Anchoring Climate Change Risk Assessment in Core Business Decisions in Insurance

Publié le par hanswillertbleuazurconsultingeu

Key messages:

  1. The development of decision-relevant climate change risk assessment with a holistic approach requires an exploratory, iterative and adaptive process that will take time. A holistic approach
    considers physical, transition and litigation risks and their interactions at different time horizons in the short and long term. It considers both sides of the balance sheet, as well as interactions across business functions and decision feedback loops to assess the materiality of risks and develop potential actions to address them. Importantly, some re/insurers that have advanced further in this iterative process have found it beneficial to anchor the assessment in overarching decision areas that link both sides of the balance sheet. While re/insurers in all business lines have started exploring the materiality of physical and transition climate change risks on each side of the balance sheet, for life & health re/insurers in particular, more research is required to assess the attributions and materiality of climate change to their underwriting exposures – including longevity, mortality and morbidity –over various time horizons. As research in this field progresses, the ability both to assess life & health re/insurer liability exposures and perform more holistic assessments will improve.
  2. An analysis of regulatory developments since June 2021 and a survey conducted by The Geneva Association reveal that the regulatory and supervisory priorities and approaches are increasingly aligned with earlier GA task force recommendations related to climate change risk assessment and scenario analysis.
  3. Responses from 11 regulatory bodies to a Geneva Association Survey shed light on the regulatory objectives and priorities that can help guide climate change risk assessment exercises within and across jurisdictions. Our analysis has revealed the top four regulatory priorities:
    • policyholder protection,
    • the insurer’s financial health,
    • corporate governance and strategy,
    • the insurability/affordability of insurance solutions,
    • financial stability,
    • raising risk awareness,
    • addressing data/risk assessment services and environmental stewardship.
  4. Company boards and executive management need to consider the following four key issues to drive the process towards a more holistic approach that would produce decision-useful information:
    • Board oversight and executive management buy-in for company-wide engagement, along with appropriate resource allocation to build these capabilities, are important;
    • The coordination and execution of climate change risk assessment require an internally established, company-specific mandate with clear accountability;
    • Central to this process is the development of overarching decision-relevant questions for the board and the C-suite (a list based on the GA survey of regulatory and standard-setting bodies is included);
    • Company-relevant business use cases should be designed and utilised to guide the iterations of climate change risk assessment.
  5. A 10-step template provided in this report can help companies design business use cases to frame the analysis, engage experts from relevant business functions across the balance sheet, and mine and utilise the same data and tools across the company. It is important to start simple by exploring the impacts of each climate change risk type, on each side of the balance sheet, considering short- and long-term time horizons. With each iteration, companies can build up the level of complexity by assessing the interactions of physical, transition and litigation risks and exploring how these risks are manifested within and across business functions. Of note:
    • This process should consider internal business functions and their interactions as well as external drivers that impact issues relevant to the business use case, by risk type and time horizon;
    • Materiality analysis is at the heart of climate change risk assessment, allowing focus on the
      areas most impacted by climate change risks and identifying priorities for a deeper dive and
      resource allocation;
    • As part of the design and implementation of business use cases, the company should seek to
      identify metrics to measure and monitor the risks and track the impacts of the measures taken to manage them;
    • This resource-intensive process will take time and present challenges that will need to be addressed, ranging from overtime and the availability of data for the given region to internal experience and expertise, and the availability of best practices. In this report, we offer three examples of business use cases to demonstrate these points.
  6. The use of forward-looking scenario analysis needs to be further explored, depending on the issue being considered. Scenario analysis is a tool for conducting a forward-looking assessment of risks and opportunities, where the company can systematically explore individual or combined factors and make strategic decisions in the face of significant uncertainties. Scenario analysis may be used for a range of applications, for example:
    • Testing the resilience of a company’s business model to climate change-related risks;
    • Assessing the implications of possible actions a company can take;
    • Stress-testing the company’s business model under extremely adverse conditions.
  7. Through strong industry collaboration, re/insurers should conduct an analysis of existing data challenges, gaps and needs, and define priority areas and requirements for the future development of tools. More work is required by re/insurers and regulatory bodies to identify gaps in data, to converge on best practices and build a robust toolbox for forward-looking climate change risk analyses. Since 2021, several organisations have offered an assessment of the gaps in climate change risk data and tools in the current landscape, with a focus on certain applications or segments in the financial sector. The journey towards a holistic approach could lead re/insurers to address such gaps over time, not least in emissions data, asset locations and supply chain data. Note that life & health re/insurers still face challenges when it comes to identifying the types of data that would allow the extraction of climate change attribution and liability exposures.
  8. Importantly, company leadership should seek to harmonise and align their net-zero target-setting
    activities using ‘inside-out’ analysis with efforts to assess the resilience of their business model to
    climate change risks using ’outside-in’ approaches for developing viable targets, transition strategy and plans    . In fact, a growing number of critics are calling out the misalignment of net-zero pledges with what the companies can actually deliver and the possibility of greenwashing, which could lead to potential reputational and climate litigation risks or even regulatory action.
  9. Robust intra- and inter-sectoral collaboration is the only way to expedite the development and convergence of good practices, meaningful baseline requirements for decision-useful climate change risk assessments and disclosures that would allow for cross-company comparisons. To this end, we acknowledge and deeply appreciate the growing proactive collaboration and engagement
    across the insurance industry and with key regulatory and standard-setting bodies in the financial sector.

Context

In 2020, The Geneva Association (GA) launched its task force on climate change risk assessment with the aim of advancing and accelerating the development of holistic methodologies and tools for conducting forward-looking climate change risk assessment. These efforts have intended not only to support primary insurance and reinsurance companies and regulatory bodies with innovation in this area, but also to demonstrate the benefits of industry-level collaboration to help expedite the development and convergence of best practices.

In its first two reports, the GA task force highlighted the complexities associated with the development of forward-looking climate change risk assessment methodologies and tools. It stressed the need to develop methodologies for holistic climate change risk modelling and scenario analysis for both sides of the balance sheet, using a combination of qualitative and quantitative approaches. The GA task force also highlighted the implications of physical and transition risks for the insurance industry, with a focus on the challenges of quantitative scenario analysis approaches. The conclusion was that the prescriptive quantitative regulatory exercises to date, which were conducted to raise awareness, have outlived their
purpose. More specifically, these resource-intensive exercises do not provide decision-useful information given the significant uncertainties associated with the transition to a carbon-neutral economy (e.g. uncertainties associated with public policy, market and technology risks). Finally, the GA task force called on regulatory bodies to clarify their regulatory objectives and explain how their exercises would deliver decision-useful information. It also stressed the need for convergence on baseline regulatory requirements for analysis and reporting across jurisdictions. To this end, it encouraged stronger collaboration between regulatory bodies within and across jurisdictions, as well as with the insurance industry, to enable the sharing of lessons learned and access to broader expertise, in the aim of expediting the convergence of best practices.

Since June 2021, there have been several developments on the policy, technology, regulatory and scientific fronts, with implications for companies’ climate change risk assessment.

The evolving regulatory landscape for climate change risk assessment

Between June 2021 and May 2022, certain regulators launched new initiatives and published guidelines. A synthesis of these developments reveals the need for regulatory bodies to:

  • Acknowledge the limitations of current tools, models and data for long-term quantitative scenario analysis (as evidence, the 2021 Bank of England Climate Biennial Exploratory Scenarios experiment concluded that projections of climate change losses are uncertain; the view that scenario analysis is still in its infancy, with notable data gaps; and the increasing recognition among some regulatory bodies that quantitative approaches can and should be complemented with qualitative assessments, especially over a longer time horizon);
  • Stress the need to consider multiple scenarios representing different plausible pathways of transition or physical risks, and expand benchmark scenarios (typically NGFS) with sectoral and geographical granularity considerations;
  • Recognise the principle of proportionality, with expectations linked to the size and organisational complexity of the company;
  • Stress the importance of materiality in supervisory expectations for quantitative assessments as well as robust governance of climate change risks, with a need for transparency, particularly in relation to re/insurer investments in carbon-intensive sectors.

As of July 2022, there are still variations in the approaches used by regulators. Regulators agree, however, that this could impede comparisons across companies and jurisdictions as well as the ability to assess broader systemic economic and social impacts. Importantly, the International Association of Insurance Supervisors (IAIS) is working on promoting a globally consistent supervisory response to climate change, with a focus on three areas:

  • standards,
  • data
  • and scenario analysis,

by providing guidance to regulatory bodies. The Financial Stability Board (FSB) is also issuing guidance on supervisory and regulatory approaches across borders and sectors to address market fragmentation and potential sources of systemic risk. Finally, the development of a global baseline for sustainability reporting standards with a focus on climate change, by the ISSB, aims to translate them further into harmonised inter-jurisdictional standards.

Strategic importance of aligning inside-out and outside-in climate risk assessment approaches

Companies are conducting two types of climate risk assessment:

  • Inside-out analysis: This includes assessing the impact of the company’s actions on the climate by setting their climate targets (e.g. net zero targets) based on a variety of science-based approaches, such as those introduced by the UN Net-Zero Asset Owner Alliance (UN NZAOA) and the Science-Based Targets initiative (SBTi). For example, the UN-convened Net-Zero Alliances uses 1.5°C-compatible pathways, which may be far more ambitious than what companies and the real economy can deliver. In fact, the UN NZAOA has warned that the global economy does not move as is required by science, leading to a widening gap between companies’ climate targets and the real economy. Net-zero targets need to take this widening gap into account as this misalignment could lead to other financial and non-financial risks for the company, including reputation risk. This is further exacerbated by the fact that climate science is still evolving.
  • Outside-in analysis: This involves assessing the resilience of the company’s business model to climate change risks, which is the focus of this report. It is important to emphasise that the development of the company’s strategy, transition plan and related actions cannot be done solely using inside-out analysis. Conducting outside-in analysis is critical, enabling the company to assess not only the impacts of climate change risks and their interactions, but also the implications of the possible range of activities under different scenarios on the firm’s business model. Of note, the inside-out view puts greater emphasis on ‘impact’ – which has a clear political component and should be grounded in materiality assumptions, which is the central objective of the outside-in analysis.

In summary, companies should seek to harmonise and align inside-out with outside-in climate change risk assessment efforts (Figure 1). In fact, a growing number of critics are calling out the misalignment of net-zero pledges by the financial sector, in light of their already committed investments in carbon-intensive sectors for the years to come. Critics are also raising the possibility of greenwashing, which could lead to potential climate litigation risk. Regarding the latter, some regulators are developing KPIs to assess and monitor the existence and level of greenwashing as part of their efforts to incorporate climate change factors into their regulatory mandate.

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The Role of Trust in Narrowing Protection Gaps

Publié le par hanswillertbleuazurconsultingeu

The Geneva Association 2018 Customer Survey in 7 mature economies reveals that for half of the respondents, increased levels of trust in insurers and intermediaries would encourage additional insurance purchases, a consistent finding across all age groups. In emerging markets this share is expected to be even higher, given a widespread lack of experience with financial institutions, the relatively low presence of well-known and trusted insurer brands and a number of structural legal and regulatory shortcomings.

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Against this backdrop, a comprehensive analysis of the role and nature of trust in insurance, with a focus on the retail segment, is set to offer additional important insights into how to narrow the protection gap—the difference between needed and available protection—through concerted multi-stakeholder efforts.

The analysis is based on economic definitions of trust, viewed as an ’institutional economiser’ that facilitates or even eliminates the need for various procedures of verification and proof, thereby cutting transaction costs.

In the more specific context of insurance, trust can be defined as a customer’s bet on an insurer’s future contingent actions, ranging

  • from paying claims
  • to protecting personal data
  • and ensuring the integrity of algorithms.

Trust is the lifeblood of insurance business, as its carriers sell contingent promises to pay, often at a distant and unspecified point in the future.

From that perspective, we can explore the implications of trust for both insurance demand and supply, i.e. its relevance to the size and nature of protection gaps. For example, trust influences behavioural biases such as customers’ propensity for excessive discounting, or in other words, an irrationally high preference for money today over money tomorrow that dampens demand for insurance. In addition, increased levels of trust lower customers’ sensitivity to the price of coverage.

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Trust also has an important influence on the supply side of insurance. The cost loadings applied by insurers to account for fraud are significant and lead to higher premiums for honest customers. Enhanced insurer trust in their customers’ prospective honesty would enable

  • lower cost loadings,
  • less restrictive product specifications
  • and higher demand for insurance.

The potential for lower cost loadings is significant. In the U.S. alone, according to the Insurance Information Institute (2019), fraud in the property and casualty sector is estimated to cost the insurance industry more than USD 30 billion annually, about 10% of total incurred losses and loss adjustment expenses.

Another area where trust matters greatly to the supply of insurance coverage is asymmetric information. A related challenge is moral hazard, or the probability of a person exercising less care in the presence of insurance cover. In this context, however, digital technologies and modern analytics are emerging as potentially game-changing forces. Some pundits herald the end of the age of asymmetric information and argue that a proliferation of information will

  • counter adverse selection and moral hazard,
  • creating transparency (and trust) for both insurers and insureds
  • and aligning their respective interests.

Other experts caution that this ‘brave new world’ depends on the development of customers’ future privacy preferences.

One concrete example is the technology-enabled rise in peer-to-peer trust and the amplification of word-of-mouth. This general trend is now entering the world of insurance as affinity groups and other communities organise themselves through online platforms. In such business models, trust in incumbent insurance companies is replaced with trust in peer groups and the technology platforms that organise them. Another example is the blockchain. In insurance, some start-ups have pioneered the use of blockchain to improve efficiency, transparency and trust in unemployment, property and casualty, and travel insurance, for example. In more advanced markets, ecosystem partners can serve as another example of technology-enabled trust influencers.

These developments are set to usher in an era in which customer data will be a key source of competitive edge. Therefore, gaining and maintaining customers’ trust in how data is used and handled will be vitally important for insurers’ reputations. This also applies to the integrity and interpretability of artificial intelligence tools, given the potential for biases to be embedded in algorithms.

In spite of numerous trust deficits, insurers appear to be in a promising position to hold their own against technology platforms, which are under increasing scrutiny for dubious data handling practices. According to the Geneva Association 2018 Customer Survey, only 3% of all respondents (and 7% of the millennials) polled name technology platforms as their preferred conduits for buying insurance. Insurers’ future performance, in terms of responsible data handling and usage as well as algorithm building, will determine whether their current competitive edge is sustainable. It should not be taken for granted, as—especially in high-growth markets—the vast majority of insurance customers would at least be open to purchasing insurance from new entrants.

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In order to substantiate a multi-stakeholder road map for narrowing protection gaps through fostering trust, we propose a triangle of determinants of trust in insurance.

  1. First, considering the performance of insurers, how an insurer services a policy and settles claims is core to building or destroying trust.
  2. Second, regarding the performance of intermediaries, it is intuitively plausible that those individuals and organisations at the frontline of the customer interface are critically important to the reputation and the level of trust placed in the insurance carrier.
  3. And third, taking into account sociodemographic factors, most recent research finds that trust in insurance is higher among females.

This research also suggests that trust in insurance decreases with age, and insurance literacy has a strong positive influence on the level of trust in insurance.

Based on this paper’s theoretical and empirical findings, we propose the following road map for ensuring that insurance markets are optimally lubricated with trust. This road map includes 3 stakeholder groups that need to act in concert: insurers (and their intermediaries), customers, and regulators/ lawmakers.

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In order for insurers and their intermediaries to bolster customer trust—and enhance their contribution to society—we recommend they do the following:

  • Streamline claims settlement with processes that differentiate between honest and (potentially) dishonest customers. Delayed claims settlement, which may be attributable to procedures needed for potentially fraudulent customer behaviour, causes people to lose trust in insurers and is unfair to honest customers.
  • Increase product transparency and simplicity, with a focus on price and value. Such efforts could include aligning incentives through technology-enabled customer engagement and utilising data and analytics for simpler and clearer underwriting procedures. This may, however, entail delicate trade-offs between efficiency and privacy.
  • ‘Borrow’ trust: As a novel approach, insurers may partner with non-insurance companies or influencers to access new customers through the implied endorsement of a trusted brand or individual. Such partnerships are also essential to extending the business model of insurance beyond its traditional centre of gravity, which is the payment of claims.

Customers and their organisations are encouraged to undertake the following actions:

  • Support collective action against fraud. Insurance fraud hinders mutual trust and drives cost loadings, which are unfair to honest customers and lead to suboptimal levels of aggregate demand.
  • Engage with insurers who leverage personal data for the benefit of the customer. When insurers respond to adverse selection, they increase rates for everyone in order to cover their losses. This may cause low-risk customers to drop out of the company’s risk pool and forego coverage. ‘Real time’ underwriting methods and modern analytics are potential remedies to the undesirable effects of adverse selection.

Recommendations for policymakers and regulators are the following:

  • Protect customers. Effective customer protection is indispensable to lubricating insurance markets with trust. First, regulators should promote access to insurance through regulations that interfere with the market mechanism for rate determination or through more subtle means, such as restrictions on premium rating factors. Second, regulators should make sure that insurers have the ability to pay claims and remain solvent. This may involve timely prudential regulatory intervention.
  • Promote industry competition. There is a positive correlation between an insurance market’s competitiveness and levels of customer trust. In a competitive market, the cost to customers for switching from an underperforming insurance carrier to a more favourable competitor is relatively low. However, the cost of customer attrition for insurers is high. Therefore, in a competitive market, the onus is on insurers to perform well and satisfy customers.

Click here to access Geneva Association’s Research Debrief

 

Incumbents and InsurTechs must embrace each other’s unique strengths and work together

Publié le par hanswillertbleuazurconsultingeu

Executive summary

New challenges, changing business dynamics have set off a tectonic shift in the insurance industry

  • Customer expectations are evolving, offers are becoming more innovative, and new players are making their presence known.
  • Fundamental and significant challenges will require insurers’ immediate and considered attention.
  • As a result of these changing dynamics, incumbents and InsurTechs agree that collaboration with other industry players is necessary to create an integrated portfolio of offerings.

Insurers must support a platform that serves a broad spectrum of customer needs

  • The future marketplace will showcase a bouquet of offerings that caters to customers’ financial and non-financial needs.
  • Insurers need a structured approach to marketplace development that includes proper identification of customer preferences and relevant offerings, evaluation of best-fit partners, and an effective GTM strategy.
  • Today’s operating model will undergo a fundamental transformation as part of the inevitable path forward.

Experience-led digital offerings and seamless collaboration with ecosystem players will drive marketplace success

  • Insurers will need to tear down internal silos, seamlessly connect with ecosystem players, and be more inventive.
  • Our Inventive Insurer profile includes key characteristics:
    • intelligent insurer,
    • open insurer,
    • deep customer,
    • and product agility.

Incumbent-InsurTech collaboration can shore up competencies in preparation for the future

  • InsurTechs’ unique capabilities and agility make them ideal partners for incumbents aiming to carve out a substantive role in the new marketplace.
  • A successful holistic collaboration will focus on long-term benefits.

New ecosystem roles will evolve as the industry transitions toward the marketplace model

  • Industry players must decide how to successfully and profitably contribute to the new ecosystem based on their most compelling competencies, as well as market needs and the external environment.

There’s no looking back for today’s digitally-empowered consumers

Throughout the past decade, as smart technology tools became mainstream, consumer interaction with the world changed dramatically. Changing lifestyles, behavior, and preferences have created a digital-age paradigm. As smartphones and the internet unlock information and decision power, interconnectivity, personalization, and seamless omnichannel access have become must-haves.

So, what does this mean for insurers?

Policyholders seek new offerings: Traditional insurance policies may not fully meet customers’ changing needs and desire for add-on services, personalization, and flexible offerings. In fact, for nearly half of policyholders, the decision to continue with their insurer is influenced by the availability of these features and benefits, according to the World Insurance Report (WIR) 2019.1

The demand for digital transaction channels is up: The popularity of digital channels is gradually growing. More than half of insurance customers (nearly 52%) interviewed as part of the WIR 2018 placed high importance on the mobile and internet or a website channel for conducting insurance transactions.

Simplicity is the rationale behind genuinely digital products

Digital channels work best when insurers streamline and standardize products and processes so customers easily understand features and benefits and can make direct purchases online with ease. In short, insurers must simplify offerings to create genuinely
digital products.

  • Easy to understand: Policy details should be redesigned and reformatted for straightforward interpretation so customers can quickly make a buy/ no-buy decision. For example, Berkshire Hathaway’s Insurance Group (BiBerk) launched a comprehensive insurance product for small businesses that combines multiple coverages. Dubbed THREE, the new product is three-pages long and links coverage for workers compensation, liability (including general liability, errors and omissions, and cyber), property, and auto.
  • Automated processes: Straight-through processing and other ease-of-use tools can simplify underwriting, claims processing, and more across the value chain. Cake Insure, a subsidiary of Colorado-based Pinnacol Assurance, launched in late 2017 with an algorithm that produces a bindable quote in less than a minute and a bound policy in fewer than five minutes for small businesses seeking workers’ compensation insurance. New York-based property and casualty InsurTech Lemonade uses artificial intelligence to automate claims processing. Lemonade showcases a 2016 case in which it crossreferenced a claim against a user’s policy, ran 18 anti-fraud algorithms, approved the claim, and sent wiring instructions to the bank in three seconds to demonstrate ease of use.
  • Straightforward policy wording: Descriptions of policy coverage and expenses (which ones are payable and which do not qualify) must be explained clearly in everyday language. Similarly, insurance industry players should work together to standardize definitions, exclusions, and processes.
  • Interactive customer education: Gamification, interactive videos, and social channels are ways to educate customers about risks, their need for coverage, and policy details. Interaction can also improve customer engagement and experience.

The marketplace of the future can holistically focus on customer needs

HomeFlix is a virtual assistant offering renters and homeowners insurance underwritten by Zurich Connect, the digital arm of Zurich Italy, and powered by on-demand digital broker Yolo, a Milan-based InsurTech. In addition to insurance coverage, the policy, introduced in July 2019, offers laundry service – washed and ironed after a few days and paid directly on delivery. Access to concierge maintenance services such as plumbing and electric also is available. Next, HomeFlix plans home delivery, babysitting, and cleaning services.

New York-based Generali Global Assistance (a division of Italy’s Generali Group, which provides travel insurance-related services) strategically partnered with San Francisco-based rideshare company Lyft in late 2017 to improve customer service and contain costs for clientele of its insurance companies and multinational corporations. Later, Lyft
collaborated with CareLinx, a US professional caregiver marketplace that helps find, hire, manage and pay caregivers online, to create CareRides, a door-to-door transportation service for special-needs individuals in 50 US metro areas. Generali Global Assistance also partnered with CareLinx to provide value-added services for existing policyholders in times of need.

The marketplace of the future can offer emerging-risk coverage

Working with Cisco, Apple, and Aon, Allianz launched a comprehensive cyber insurance product for businesses in early 2018. The product includes a solution comprised of cyber-resilience evaluation services from Aon, secure technologies from Cisco and Apple, and options for enhanced cyber insurance coverage from Allianz. The product aims to help a broader range of organizations manage and protect themselves better from cyber risks associated with ransomware and malware-related threats.

The marketplace of the future can deliver simple to understand, easy-access offerings

Berlin-based startup FRIDAY offers innovative, digital automotive insurance with features like kilometeraccurate billing, the option to terminate at month’s end, and paperless administration. The InsurTech’s technologies and partnerships include:

  • Telematics support from the BMW CarData platform and from TankTaler, which tracks vehicle location as well as data such as battery voltage, mileage, and other statistics
  • Automotive services through the mobility hub of ATU, a German chain of vehicle repair franchises
  • Drivy, a peer-to-peer car rental marketplace that enables consumers to lease vehicles from private individuals
  • Friendsurance, a peer-to-peer InsurTech that pays out a percentage to customers who do not use (or use very little) annual insurance also sells FRIDAY policies

Prudential Singapore and StarHub partnered to create FastTrackTrade (FTT), Singapore’s first digital trade platform for small and midsized business (SMBs) that uses blockchain technology. FTT helps SMBs find business partners and distributors, buy and sell goods, track shipments, receive and make payments, access financing, and buy insurance via a single platform. FinTech startup Cités Gestion developed the pioneering platform with funding from Prudential.

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Structure supports success

Insurer success in the future marketplace will rely on a structured approach (see Figure 3).

  • Understanding customer preferences and conceptualizing product portfolios: Insurers can tap new data sources such as social media channels and use behavioral analytics for better understanding and more accurate estimation of their customer’s preferences and risk profile. With a deeper understanding of customers, they can conceptualize personalized product portfolios for each customer segment.
  • Recruiting the right partners: Once the product portfolio is finalized, insurers should look for partners that align with their business objectives and strategic vision. Cultural fit, ease of integration of systems, and seamless channels of communication are key success factors.
  • Structuring the offerings portfolio: Insurers should closely collaborate with partners while assembling their portfolio. A winning product/service mix offers a hyper-personalized one-stop solution for all the needs of the customer.
  • A compelling go-to-market strategy: Insurers should be able to communicate the value of the marketplace by touting human-centric offerings that customers find simple to understand and easy to access.
  • Capturing feedback: Through advanced analysis of sales data, direct customer input, social media, etc., insurers can capture feedback about their offerings. The process should be continuous rather than on an ad-hoc basis. More importantly, the input should be immediately acted upon to enhance current products or to conceptualize a new product.

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To realize the full potential of the structured approach, four fundamental shifts in the current operating model are critical

For an insurer to realize the full potential of the structured approach and ensuring the successful creation of the marketplace of the future, four fundamental shifts in the current operating model are critical (see Figure 4). The importance of these areas is borne out by the research. For example:

  1. Experience: More than 70% of insurers and InsurTechs said a focus on holistic risk solutions for customers was critical to establishing a future-state insurance marketplace.
  2. Data: More than 70% said advanced data management capabilities are critical.
  3. Partnerships: 90% of InsurTechs said partnerships were critical while 70% of incumbents said the same. Both insurers and InsurTechs have a hearty appetite for collaboration with other sectors, such as healthcare providers and players from the travel, transportation, and hospitality space (see Figure 5).
  4. Shared access: However, an emerging area in which views are evolving is the transition to a shared economy. Here, less than 40% of established insurers and InsurTechs say they consider shared ownership of assets to be critical.

Industry players should understand that the four shifts – focus on experience, data, partnership, and shared access – are interrelated and critical for partnering with other entities to develop bundled offerings. Concentrating on one at the expense of others may stymie the overall efficiency of the marketplace.

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Digital maturity does not match aspiration

While insurers realize the importance of these fundamental shifts, there is a significant gap between their expectations and their current digital maturity. Lack of digital maturity is the biggest concern for incumbents. While 68% of insurers said they believe partnerships are critical, only 32% are currently collaborating with ecosystem partners (see Figure 6).

Less than 40% of insurers have a holistic digital transformation strategy and are collaborating with ecosystem players to provide value-added services. Only 11% of insurers say they leverage open architecture, which is critical for working with other industry players.

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Experience-led digital offerings and seamless collaboration with ecosystem players will drive marketplace success

We call firms prepared to excel in the future marketplace Inventive Insurers because they have strategically updated their product portfolios, operating models, and distribution methods. They have outlined their distinctive capabilities as well as their competency gaps and are ready to deliver end-to-end solutions in the manner customers prefer.

Pragmatic assessment (and subsequent enhancement) of a firm’s digital maturity is critical to connecting with ecosystem players seamlessly. Figure 7 shows the steps companies need to take to establish the marketplace of the future.

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1. Prioritize digital agility

The critical first step in the future marketplace journey is boosting digital agility. The more quickly initiatives are implemented, the more quickly firms will enhance their digital maturity and actively participate within a connected ecosystem. Insurers must holistically adopt these critical capabilities to optimize their digital agility and seamlessly connect with partners to develop digitallyintegrated ecosystems (see Figure 8).

  • Real-time data gathering
  • Advanced analytics
  • Re-engineering complex processes and automating them

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2. Build an integrated ecosystem

Seamless collaboration between insurers and their strategic partners is the backbone of a digitally integrated ecosystem. As new players enter the insurance value chain (aggregators, original equipment manufacturers (OEMs), one-stop policy management apps, and third parties such as repair stores), incumbents must strengthen their position through strategic partnerships.

Our proposed digitally-integrated ecosystem seamlessly interconnects insurers with customers and partners to enable the efficient flow of information and services (see Figure 9).

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In the digitally-integrated ecosystem, customers can access insurers over various channels through extended multi-device, multi-platform, and mobility offerings. Digital integration with partners will play a crucial role as insurers seek to increase their reach and provide customers with convenient and seamless services.

Integration with aggregators and intermediaries offers insurers a choice of distribution channels. As insurers connect with individual customers through devices, real-time data can be captured and used to provide personalized offerings and value-added services.

Insurers will move beyond traditional touchpoints to become their customers’ constant risk control advisory and partner. For that to happen, however, insurers will need to join forces with third-party vendors for efficient claims management and payout, and with OEMs for real-time customer data.

APIs, cloud-based storage, and blockchain can foster insurance ecosystem integration by enabling the seamless and secure transfer of data between diverse systems. A digitally-integrated ecosystem – both within and outside the organization – will support the real-time, personalized services that customers already demand. Digital mastery can benefit top- and bottom lines and propel insurers forward.

Grasping the art of teamwork with close ecosystem players – and relevant offerings based on core capabilities – will lay the groundwork for insurers to partner profitably.

3. Create tomorrow’s marketplace

Firms must develop Inventive Insurer competencies to contribute to the successful development of tomorrow’s marketplace. These competencies include intelligent processes, open platforms, customer centricity, and an innovative mindset among team members ( see Figure 10).

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Intelligent insurer. Automation, analytics, and artificial intelligence can prioritize customer experience within all operations.

  • Process efficiencies can support top-notch service with quick turnaround times.
  • Analytical competencies help insurers understand customer needs and act swiftly.
  • Robust digital governance provides monitoring and ensures compliance within today’s dynamic regulatory environment.

Open insurers leverage open platforms to build an ecosystem of partners through seamless collaboration with third parties and enable firms to participate in the value chain of third parties. Insurers with open platforms can access and integrate new data streams to cater to customers’ evolving needs, reaching them in the way they prefer via new distribution channels. Modern platform with open architecture for providing bouquet of offerings also allow firms to take a fail-fast approach to product development and innovate at a faster pace.

Deep customer competencies allow insurers to leverage data and channels for enhancing the customer experience across all touchpoints. Deep customer insights generated using advanced analytics and AI enable insurers to keep the customer at the center of all decisions.

Product agility is crucial for insurers to create new products at a faster pace and gain a competitive edge from an increased speed-to-market. Creative culture and ability to innovate at scale are critical components for achieving product agility. A creative culture
encourages novel thinking from employees and spurs openness to change.

Innovation labs and design thinking can encourage a fresh approach, especially within cultures that are hard-wired with conventional processes and culture.

Leadership support and vision are also critical. While Inventive Insurer status may be an aspirational future state, each firm’s journey is unique. An open platform used as a sandbox is an excellent place to begin developing new competencies and learning how to innovate at scale. Inventive Insurers create digital, experience-led offerings by collaborating seamlessly with other ecosystem players.

Incumbents and InsurTechs will benefit from strategic collaboration

For the most part, the industry sees InsurTech collaboration only as a means to drive growth and transform the customer experience. For example, 84% of insurers and 80% of InsurTechs say they are focusing on “developing new offerings.”

However, when it comes to the critical building blocks for the new insurance marketplace – such as developing holistic technology infrastructure and advanced data management capabilities – there are significant gaps in the expectations of insurers and InsurTechs. For example, fewer than 40% of incumbent insurers want to build holistic technology infrastructure by collaborating with InsurTech firms, while more than 60% of InsurTechs wish to work with insurers to create such a foundation.

What’s more, while data security remains a crucial concern when establishing partnerships with other industries, only around 10% of incumbents and 25% of InsurTechs say they want to focus collaborative efforts on data security.

Industry players should focus on a holistic approach while venturing into an insurer-InsurTech collaboration to prepare for the future and consider tactical plans for quick wins that may offer short-term benefits.

External partners can facilitate incumbent-InsurTech collaboration

After clearly outlining collaboration objectives, insurers must select a partner. The World InsurTech Report 2018 took a deep dive into the InsurTech landscape and offered ways in which incumbents can assess the success potential of short-to-medium term partnerships with InsurTech firms as well as longterm relationship feasibility. Finding a partner that can address technology capability gaps may require specialized third-party support.

Incumbents and InsurTechs can optimize their structured collaborative efforts by keeping four guiding pillars in mind: People, Finance, Business, and Technology (Figure 13).

CG10

People (The right individuals in the best-fit positions): Employees are a firm’s most essential assets when it comes to driving innovation, growth, expansion, and fruitful collaboration. Both partnering entities must be flexible and strive for a balance between the hierarchical nature of many traditional insurers and the flat organizational structure favored by InsurTechs.

Finance (Allocate optimal capital, realistically forecast returns): Without a defined investment and revenue model, it may be difficult to articulate a compelling value proposition. Participants need adequate capital to invest in the partnership and a proven revenue generating model to maintain positive cash flow in the not-too-distant future.

Business (Early traction, measurable success): Business traction, a proven business model, customer adoption, and value creation are must-meet goals for any potential collaboration. A new business model should solve the needs and challenges that were difficult to tackle independently. A collaborative partnership should produce a value proposition with quantifiable results.

Technology (Collaboration tools and technologies): Technology tools should be secure and enable frictionless collaboration, as well as scalability. Partner systems should securely integrate with the help of technology. Accessed information must be accurate, timely, and be regulatorily compliant. It should be scalable without affecting current systems.

New ecosystem roles will evolve as the industry transitions toward the marketplace model

As the insurance industry advances, new specialist roles are developing. In addition to the traditional integrated business role, new functions include that of Supplier, Aggregator, and Orchestrator. Close collaboration will enable incumbents and InsurTechs to maximize opportunities in each.

These roles are not business-model exclusive but business-case specific. Each ecosystem entity may mix and match positions depending on the business model in play (see Figure 15).

Established insurers and InsurTechs can also play multiple roles within an ecosystem. For example, a firm can act as both supplier and orchestrator. Similarly, one firm may be a supplier in an ecosystem, but be an orchestrator in another ecosystem.

CG11

 

Click here to access Cap Gemini’s entire report

 

Can Data and Technology Support the Insurance Industry to Regain Lost Relevance?

Publié le par hanswillertbleuazurconsultingeu

Since the start of the Third Industrial Revolution in the 1980s, the world has changed in many different ways:

  • rapid introduction and adoption of technological innovation (global internet; social networks; mobile technologies; evolving payment solutions; data availability);
  • new economic realities (volatile and shorter economic cycles; interconnected financial climate; under utilisation of assets);
  • structural shifts in society’s values (desire for community; generational altruism; active citizenship);
  • and demographic readjustment (increasing population; urbanization; longer life expectancy; millennials in the work force).

While these changes have been happening, the Insurance industry has seemingly preferred to operate in a closed environment oblivious to much of the impact these changes could bring:

  • Resistance to change,
  • Failure to meet changing customer demands
  • Decrease in the importance of attritional risks

has led the Insurance industry to reduce its relevance.

However

  • the availability of data,
  • the introduction of new capital providers,
  • the impact of new business models emerging from the sharing economy
  • and the challenge of InsurTechs

are affecting the industry complacency. Collectively, these factors are creating the perfect storm for the incumbents allowing them to re-evaluate their preference for maintaining the status quo. There is an ever increasing expectation from the industry to be more innovative and deliver a vastly improved customer experience.

As data and emerging technology are accelerating the need for change, they are also opening doors. The industry is at cross roads where it can either choose to regain relevance by adapting to the new world order or it can continue to decline. Should it choose the latter, it could expose the US$ 5 trillion market to approaches from large technology firms and manufacturers who have the access to customers, transformational capabilities and more than enough capital to fill the void left by the traditional players.

Insurance industry is slow to evolve

The Insurance industry has historically lacked an appetite to evolve and has shown reluctance in adopting industry-wide changes. A number of key elements, have created high barriers to entry. New entrants have found it difficult to challenge the status quo and lack appetite to win market share from incumbents with significantly large balance sheets. Such high barriers have kept the impact of disruption to minimal, allowing the industry to stay complacent even when most other industries have undergone significant structural shifts. In many ways ‘Darwin’ has not been at work.

  • A complex value chain

The Insurance industry started with a simple value chain involving four roles – the insured, a broker who advices the insured, an underwriter who prices the risk and an investor who provides the capital to secure the risk. Over centuries, the chain has expanded to include multiple other roles essential in helping the spreading of large risks across a broad investor community, as shown below.

Aon1

These new parties have benefitted the chain by providing expertise, access to customers, secure handling of transactions, arbitration in case of disputes and spreading of risk coverage across multiple partners. However, this has also resulted in added complexities and inefficiencies as each risk now undergoes multiple handovers.

While a longer value chain offers opportunities to new entrants to attack at multiple points, the added complexities and the importance of scale reduces opportunities to cause real disruption.

  • Stringent regulations

Insurance is one of the highest regulated industries in the world. And since the global financial crisis of last decade, when governments across the globe bailed out several financial service providers including insurers, the focus on capital adequacy and customer safety has increased manifold.

While a proactive regulatory regime ensures a healthy operating standard with potential measures in place to avoid another financial meltdown, multiple surveys have highlighted the implications of increased regulatory burden, leading to increased costs and limited product innovation.

  • Scale and volatility of losses

The true value of any insurance product is realised when the customer receives payments for incurred losses. This means that insurers must maintain enough reserves at any time to meet these claims.

Over the years volatility in high severity losses have made it difficult for insurers to accurately predict the required capital levels.

In addition, regulators now require insurers to be adequately capitalised with enough buffer to sustain extreme losses for even the lowest probability of occurrence (for example 1-in-100 years event or 1-in-200 years event). This puts additional pressure on the insurers to maintain bulky balance sheets.

On the other hand, a large capital base gives established insurers advantage of scale and limits growth opportunities for smaller industry players/new entrants.

  • Need for proprietary and historical data

Accurate pricing of the risk is key to survival in the industry. The insurers (specifically underwriters supported by actuaries) rely excessively on experience and statistical analysis to determine the premiums that they would be willing to take to cover the risk.

Access to correct and historical data is of chief importance and has been a key differentiating factor amongst insurers. Since the dawn of Third Industrial Revolution in the 1980s, insurers have been involved in a race to acquire, store and develop proprietary databases that allow them to price risks better than the competitors.

The collection of these extensive databases by incumbent insurers have given them immense benefits over new entrants that do not typically have similar datasets. Additionally, the incumbents have continued to add on to these databases through an unchallenged continuation of underwriting– which has further widened the gap for new entrants.

Struggling to meet customer needs

Despite years of existence, the Insurance industry has failed to keep up with the demand for risk coverage. For example the economic value of losses from all natural disasters has consistently been more than the insured value of losses by an average multiple of 3x-4x.

The gap is not limited to natural disasters. As highlighted by Aon’s Global Risk Management Survey 2019, multiple top risks sighted by customers are either uninsurable or partially insurable leading to significant supply gap.

Aon2

Six of the top 10 risks, including Damage to reputation/brand and Cyber, require better data and analytical insights to achieve fully effective risk transfer. However, current capabilities are primarily applied to drive better pricing and claims certainty across existing risk pools, and have not yet reached their full potential for emerging risks.

This inability to meet customer need has been driven by both an expensive model (for most risks only 60% of premiums paid are actually returned to the insured) and a lack of innovation. Historically, the need for long data trends meant insurance products always trailed emerging risks.

Status Quo is being challenged

While the industry has been losing relevance, it is now facing new challenges which are creating pressure for change. While these challenges are impacting the incumbents they also provide the potential for insurance to regain its key role in supporting innovation. Creating opportunity for lower costs and new innovations.

The insurance customer landscape has changed considerably: traditional property and casualty losses are no longer the only main risks that corporations are focused on mitigating. The importance of intellectual property and brand/reputation in value creation is leading to a realignment in the customer risk profile.

Value in the corporate world is no longer driven by physical/ tangible assets. As technology has advanced, it has led to the growth of intangibles assets in the form of intellectual property. The graph below shows that 84% of market capitalization in 2018 was driven by intangible assets. While the five largest corporations in 1975 were manufacturing companies (IBM; Exxon Mobil; P&G; GE; 3M), that has completely changed in 2018 as the first five positions were occupied by Tech companies (Apple; Alphabet; Microsoft; Amazon; Facebook). Yet, organizations are only able to secure coverage to insure a relatively small portion of their intangible assets (15%) compared to insurance coverage for legacy tangible assets (59%).

Aon3

This shift represents both a challenge and an opportunity for the Insurance industry. The ability to provide coverage for intangible assets would enable insurance to regain relevance and support innovation and investment. Until it can, its importance is likely to remain muted.

InsurTech

The Insurance industry has had traditionally manual processes, and has been a paper driven industry with huge inefficiencies. While customers´ needs are evolving at an unprecedented quick pace, the incumbents´ large legacy systems and naturally conservative approach, make them slow to reach the market with new products and an improved customer experience.

InsurTechs are companies that use technology to make the traditional insurance value chain more efficient. They are beginning to reshape the Insurance industry by targeting particular value pools or services in the sector, rather than seek to provide end-to-end solutions.

InsurTechs have seen more than US$ 11 billion of funding since 2015, and the volume in 2018 is expected to reach US$ 3,8 billion (FT PARTNERS). While Insurtechs were originally viewed as a disruptive force competing with traditional insurers to gain market share, there is a growing collaboration and partnership with the incumbent players. Most of them are launched to help solve legacy insurer problems across the organization, from general inefficiency in operations to enhancing underwriting, distribution, and claims functions, especially in consumer facing insurance. More recently they are also moving into the commercial segment focusing on loss prevention and efficiency. (CATLIN, T. et al. 2017). Incumbent insurers have managed to leverage InsurTechs to speed up innovation (DELOITTE, 2018: 11). From a funding perspective most of the US$ 2.6 billion that went into the InsurTechs in the first nine months of 2018 came from incumbent Insurers. (MOODY`S, 2018: 6).

The accelerated use of technology and digital capabilities again represents both a challenge for the industry but also an opportunity to innovate and develop more efficient products and services.

Data and technology with potential to transform

Traditionally, the Insurance industry has used proprietary historic data to match the demand from risk owners with the supply from capital providers. Focusing on relative simplistic regression analysis as the main approach.

While robust, this approach is reliant on a long data history and limits insurers ability to move into new areas. Increasingly the transformative power of data and technology is changing this relationship, as shown in the graph below. While underwriting data used to be in the hands of the incumbents only, emerging technologies, new analytical techniques and huge increases in sensors are enabling usage of new forms of data that are much more freely accessible. In addition, these technologies are supporting instant delivery of in-depth analytics that can potentially lead to significant efficiency gains and new types of products.

Aon4

  • Artificial Intelligence

Artificial Intelligence – Robotic Process Automation (RPA) and Cognitive Intelligence (CI) – is know as any system that can perceive the world around it, analyse and understand the information it receives, take actions based on that understanding and improve its own performance by learning from what happended.

Artificial Intelligence not only gives the opportunity to reduce costs (process automation; reduction of cycle times; free up of thousands of people hours) but improves accuracy that results in better data quality. For insurers this offers significant potential to both enable new ways of interpreting data and understanding risks. As well as reducing the costs of many critical processes such as claims assessment.

This dual impact of better understanding and lower costs is highly valuable. Insurers’ spend on cognitive/artificial intelligence technologies is expected to rise 48% globally on an annual basis over five years, reaching US$ 1.4 billion by 2021. (DELOITTE, 2017: 15).

  • Internet of Things

The Internet of Things refers to the digitization of objects around us. It works by embedding advanced hardware (e.g. sensors, cameras and meters) into everyday objects and even people themselves, linking those objects further to online networks. (MOODY`S, 2018: 11).

For example, connected devices in the homes such as water leakage detectors, smoke alarms, C02 readers and sophisticated home security systems will support prevention and reduction in losses from water damage, fire and burglary, respectively.

The Internet of Things has the potential to significantly change the way that risks are underwritten. The ability to have access to data in ‘real time’ will provide greater precision in the pricing of risk and also help insurers to respond better to the evolving customer needs. Consider the example of home insurance; customers will be forced to resconsider the decision to buy home insurance as packaged currently when their house is already monitored 24/7 for break-ins and the sensors are constantly monitoring the appliances to prevent fires. The insurers could utilise the same data to develop customised insurance policies depending on usage and scope of sensors.

The Internet of Things applies equally to wearable devices with embedded sensors for tracking vital statistics to improve the health, safety and productivity of individuals at work. It is predicted that the connected health market will be worth US$ 61 billion by 2026.

The Internet of Things offers the Insurance industry an opportunity to reinvent itself and to move from simply insuring against risk to helping customers protect the properties / health. This integration of insurance with products through live sensor data can revolutionise how insurance is embedded into our every day lives.

  • Blockchain

All disruptive technologies have a “tipping point” – the exact moment when it moves from early adopters to widespread acceptance. Just as it was for Google in the late 1990s and smartphones in the 2000s, could we be approaching the tipping point for the next big disruptive technology – blockchain?

Essentially, blockchain is a shared digital ledger technology that allows a continuously growing number of transactions to be recorded and verified electronically over a network of computers. It holds an immutable record of data, stored locally by each party to remove the barrier of trust. Through smart contacts, blockchain can enable automation of tasks for more efficient processing. It made its debut in 2009 as the system used to track dealing in the first cryptocurrency, Bitcoin, and, since then, organisations around the world have spotted blockchain’s potential to transform operations.

Most industries are currently experimenting with blockchain to identify and prove successful use cases to embrace the technology in business as usual. IDC, a leading market intelligence firm, expects the spend on blockchain to increase from US$ 1.8 billion in 2018 to US$ 11.7 billion in 2022 at a growth rate of 60%.

With all the aforementioned benefits, blockchain also has potential to impact the Insurance industry. It can help Insurers reduce operational and administrative costs through automated verification of policyholders, auditable registration of claims and data from third parties, underwriting of small contracts and automation of claims procedures. Equally, it can help reduce the fraud which would contribute to reduce total cost.

In an industry where ‘trust’ is critical, the ability to have guaranteed contracts, with claims certainty will help the take-up of insurance in new areas. BCG estimates that blockchain could drastically improve the end-to-end processing of a motor insurance policy and any claims arising thereof as shown in the graph below.

Aon5

Conclusion

The relevance of insurance, which has declined over the last few decades, after peaking in the early 1980s, is set to increase again:

  • Big shifts in insurance needs, both in the commercial and consumer segments,
  • New sources of cheap capital,
  • Prevelance of cheap and accessible data and the technology to automate and analyse

will transform the Insurance industry.

Not only is this important for insurers, it is also important for all of us. Insurance is the grease behind investment and innovation. The long term decline in the Insurance´s industry ability to reduce risk could be a significant impediment on future growth.

However we believe that the reversal of this trend will mean that insurance can once again grow in its importance of protecting our key investments and activities.

Click here to access Aon’s White Paper

 

Data Search and Discovery in Insurance – An Overview of AI Capabilities

Publié le par hanswillertbleuazurconsultingeu

Historically, the insurance industry has collected vast amounts of data relevant to their customers, claims, and so on. This can be unstructured data in the form of PDFs, text documents, images, and videos, or structured data that has been organized for big data analytics.

As with other industries, the existence of such a trove of data in the insurance industry led many of the larger firms to adopt big data analytics and techniques to find patterns in the data that might reveal insights that drive business value.

Any such big data applications may require several steps of data management, including collection, cleansing, consolidation, and storage. Insurance firms that have worked with some form of big data analytics in the past might have access to structured data which can be ingested by AI algorithms with little additional effort on the part of data scientists.

The insurance industry might be ripe for AI applications due to the availability of vast amounts of historical data records and the existence of large global companies with the resources to implement complex AI projects. The data being collected by these companies comes from several channels and in different formats, and AI search and discovery projects in the space require several initial steps to organize and manage data.

Radim Rehurek, who earned his PhD in Computer Science from the Masaryk University Brno and founded RARE Technologies, points out:

« A majority of the data that insurance firms collect is likely unstructured to some degree. This poses several challenges to insurance companies in terms of collecting and structuring data, which is key to the successful implementation of AI systems. »

Giacomo Domeniconi, a post-doctoral researcher at IBM Watson TJ Research Center and Adjunct Professor for the course “High-Performance Machine Learning” at New York University, mentions structuring the data as the largest challenge for businesses:

“Businesses need to structure their information and create labeled datasets, which can be used to train the AI system. Yet creating this labeled dataset might be very challenging apply AI and in most cases would involve manually labeling a part of the data using the expertise of a specialist in the domain.”

Businesses face many challenges in terms of collecting and structuring their data, which is key to the successful implementation of AI systems. An AI application is only as good as the data it consumes.

Natural language processing (NLP) and machine learning models often need to be trained on large volumes of data. Data scientists tweak these models to improve their accuracy.

This is a process that might last several months from start to finish, even in cases where the model is being taught relatively rudimentary tasks, such as identifying semantic trends in an insurance company’s internal documentation.

Most AI systems necessarily require the data to be input into an AI system in a structured format. Businesses would need to collect, clean, and organize their data to meet these requirements.

Although creating NLP and machine learning models to solve real-world business problems is by itself a challenging task, this process cannot be started without a plan for organizing and structuring enough data for these models to operate at reasonable accuracy levels.

Large insurance firms might need to think about how their data at different physical locations across the world might be affected by local data regulations or differences in data storage legacy systems at each location. Even with all the data being made accessible, businesses would find that data might still need to be scrubbed to remove any incorrect, incomplete, improperly formatted, duplicate, or outlying data. Businesses would also find that in some cases regulations might mandate the signing of data sharing agreements between the involved parties or data might need to be moved to locations where it can be analyzed. Since the data is highly voluminous, moving the data accurately can prove to be a challenge by itself.

InsIA

Click here to access Iron Mountain – Emerj’s White Paper

 

Overcome Digital Transformation Distress

Publié le par hanswillertbleuazurconsultingeu

Digital has become one of the most over-loaded words in the English language, meaning very different things in different contexts. Insurers have been digital since the first policy was recorded on magnetic drum or tape in the 1960s. Oddly enough, insurers now lag considerably behind other industries in their digital maturity and stage of adoption.

Why insurers lag in digital strategy

So many factors go into understanding why insurers trail in developing and implementing a modern digital strategy. At this point, most insurers have developed a digital footprint and deliver varying levels of engagement with their customers and partners, including some direct access to policy information and service. The transactional nature of some Personal and Commercial (P&C) lines make this process more straightforward. However, for Life, Accident and Health (LA&H) carriers, especially those providing Group Employee Benefits, it’s a more complex problem with additional parties involved and customization of product and service at the plan level, requiring more detailed policy information and flexibility requirements in service options. Combined with the legacy technology platforms most carriers still employ, this makes direct self-service options more difficult to implement requiring more manual intervention which ultimately erodes customer satisfaction. Ironically, the prevalent underlying key stumbling block to implementing a next generation digital strategy is insurers’ digital legacy.

Digital Transformation Distress

According to McKinsey, Insurtechs are focusing more on P&C than LA&H but there is significant activity in distribution and new business-related activities, which falls squarely in the digital arena. In a recent multi-country study by Couchbase across multiple industries including insurance,

  • 64% of respondents say if they can’t keep up with digital innovation they will go out of business or be absorbed;
  • 95% say digital transformation seems an insurmountable task and
  • 83% felt they would face being fired if such a project failed.

Despite the challenges, LA&H insurers are putting more comprehensive digital strategies into place and technology vendors servicing this market must think beyond providing basic digital engagement capabilities to supporting a more complete vision of digitally-enabled business.

Digital Enagement and Flexibility

Leading SaaS core insurance system providers believe insurance business leaders need a platform that can provide a level of digital engagement and service equal to their customers’ expectations for all service providers. To enable this, there must be an underlying OpenCore system that can ensure accurate, open and flexible product development, deployment and service to serve a rapidly changing market.

  • Digital Engagement is a critical element of a complete strategy and the most visible. In the Group and Employee Benefits market, there are multiple stakeholders in the value chain with differing roles and digital engagement should be role-based, whether it is transactional or purely informational.
  • Flexibility is required within the business model. The chain of carrier(s), brokers, benefit administration companies (ben admin), enrollment vendors, employers, and employees must provide rapid and accurate straight through processing and be flexible enough to change out any given player in the chain, based on the deal.

Legacy systems are proving inadequate

The traditional approach to support these two key needs of the value chain is

  • either to provide an end-to-end portal solution driven from the core system architecture
  • or a standardized data feed interface between the core system and the next link in the value chain.

The problem with these two approaches is that they are inadequate. Why?

The first approach of end-to-end portal solution is not feasible given current and future insurance market directions around multi-carrier plans and value-added services from benefit admin providers. The standardized data feed interface can work but invariably leads to a great deal of custom IT interface work, even when employing industry standards like the emerging LIMRA-backed Workplace Benefits standard. This proves especially difficult when there are broad systems of engagement in play from companies like Salesforce.com that are used in call centers and broad community portals.

An Engagement Model that Works

Leading insurance technology vendors are proving that OpenCore is the best approach applying a role-based scenario to defining digital engagement requirements for the core system. This tactic provides a layered architecture to suit those roles and the engagement path needed for the particular customer. The way that might evolve could include a large carrier that uses a system of engagement for their customer service reps (CSR) and works with a broker, enrollment vendor and larger employer in the following scenarios:

  • The insurance specialist who installs and manages the details of a case works directly with the core system interface, designed for experts.
  • The CSR who works for the carrier and answers basic questions about the case for the employer or employee and who interacts with the system of engagement, which is tied to the core system in real-time via an app written by the core system vendor specifically for that platform.
  • The broker who does case and member inquiries and updates through a broker portal provided by the carrier with role-based access into the core system.
  • The enrollment vendor uses industry standard real time APIs and batch file transfers to exchange data directly with the carrier’s core system. The larger employer exchanges transactions through API or data feed to the HCM system and has direct access to the carrier’s core system through a role-based portal designed for the exchange process.
  • The employee has access to the employers Human Capital Management (HCM) employee portal and the option to go directly to the carrier for deeper interactions such as claims or absences, or portability issues. The interaction with the carrier is via portal, mobile, voice or SMS depending on the employee’s preference or circumstance.

Insurance technology companies that provide a layered digital engagement architecture, with core systems capabilities supporting role-based APIs sets that support both digital engagement applications and are available for customers and partner DIY projects, enables the insurer to achieve the most flexible, stable and modern digital experience.

OpenCore

Click here to access Fineos’ White Paper

Navigating the new world – Preparing for insurance accounting change (IFRS 17)

Publié le par hanswillertbleuazurconsultingeu

If implementation of the forthcoming insurance contracts standard is to reach the best possible outcome for your organization, we believe it needs to be seen as more than just a compliance exercise. This will entail

  • combining multiple strands into a common program,
  • identifying linkages
  • and addressing dependencies

across the business in a logical sequence and thinking strategically about possible effects on the organization and its stakeholders. A well-developed and ‘living’ plan assigns clear accountabilities and breaks down objectives into manageable tasks for delivery to realistic time-scales in order to establish an effective blue-print for success.

Our methodology groups activities into four manageable phases:

  1. assess the change
  2. design your response
  3. implement your design
  4. sustain your new practices, securely embedding them in business as usual.

Key success factors

Our experience shows us there are many factors that will contribute to successfully implementing insurance accounting change, including:

  1. Dedicated staff: In our experience the single biggest factor contributing to program success is the presence of full-time staff dedicated to the project, with a wide range of skills including data management, IT implementation and project management and who know your business.
  2. Spend sufficient time and energy on the initial impact phase: It is essential that an insurer plans for this critical phase and allows for sufficient time to perform a gap analysis on a line-by-line basis through the income statement and balance sheet and supports disclosures.
  3. Consider fundamental questions surrounding core business drivers: earnings trends, growth opportunities and target operating models. The earlier effects are identified, the more time an insurer will have to develop and implement a strategic response.
  4. Training staff: Many organizations underestimate the amount of personnel training required. Designing a comprehensive training strategy and program is highly complex and requires careful planning.
  5. Robust project planning: The plan must be achievable and continuously refined with formal tracking and monitoring.
  6. Clear communications: Communication needs to be both formal and informal and applied throughout the life of the program.
  7. Careful change management: IFRS conversion will lead to significant changes in how people do their jobs. Some of the biggest challenges have arisen when the cultural issues have not been acknowledged and addressed.
  8. More than just an accounting and actuarial project: Implementing the forthcoming insurance contracts project will undoubtedly be a multi-disciplinary effort.
    1. IT specialists consider the functionality of source systems and enterprise performance management (EPM) systems;
    2. Change management specialists focus on behavioral change and communication;
    3. specialists in commercial functions (tax, data management, executive incentives, etc.) bring a holistic approach to the program.

Robust project management helps to bring everything together coherently.

Assessing what the forthcoming standard will mean for you

Accounting, actuarial, tax and reporting

Q1. What are the key accounting, actuarial, tax and disclosure differences between our current generally accepted accounting principles (GAAP) and the new standards? What are the key decisions that need to be made by management regarding the alternative treatments that are available?

Data, systems and processes

Q2. What will the impact be for our data requirements, and on the systems and processes used for

  • data collection,
  • actuarial projections,
  • calculating and accruing interest on the contractual service margin
  • and consolidation and financial reporting systems?

Are there quick fixes that we can use? Can we leverage recent investments in infrastructure or will we need a major overhaul?

Q3. How will the group‘s close and other processes be impacted?

Business

Q4. What is the estimated directional impact on profit and equity and what are the key decisions and judgments that this will influence?

Q5. What are the key impacts for my business and how will these be influenced by the choices open to us? Who will need to understand results and metrics on the new basis?

People and change management

Q6. Who will be impacted by the conversion, what skills and resources are likely to be needed and what training needs can we identify?

Program management

Q7. What would a high-level conversion plan look like and what is its likely impact on resources?

IFRS17 3

Click here to access KPMG’s methodology paper

Accelerated evolution – M&A, transformation and innovation in the insurance industry

Publié le par hanswillertbleuazurconsultingeu

Strong appetite for deal activity

Today’s insurers know that maintaining the ‘status quo’ is not a recipe for sustainable growth. They feel the pressure of disruption in the market from

  • new competitors,
  • new technologies,
  • new customer demands
  • and new sources of capital.

They feel the pain of

  • continued low interest rates,
  • volatility in underwriting losses
  • and pressure on profitability,

as investment portfolio yields continue to decline.

Organic growth has been challenging across most of the mature insurance markets. Consider this: Since the start of this decade to 2016, global gross domestic product (GDP) increased by more than 20 percent. Yet the global premium market grew by just 9 percent over the same period. Insurers recognize that things must change if they want to maintain or grow their market share.

“In an era of anticipated disruption of legacy business and operating models, global insurance executives realize that their strategy cannot be about pursuing growth for growth’s sake. When it comes to growth strategy, more of the same is not necessarily the best answer. What may have been a core business in the past may not be in the future,” notes Ram Menon, KPMG’s Global Insurance Deal Advisory Leader.

Today’s insurance leaders are taking a more strategic view of the value of M&A. According to a recent global survey of 115 insurance CEOs conducted by KPMG International, more than 60 percent of insurers now see disruption as more of an opportunity for growth than a threat. And they are using their capital and their M&A capabilities to maximize those opportunities — often by strategically deploying capital towards emerging technology as a competitive advantage to

  • engage customers,
  • generate cash flows
  • and enhance enterprise value.

The good news is that — for the most part — capital and surplus levels are at record highs across life, non-life and reinsurance markets. And most insurers plan to tap into that capital to make deals. In fact, our survey suggests that close to three-quarters of insurers expect to conduct an acquisition and two-thirds expect to seek partnership opportunities over the next 3 years. Eighty-one percent say they will conduct up to three acquisitions or partnerships in the same period. More than 70 percent said they are hoping their deals will help transform their organization in some way. As a top priority,

  • 37 percent hope to transform their business models,
  • 24 percent want to transform their operating models,
  • and 10 percent are looking to acquire new innovation capabilities and emerging technologies

through their acquisitions.

“Insurers increasingly recognize their days of operating business-as-usual numbered. And it’s not small changes market going to be undoing — big ones,” says Thomas Gross with KPMG Germany. Auto insurers, for example, looking at rapid adoption of mobility models and wondering how they add value when car manufacturers or leasers own relationship customer.”

On their path to transformation, insurance companies expect to strategically deploy capital against a range of specific inorganic growth opportunities:

  • transforming their business models for sustainable growth;
  • modernizing their operating models for profitable growth;
  • enhancing customer engagement;
  • and gaining access to innovation and emerging technologies.

“The top factor that will drive insurance acquisitions will be the need for emerging technologies. Insurance companies are all looking at how to put their operations on digital platforms in order to save time and resources both for the company and the customers,” notes the Head of Finance at a China-based property and casualty (P&C) insurer. At the same time, a significant number of insurers also hope to rebalance their portfolio of businesses. Many plan to evaluate whether they should fix or exit businesses that are struggling to achieve returns in excess of their longterm capital rates. This should allow them to remain focused on transforming businesses they consider core for the future while freeing up additional capital for reinvestment into new lines of business and technology capabilities.

As the director of finance at a UK-based non-life insurer notes, “Units that are consistently performing poorly will be segregated to further analyze their positions and whether or not they still fit in the company’s planned structure. We discourage force-fitting any product or company unless it has great potential for generating revenue. If it does not, we look for suitable buyers for the business.”

Our data indicates, insurance executives expect to exit non-core businesses, enter new markets and gain access to new technology infrastructure and operating capabilities via M&A and partnerships, as a way to further diversify their global risks and earnings profile.

Looking beyond the borders

Our survey suggests that the majority of insurers will be involved in some sort of non-domestic deal: 68 percent say they expect to conduct a cross-border acquisition, partnership or divestiture over the next 3 years. Just 32 percent say their top priority will be on domestic activity.

“Over a period of 3 years, we expect to see a lot of M&A transactions overseas. We are looking to expand into regions that are new for us and with acquisitions, you can get going without having to set up a base from scratch or encounter a lot of unforeseen risks,” notes the senior VP for M&A at a global insurance brokerage firm. Perhaps not surprisingly, our data suggests that insurers expect to see the most activity in North America — the US in particular. Given that the US is still the largest insurance market in the world with around 30 percent of the global premium market share, many insurers see the US as a source of steady market growth and relative premium stability.

“The volume of M&A in North America will increase the most in the coming years. With the new tax reforms, insurance companies will pay lower taxes — these new regulations will provide insurers opportunities to grow. Companies from other markets will also want to take advantage of the lower tax rate and will look for ways to expand into the US market,” suggested the CFO at a Bermuda-based reinsurer. Changes to US tax laws will certainly create significant disruption and opportunity for insurers both onshore and offshore. “The reduction in the corporate tax rate to 21 percent makes US assets much more compelling,” notes Philip Jacobs, leader of the Insurance Tax practice with KPMG in the US. “The lower US tax rate has also eliminated some of the offshore tax advantage; the large Bermuda players may still be operating with relatively low effective rates, but the tax differential between operating in the US versus Bermuda has narrowed.”

Latin America, however, expects relatively lower levels of deal activity. “It’s a sellers’ market in Latin America,” notes David Bunce, Senior Client Partner with KPMG in Brazil. “Lots of international insurers want to get into certain Latin American markets, but nobody is really ready to sell.”

At the other end of the spectrum — and the other side of the world — Asia-Pacific is widely viewed as a region of massive growth potential and innovation. China has already become the world’s second largest insurance market (with around 10 percent of
global premium market share) and premiums have more than doubled since 2010. Singapore and Hong Kong have long been key centers of insurance innovation growth.

Asia-Pacific was identified as the geographic region where insurers would most likely seek partnership opportunities. “As insurers seek to expand outside of their traditional distribution networks in Asia, digital partnerships are emerging as a fairly quick way to tap into new customer segments without significant upfront capital investment,” adds Joan Wong with KPMG China. “A digital partnership could unlock significant new growth, which would tip the balance for those making a ‘go or grow’ decision about their businesses.”

The director of investment at a Korea-based international insurer agrees. “Asia has become one of the biggest markets for insurers, and the region’s growing population along with changes in capital regulations will give insurers the backing they need to grow. In China alone we have seen a major increase in the number of companies seeking out new ventures in the insurance sector.”

While the majority of our respondents say they are looking across their borders for growth, those in Asia-Pacific are much more likely to be focused on domestic acquisitions instead. “Most of the markets in Asia are still fairly domestically oriented and there is still significant fragmentation and inefficiency that could be eliminated,” adds Stephen Bates with KPMG in Singapore. “Given the growth potential across the region, it’s not surprising that Asian insurers are thinking about taking advantage of opportunities at home before investing further into foreign markets.”

Somewhat tellingly, insurers expect most of the divestiture activity to originate from Western Europe. As the head of finance and investments at a large French insurer argues, “The persistent compression in global interest rates continues to be a challenge for the insurance industry, and many companies in Europe are aiming to divest in part to cope with this. When you add in the factors of changing regulation and customer demographics, it means that insurance business models have evolved and companies are reshaping themselves accordingly.”

“Insurers in Europe are very interested in diversifying their risk and see adjacent markets as an opportunity to do just that,” notes Giuseppe Rossano Latorre, Head of Corporate Finance at KPMG in Italy. “There are a number of life insurers that are looking at the asset management business, for example, as a potential growth opportunity in the future.”

Our data indicates that in the Life sector, acquisitions will likely focus on finding lower-risk, higher-growth, higher-return assets, particularly around capital-light retirement, investment management and group benefits businesses. However, greater levels of activity should be expected in the Nonlife sector, driven by a growing appetite for more profitable specialty risks and commercial risks, with a preference for commercial risk in the small- and medium-sized enterprise (SME) sector.

What this survey makes clear is that global insurance companies recognize they now have a window of opportunity to strategically allocate their capital across the globe towards achieving and accelerating their transformation strategy.

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Click here to access KPMG’s detailed study

A Transformation in Progress – Perspectives and approaches to IFRS 17

Publié le par hanswillertbleuazurconsultingeu

The International Financial Reporting Standard 17 (IFRS 17) was issued in May 2017 by the International Accounting Standards Board (IASB) and has an effective date of 1st January 2021. The standard represents the most significant change in financial reporting for decades, placing greater demand on legacy accounting and actuarial systems. The regulation is intended to increase transparency and provide greater comparability of profitability across the insurance sector.

IFRS 17 will fundamentally change the face of profit and loss reporting. It will introduce a new set of Key Performance Indicators (KPIs), and change the way that base dividend or gross payments are calculated. To give an example, gross premiums will no longer be recorded under profit and loss. This is just one of the wide-ranging shifts that insurers must take on board in the way they structure their business to achieve the best possible commercial outcomes.

In early 2018 SAS asked 100 executives working in the insurance industry to share their opinions about the standard and strategies for compliance. The research shed light on the sector’s sentiment towards the regulation, challenges and opportunities that IFRS 17 presents, along with the steps organisations are taking to achieve compliance. The aims of the study were to better understand the views of the industry and how insurers are preparing to implement the standard. The objective was to share an unbiased view of the peer group’s analysis of, and approach to, tackling the challenges during the adjustment period. The information garnered is intended to help inform insurers’ decision-making during the early stages of their own projects, helping them arrive at the best-placed strategy for their business.

This report reveals the findings of the survey and provides guidance on how organisations might best achieve compliance. It provides a subjective, datadriven view of IFRS 17 along with valuable market context for insurance professionals who are developing their own strategies for tackling the new standard.

SAS’ research indicates that UK insurers do not underestimate the cost of IFRS 17 or the level of change it will likely introduce. Overall, 97 per cent of survey respondents said that they expected the standard to increase the cost and complexity of operating in insurance.

Companies will need to

  • introduce a new system of KPIs
  • and make changes in management information reports

to monitor performance under the revised profitability metrics. Forward looking strategic planning will also need to incorporate potential volatility and any ramifications within the insurance industry. To achieve this, firms will need to ensure the main parties involved co-operate and work together in a more integrated way.

The cost of these measures will, of course, differ considerably between organisations of different sizes, specialisms and complexities. However, the cost of compliance also greatly depends on

  • the approach taken by decision-makers,
  • the partners they choose
  • and the solutions they select.

Perhaps more instructive is that 90 per cent believe compliance costs will be greater than those demanded by the Solvency II Directive, aimed at insurers retaining strong financial buffers so they can meet claims from policyholders.

The European Commission estimated that it cost EU insurers between £3 and £4 billion to implement Solvency II, which was designed to standardise what had been a piecemeal approach to insurance regulations across the EU. Almost half (48 per cent) predict that IFRS 17 will cost substantially more.

Respondents are preparing for major alterations to their current accounting and actuarial systems, from minor upgrades all the way to wholesale replacements. Data management systems will be the prime target for review, with 84 per cent of respondents planning to either make additional investment (25 per cent), upgrade (34 per cent), or replace them (25 per cent). Finance, accounting and actuarial systems will also see significant innovation, as 83 per cent and 81 per cent respectively prepare for significant investment.

The use of analytics appears to be the most divisive area for insurers. While 27 per cent of participants are confident they will need to make no changes to their analytics systems or processes, 28 per cent plan to replace them entirely. A majority of 71 per cent still expect to make at least some reform.

IFRS17

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Click here to access SAS’ Whitepaper

 

Risk Dashboard for fourth quarter of 2017: Risk exposure of the European Union insurance sector remains stable

Publié le par hanswillertbleuazurconsultingeu

Risks originating from the macroeconomic environment remained at a high level in Q4 2017, although most indicators improved slightly comparing with Q3. Positive developments in forecasted real GDP growth and increased expected inflation closer towards the ECB target contributed somewhat to a decrease in risk, as well as a slight reduction in the accommodative stance of monetary policy. Swap rates recently increased but remained low by historical standards. The credit-to-GDP gap was the only indicator to deteriorate since the previous assessment, moving further into negative territory.

Credit risks remain constant at a medium level in Q4 2017. Since the last assessment spreads have decreased across all bond segments, except for unsecured financial corporate bonds. Concerns about potential credit risk mispricing remain.

Market risks were stable at a medium level in Q4 2017. Most market indicators changed only little when compared to the previous risk assessment, except for investments in equity. Volatility of equity prices increased, with a temporary peak in February. A slight decline was reported for the price-to-book value ratio (PBV). In addition, Q4 Solvency II data seems to indicate a slight increase in median exposures to bonds and property and an increase of exposures to equity for insurers in the upper tail of the distribution.

Liquidity and funding risks remained constant at a medium level in Q4 2017, with most indicators pointing to a stable risk exposure.

Profitability and solvency risks remained stable at a medium level in Q4 2017. Annual figures for some profitability indicators show a slight deterioration when compared to annualised Q2 indicators, but are broadly at the same level as in Q4 2016. Solvency ratios remain well above 100% for most insurers in the sample. A slight increase in the quality of own funds has also been observed.

EIOPA1

Risks related to interlinkages and imbalances remain stable at a medium level in Q4 2017. Main observed developments relate to a slight decrease in median exposures to domestic sovereign debt and to a mild increase in the share of premiums ceded to reinsurers. Investment exposures to banks, insurers and other financial institutions remained broadly unchanged.

Insurance risks remained stable at a medium level when compared to Q3 2017. The impact of the catastrophic events observed in Q3 on insurers’ technical results still weights on the risk assessment.

EIOPA2

Market perceptions remained stable at a medium level since the last assessment. Positive developments related to the performance of insurers’ stock prices relative to the overall market and a decrease in the upper tail of the distribution of price-to-earnings ratios contributed to decreased risk, but this was partially compensated by a deterioration of some insurers’ external rating outlooks. Other indicators, such as insurers’ CDS spreads and external ratings remained largely unchanged.

Summary

Click here to access EIOPA’s detailed Risk Dashboard – April 2018

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