Learn how global regulations such as Solvency II, demographic trends, and technology will impact insurers in 2014 and how they can best prepare for the changes.
The current state of the industry reminds me of the opening line from Charles Dickens’ A Tale of Two Cities, “It was the best of times, it was the worst of times.”
The past few years have seen insurers, along with other financial institutions, focus on strengthening their balance sheets. They have had to manage their businesses during turbulent markets with weak consumer confidence, against the backdrop of historically low interest rates. This turmoil has put insurers’ solvency in the spotlight and increased the call for more demanding regulatory standards.
Moving into 2014, there are positive signs that insurers can begin establishing a more growth-focused strategy. With economic activity picking up around the globe, unemployment declining, and the recent positive movement in the stock markets and real estate, consumer confidence is returning.
The core of any growth strategy during 2014 and beyond will focus on the emerging opportunities driven by changing demographics and the runaway trains of social media, mobile, and big data.
The primary global trend that has driven much of the growth in the insurance and financial services markets over the last 20 years has been the increasing wealth and insurance needs of baby boomers. This has now turned into another opportunity. Baby boomers globally are aging and transitioning into a retirement phase. They need to sustain their lifestyle when they are not working.
Although this demographic has been good for insurers, there is significant competition among a wide range of market participants in that segment.
Perhaps more interesting is the situation of Generation X, the demographic group that came after the baby boomers. Research shows they are the largest underserved market from an insurance perspective, and they now have as much accessible money as the baby boomers.
Targeting Generation X will also spark a greater focus on mobile and social media, both in terms of how people interact with insurers and how they will transact. The most significant aspect of this demographic shift is what it will mean for the type and volume of data an insurer will have available.
Insurers generally assess risk based on models that rely on historic data. The increasing availability of data through mobile and social media and the acceptance by customers to supply that data are likely to be disruptive and present an opportunity for many segments of the insurance market.
One example is telematics, or pay as you drive. An insurer can capture second-by-second information on driving behavior, either through a mobile phone or a specific in-car device. They can then price the auto insurance on the basis of this information. This type of insurance product is already available in a number of countries and, as it becomes more widely adopted, could be a great opportunity for insurers to grow their business by essentially personalizing the price.
This is the most well developed example of use-based insurance. There will also likely be growth in how the data from “fit bands” and other fitness or health-related data capture devices can be leveraged to assess health and life risks – maybe all those gym work outs will pay off eventually.
For many insurers, capitalizing on these emerging trends will help move them back into a growth phase during 2014.
Insurance regulation is generally local, reflecting the requirements of individual markets. In 2014, local regulatory regimes will have the most impact on insurers. As with most industries, however, insurance is global as many insurance companies are active in different markets. The globalization of insurance has led to more consideration of whether there should be global regulatory requirements, particularly in relation to prudential regulations and solvency.
This push for global standards has been the work of the International Association of Insurance Supervisors (IAIS), who has set core principles for insurers, such as solvency and a risk management framework. These core principles have been agreed on by almost every country around the world and certain aspects are starting to be adopted.
During 2014 and 2015, Canada and the US are adopting the IAIS ORSA core principles, which require insurers to have a documented risk management framework, with associated risk assessment, stress testing, and capital planning.
In 2014, there will also be a focus on insurers seen as globally systemically significant. The IAIS will introduce higher capital standards and the Federal Reserve Board will apply more stringent requirements to these insurers.
In Europe, Solvency II is nearing completion and 2014 is a key year for implementation. Many countries around the world are also basing their local regulations on Solvency II, with significant activity in Mexico, South Africa, Australia, and a number of countries in Asia.
Solvency II has been in the works for many years and has experienced peaks and troughs in relation to insurers’ focus and investment. Although there have been many questions about its value, Solvency II should be ultimately positive for the insurance industry around the world. It will create a single regulatory framework across Europe, with common solvency standards and reporting.
Given that the Solvency II start dates have been pushed back a few times, it now seems certain that the first full reporting will begin on January 1st, 2016.
Insurer readiness varies widely by country, but they will still need to do a lot of work in 2014 to complete what they have started. Most of that activity will likely focus on the reporting preparation. There is a significant amount of reporting required for Solvency II – there are more than 70 standard reports – and most insurers are not ready for these reporting standards. Implementing that number of regulatory reports presents challenges, most notably in accessing, storing, and validating the required data.
There are also a significant number of data items (in excess of 10,000) required for these reports. Although some insurers may take tactical shortcuts, the majority would greatly benefit from identifying the data requirements and establishing a process to put the data infrastructure in place. There will be a reporting dummy run for a subset of insurers in 2015, so they really only have a year to implement the infrastructure.
Many of the larger insurers have developed an internal model as part of their Solvency II preparations. These are complex models, and insurers will have to go through the regulatory model review process. It is inevitable that, as a result of this review, insurers will need to enhance their model validation and analytics automation processes.
Although 2016 is the Solvency II start date, this will not be the end of its impact. Many insurers will have done the minimum to get through the first regulatory round and the regulators themselves will only start to truly understand the issues once they have experienced the first full reporting cycle. Solvency II will continue to impact insurers and regulators for at least the next five years.
The volume, variety, and velocity of data that insurers have to manage will continue to increase. That data is more and more unstructured and insurers will need the enabling technology, infrastructure, and analytics to leverage this data. Breaking down silos and viewing data, risks, and business opportunities at an enterprise level – rather than just at a product or business unit level – will be critical to future success.
The regulators will continue to put greater emphasis on insurers to not only understand and manage their risk, but also integrate their risk management technology and capabilities across their organization. Regulators will expect insurers to support higher frequency, more granular reporting, which will only lead to a risk and regulatory technology infrastructure being a priority spend for insurers. Perhaps the days of the spreadsheet are numbered.
Addresses the challenges and opportunities in the global insurance sector, and how they impact the risk management practices of insurers.
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