
Cognizant (NASDAQ: CTSH) is a leading provider of information technology, consulting, and business process out-
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