Why Insurers Must Urgently Prioritize Vendor Risk Management
Effective vendor risk management is crucial as insurance companies increasingly outsource technology and services. While outsourcing helps access advanced technology it also introduces challenges, such as increased regulatory scrutiny. With an increasingly interconnected digital world, malicious actors frequently exploit vulnerabilities in an organization’s network and this could include its vendors and third parties.
Technology partner vendor agreements often last five to seven years. Over such long periods, the risk landscape can change significantly. Having a third-party risk management framework spelled out will ensure ongoing oversight and safeguard against evolving threats, regulatory changes, and potential lapses in vendor performance.
Why a Vendor Risk Management Framework Matters
A Vendor Risk Management (VRM) framework supports and sustains the entire VRM program. It provides the essential guidelines, procedures, and best practices to effectively manage third-party vendors' risks. Without a solid framework in place, any VRM program will struggle with inefficiencies, inconsistencies, and missed opportunities to mitigate risks.
A Vendor Risk Management (VRM) framework for insurance companies is a structured approach to identify, assess, manage, and mitigate risks associated with third-party vendors and service providers.
Imagine the VRM framework as the skeleton of a building. It defines the architecture and ensures that every component — from risk assessments to vendor monitoring and incident response — is structured and interconnected. This organization is crucial because it enables companies to systematically identify potential risks, assess their impact, and implement appropriate controls. Without such a framework, there’s a risk of ad-hoc approaches and reactive measures, which can lead to vulnerabilities and missed regulatory compliance.
Here is why an effective third-party risk management framework is critical:
The Regulatory Radar for Insurance Vendor Risk Management
The insurance industry in America, along with its third-party vendors, operates under stringent regulations set by both federal and state agencies. These regulations establish standards and best practices that companies must follow to ensure security, compliance, and operational integrity. Specifically:
- The Insurance Data Security Model Law: Developed by the National Association of Insurance Commissioners (NAIC) and adopted by many U.S. states, requires insurance organizations to implement comprehensive information security measures. These include stringent protocols for managing and mitigating risks posed by third-party vendors
- OCC (Office of the Comptroller of the Currency): Although the OCC primarily regulates national banks, its guidelines on risk management practices are often adopted by insurance companies to manage third-party risks effectively.
- FFIEC (Federal Financial Institutions Examination Council): The FFIEC provides uniform standards and reports for financial institutions, including insurers, focusing on IT security, risk management, and third-party oversight. Insurance companies adhere to these guidelines to ensure robust cybersecurity measures (particularly if insurance platforms are on the cloud) and risk management practices.
- CFPB (Consumer Financial Protection Bureau): The CFPB regulates financial products and services, including those offered by insurance companies. Compliance with CFPB standards ensures that companies treat customers fairly and transparently, particularly regarding third-party vendor interactions.
Additionally, insurance companies must meet reporting and auditing requirements set by state regulators. Each state’s insurance department may have specific regulations that require regular reporting on compliance, financial health, and risk management practices. This includes annual risk assessments of third-party services.
Four-Stage Vendor Risk Management Framework for U.S. Insurance Companies
American insurance companies operate under stringent regulations and handle highly sensitive data, making a robust third-party risk management framework essential.
Given that most insurance platforms utilize external cloud services, much of the security responsibility lies with these cloud providers. The responsibility of your insurance technology vendor is to provide a system that is regulatory compliant. They must additionally manage the responsibility of ensuring that the cloud service providers adhere to their security obligations.
Here’s a comprehensive insurance vendor risk management framework that covers the full cycle of vendor interactions.
All 4 stages are available in the original article published here with permission: https://www.simplesolve.com/blog/vendor-risk-management
Originally published at https://www.simplesolve.com.
