Business Insurance RMIS Article

"Adoption of XML standard could ensure data quality and control "

May 23, 2005

by Joanne Wojcik

Spurred by the need for better financial reporting, the insurance industry's global standards organization is exploring ways to make it easier for companies to transfer insurance-related data-such as claims reserves-onto their corporate balance sheets.

While such a link ultimately may be desirable, it may not be of much use immediately, though, because few commercial insurers and third-party administrators currently transmit data to corporate risk management departments using ACORD XML, the electronic data language standard for the insurance industry that the Pearl River, N.Y.-based Assn. for Cooperative Operations Research & Development has been trying to promulgate since 1999.

But the passage of the Sarbanes-Oxley Act, which requires greater controls on electronic information systems to ensure better data quality, should speed up the adoption of ACORD XML, thereby making such a bridge more useful, insurance data experts hope.

ACORD XML is one member of a family of languages based on XML, short for "extensible markup language," a universal general-purpose format for the communication of electronic data introduced in 1998 by the World Wide Web Consortium (see related story). ACORD XML and many other such "metalanguages" based on XML-including XBRL, or "extensible business reporting language," which was developed for use by accountants and auditors-use "tags" to code and define virtually any electronic data elements on Web pages and documents. The tags can be defined by the developer of the page or document, allowing them to function as database records.

"XML is an artifact, a manufactured thing that came out of document management systems in the irst attempts to automate word processing," explained Kevin S. Kelly, managing director, U.S. insurance industry, at Microsoft Corp. in Redmond, Wash. "They had to find a way to store the data about the documents that could then be presented up on a screen," he said.

"So ACORD manages all of this vocabulary by having industry people come in and vote on it in meetings. And they actually do a maintenance process of adding and replacing tags, adding new forms, etc.," he said.

But while ACORD XML and XBRL-which was developed by a New York-based nonprofit consortium called XBRL International-may both use a tag structure, they are not similar enough to permit the data from one to be transferred directly to the other. Instead, the data usually has to be translated and manually reinputted, which can lead to errors.

"A lot of the elements in ACORD wouldn't fit in XBRL, such as a policy number or a vehicle identification number. But XBRL has a place for accounts receivable or billing information or account status, which might include reserves that have been established or funds received from an insurance claim having been filed," Mr. Kelly said.

It is because of the potential overlaps that ACORD and XBRL are beginning discussions about creating a bridge to share data.

"Any technology standard that enables developers to exchange more data more rapidly and more easily and enables applications to be built faster and with very rich interactions with real-time data or real-world data is a good thing for the business community," Mr. Kelly said.

For risk managers, connecting the two XML languages may offer benefits, but only once their insurers and other business partners support the existing ACORD XML standards, according to Elizabeth M. Morrell, senior risk analyst at Southern Co., a utility company based in Atlanta. Ms. Morrell recently stepped down as chair of the technical advisory council of the Risk & Insurance Management Society Inc.

"Once risk managers are receiving claims data in the ACORD XML loss run format, then I could see having a conduit to translate detailed loss data-particularly reserves-into a summary number that could flow to your financial reports," Ms. Morrell said. "But we have to put first things first."

"Claims reserves are getting a lot more attention from auditors these days because of the potential for manipulation or misstatement," she said. "If you don't get your claim reserves right, you're potentially impacting both your balance sheet liability and earnings for the period. Under Sarbanes-Oxley, the consequences of a problem with reserves that results in a restatement of earnings are much more serious."

RIMS has pushed for greater use of ACORD XML, but for the most part, "every carrier still sends data to the risk manager, or their RMIS (risk management information system) vendor, in their own proprietary format," Ms. Morrell said.

"For risk managers, calling on our industry partners to implement existing ACORD standards, especially where they can support more-consistent, accurate, real-time claims reporting, has to come first" before any bridge with XBRL is built, she said.

The use of the ACORD XML data standard has been more common in personal and small commercial lines than in large commercial lines, acknowledged Beth Grossman, assistant vp, industry relations, at ACORD in Pearl River, N.Y.

"The ACORD XML standards for policy administration are fighting years of traditional other methods," said Mr. Kelly. "By contrast, there hasn't been another competing technology standard in financial statement reporting before XBRL."

But the U.S. Securities & Exchange Commission's announcement in early February that it would begin accepting financial reports in XBRL, along with Sarbanes-Oxley and pressure from RIMS, should accelerate the adoption of ACORD XML by the insurance industry, making a link to XBRL even more desirable, Ms. Grossman said.

"Across the board, the importance of data quality and translation and being able to follow the flow of information is continuously growing, especially with Sarbanes-Oxley," Ms. Grossman said.

Under Sarbanes-Oxley, a company must document all of the controls it has in place to ensure the quality of its financial data, as well as any information coming from outside sources that is material to a company's operations, she explained. For example, both insurers and self-insurers must certify the accuracy and completeness of systems feeding loss information into their general ledgers. They also must closely follow any data transmitted to them by TPAs and insurers, Ms. Grossman said.

Once ACORD XML becomes more commonly used by the commercial insurance industry, it shouldn't be difficult to link it to XBRL, because both are based on XML, according to Mr. Kelly.

"Building the bridge should be easy, because the group that developed XBRL at Microsoft is the same group that works with ACORD. So there's already a connection between the Microsoft people who participated on the steering committee and the group that deals with ACORD. It's the same group of people," he said. "Microsoft also helped ACORD get into XML."