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Global Trend Map No. 18: Europe (Part 2)

In Part I of our profile for Europe, we reviewed our statistics for the region, which we gathered in the course of our Global Trend Map (download the full thing here), and outlined a number of qualitative themes, exploring the first two of these:

  1. Growth opportunities in a relatively saturated market
  2. The European consumer and Europe’s early adopter status
  3. How European insurers can deliver on their customer promise with new tech
  4. Dynamic, real-time insurance and IoT
  5. Progress on developing connected insurance models across the continent

Here we explore themes three to five in discussion with two in-region influencers:

  • Switzerland-based venture capitalist Spiros Margaris, VC (InsureScan.net, moneymeets and kapilendo)
  • Charlotte Halkett, former general manager of communications at U.K.-based telematics provider Insure The Box (now MD of Buzzvault at Buzzmove)

Delivering on the Customer Promise

In Part I, we posited that Europe holds a slight innovation lead over our other major regions, finding this borne out in the more disrupted distribution landscape (with affiliate, aggregator and direct-to-customer channels all relatively well established).

However, embracing innovative distribution methods is only part of the story for European insurers seeking to engage digitally savvy and ever-more-demanding consumers; another key aspect is to incorporate a greater level of personalization into products.

“The consumer is used to a really personal experience now, and that is exactly the same as when they’re buying a pair of shoes online,” comments Charlotte Halkett, formerly of Insure the Box (and now at Buzzmove). “They’re used to being able to get something if they want it, where they want it and at the cost they want, including complete information like the exact half hour it’s going to turn up in their house and what color it is.

“That’s the same for the £1,000 insurance they’re going to buy, they want to have that real personalized experience to get the cover they want, how they want it, and to be able to influence the price that they’re going to pay. The big, overwhelming message is that the insurance industry is going to need to be flexible and innovative, because consumers are becoming ever-more-demanding, and the base level of their expectations is rising all the time.”

Personalization in insurance extends from offering positive customer service across channels to customizing policy prices on an individual basis (UBI). Halkett believes that the U.K. market in particular has been a leader in this sense:

“The complexity of pricing has always been at the cutting edge in the U.K.,” she says. “From developing general linearized modeling through to telematics, the initial development has occurred within the U.K. And it’s partly to do with this being a worldwide center of insurance, that’s true, but it’s also to do with the consumer. It’s very consumer-led: consumers are very willing to adopt, consumers are very willing to try new things.”

Halkett believes that the U.K. has served as a guinea pig for in-car telematics and that the models developed here can benefit a wide range of insurance markets. This impression fits in with our product-development stats for Europe overall: Auto was indeed one of the lines respondents identified as driving the most product innovation in the region, the other being health (see our earlier post on product development). We explore UBI models, especially as they relate to the auto line, as our next theme.

“It is important to listen to your customers and speak their language in order to influence your top and bottom line. If you want to satisfy your customers, you have to know what they want and need, what they’re saying about you, and how they feel about your products, services and brand.” — Monika Schulze, global head of marketing at Zurich Insurance

All these customer initiatives, if they are to be more than just good intentions, require far-reaching back-office transformation; investment is required in new technologies and solid digital capabilities (such as analytics), and these in turn need to be grounded in well-conceived strategies if they are to truly take root and flourish at an organizational level. Let’s look now at what European insurers are doing practically to deliver on their customer promises.

Encouragingly, a large majority of European respondents acknowledged having formal digital, mobile and cross-platform strategies, so digitization appears to be well underway among European (re)insurers, consistent with our other regions (see our earlier post on digital innovation). We also found a strong increase in analytics focus/investment among our European respondents, as well as a reasonable level of coordination of analytics across their organizations (see our earlier post on analytics and AI).

Analytical and machine-learning models have plenty to get their teeth into with what customer data has been captured directly by insurers, but they can additionally be supplied with external data from third parties. We found this practice to be widespread in Europe, as indeed were formal data-governance strategies.

“The one who is doing similar business to you should be considered as a chance and not as a risk – being connected via Open APIs based on your open insurance ecosystem. You will win because your processes and technologies are faster, cheaper and more customer-oriented than others, because you are open.” — Oliver Lauer, formerly head of architecture/head of IT innovation at Zurich

One major hurdle for the implementation of more data-driven, customer-centric systems is the presence of legacy, and this is just as present in Europe as anywhere else. Legacy systems came in second place among the internal challenges for Europe (in line with the global trend), and was additionally identified by our European contributors Halkett and Margaris as a serious challenge for the region. Margaris highlights a couple of particular pain points as far as legacy systems go:

“If you have legacy systems, it’s difficult to put cutting-edge technology on top of them,” he says. “Legacy systems make it so much harder for incumbents to innovate and to comply with regulations.”

Taking Insurance into the Real World, Real-Time

In Part I of our profile on Europe, we tentatively identified Europe as an early adopter, and we saw this tendency manifested in the prevalence of new-age distribution channels and personalized, customer-centric products.

Here, we extend this line of inquiry by turning to the vanguard of personalization in insurance, namely the Internet of Things, and exploring the progress it has made within European insurance. IoT is the final frontier of customer-centricity in the sense that it takes insurance into the real world on a real-time basis, placing the customer literally, and not just figuratively, at the center.

If Europe is marginally further along the journey of customer-driven disruption than our other regions, as we have suggested, then we would expect IoT to be marginally ahead, as well. And while the technology is making strides the world over, our stats do place Europe above trend on the IoT-for-insurance adoption curve, at least in terms of current platform implementation (more details in our dedicated Internet of Things section), and the pre-eminence of the continent in this field is borne out by much of our broader research.

While Internet of Things was not a priority area that Europe led on in our insurer priorities section (it came second behind Asia-Pacific), Europe did achieve top spot for mobile, customer-centricity and claims – which form a constellation very auspicious for IoT-enabled business models and innovation.

Margaris tends to agree on the importance of IoT for European insurers, and Halkett, as we have already mentioned, credits the U.K. market as having fostered the development of in-car telematics.

“The IoT development (expected to reach $20.8 billion by 2020, according to Gartner Inc forecast) should help a new insurance to emerge, increasing customer-centricity and decreasing costs. An example of IoT impact on insurance is wearable tech, a passive way to monitor health and wellbeing, in real time and for everything. By identifying those who seem to be looking after themselves, insurers can drive premiums down for them.” — Minh Q Tran, general partner at AXA Strategic Ventures

The real opportunity consists not just in personalized experience à la retail but in personalized pricing, so that the price customers pay reflects their real-world usage as captured by connected devices.

It is thus that personalization and premium-price reductions actually go hand in hand; rather than requiring two strategic thrusts, they can be part of one IoT-enabled customer-centric approach. These two Ps – price and personalization – are the two main advantages enjoyed by insurtechs, so insurers looking to the future, and to future-proof themselves, should definitely be taking an interest in IoT.

See also: Global Trend Map No. 15: Products  

While still only a minority of insurers in Europe have a strategy on usage-based insurance (UBI), this is in line with our other key regions; we expect to see this percentage rise dramatically across the board over the coming years. Auto, home and health are the leading lines across all our regions in terms of the expected IoT benefits, though the benefits of sensor networks in other lines should not be ignored.

Auto is an example of a line that has already been extensively transformed by IoT in the form of telematics. This area is home to solutions of varying sophistication, from smartphone apps to “black boxes” built into cars. Depending on the richness of data coming from in-car sensors, a variety of insurance use cases and business models are enabled.

The one that most immediately jumps to mind is UBI, incorporating dynamic pricing and driving behavior modifications. By making customers’ premiums dependent on how they drive, insurers both encourage better driving (which is good for everybody) and lower the cost of premiums, which helps to get more people, more affordably, on the road.

“The joy of all insurance is the same: the financial desire of the insurance company is completely aligned with customers’ needs. So nobody wants to have crashes! The consumer doesn’t want to have crashes, and the insurance company would like to reduce the risk on their books,” Halkett says. “With telematics, you really get to do that; it’s not only that you get to understand the risk of the individual consumer, it’s that you get to influence that risk, so the risk that you write does not have to be the risk that you keep.”

Even if premium prices remain the same, a premium with the potential for reduction is an infinitely more saleable proposition than the fixed-price alternative. And it is not solely up to drivers to educate themselves – insurers can take a much broader tutelary role by communicating tips and advice on a continuing basis. In this way, companies like Insure The Box are much more than just providers of telematics.

“We take customers, and then we make them safer drivers,” Halkett says, “and we do that via communications, online portals and via direct messages to the consumers, all the time rewarding safer driving behaviors.”

From language courses to money-saving apps, gamification has proven itself time and time again to be a powerful force for bringing about positive outcomes, and the case with telematics is no different. The key is to engage the customer via whichever touchpoints are the most natural and offer the highest level of trust and engagement.

Insurers should not therefore conceive IoT solely in terms of inbound traffic (data traveling from customer devices to their back office) but also as a means of achieving higher engagement for their outbound messaging (from insurers to customers). Halkett points out the potential of connected home devices, such as the voice-enabled Amazon Alexa, for initiating contact with consumers in a world where “mobile” refers to much more than portable telephones.

“Automated data capture through IoT does not just help insurers preempt claims, it also helps mitigate losses and improve customer service when claim events do occur, by rooting out fraudulent or inflated claims and enabling faster turnaround of legitimate ones. Provided customer privacy concerns form part of the discussion, there is no reason why connected claims cannot be a win-win for everyone.” — Mariana Dumont, head of new projects at Insurance Nexus

Beyond facilitating UBI models and continuous customer engagement, IoT solutions also give insurers detailed insight into what is actually happening on the ground on a second-by-second basis. Admittedly, this requires a lot of data and sophisticated models and, in telematics for example, is certainly a lot more than just detecting high G-forces.

Indeed, Halkett recounts an example from the early days of Insure The Box, where a spike in G-forces triggered an accident alert but actually turned out to be nothing more than the forceful slamming of one of the car doors. Nowadays, though, the company can reliably detect the telltale signs of accidents and other claim events from the incoming stream of black-box data in real time and react accordingly. With motor accidents, speed is of the essence, so being able to dispatch an ambulance instantaneously to the scene can be the difference between life and death: the ultimate in claims loss mitigation.

This data is also useful in the inverse case, where insurers want to demonstrate that an accident has not in fact occurred (and that, therefore, an associated claim is fraudulent).

The business case for IoT in claims is self-evident; as we recall from our Internet of Things post, a majority of our respondents selected claims as one of the areas best-placed to benefit from IoT. Further still, in our stats on claims, a majority of respondents believed that IoT would affect the claims department, and a majority also acknowledged having a high level of focus on claims loss mitigation.

The immediate access that IoT gives to data, which does not have to be sought out and gathered but simply ends up in insurers’ back-end systems as a matter of course, is driving the development of automated, or straight-through, claims-handling. We found a reasonable incidence of automated claims-handling among our European respondents, whose claims departments also expressed a strong focus on customer experience.

In the context of continually expanding horizons, we asked ourselves what the next stage of dynamic real-time insurance might be. Continuing this section’s particular focus on the auto line, we of course cannot ignore the amount of chatter around autonomous driving and what it means for the insurance industry.

While some believe that autonomous driving may eliminate the auto line, the truth of the matter is that human error is not the sole source of catastrophic events on the road.

“You don’t just eliminate all risks by making your vehicles autonomous,” Halkett points out.

“And that’s before you even start to think about what you’d need to do to have an entirely autonomous ecosystem. The environment is going to have to have so many significant changes before it can support current autonomous functionality, and the journey between now and 100% autonomous – even if that does happen, and it’s not certain it will – is not straightforward at all, and there will be lots of different forms of mobility between now and then.”

Halkett underlines rural and city driving as two key hurdles to be overcome on the way to full autonomy. For now and the immediate future, she believes there is food for thought enough in the intermediate stages between today’s conventional cars and the putative point of total autonomy in the future:

“We’re going to have multiple different vehicles, some with ADAS systems, some with minor help for driving in there and some with barely more than a glorified cruise control, up to fully autonomous vehicles, all on the road at the same time with drivers behind the wheel with very differing levels of experience and expectations for that driving, too.

“And what they are going to want from their insurance is a seamless product that just covers them for whatever they’re going to do – that is the reality of what the insurance industry is facing over the next 10-20 years.”

Instead of focusing exclusively on different degrees of autonomy within what is essentially a private ownership paradigm, Halkett believes insurers should also be looking laterally, at emerging mobility formats:

“I would be looking at things like ride-sharing, things like shared ownership and different forms of vehicles, before we ever got to the point of complete autonomy,” she concludes.

Driving Connected Insurance Models Across the Continent

Our exploration of Insurance IoT and telematics has so far leaned toward the U.K. But what sort of progress have new-age insurance models made across the continent as a whole?

Another country that currently boasts plenty of IoT buzz is Italy. Our influencer Matteo Carbone, of the Connected Insurance Observatory, draws attention to the telematics leadership shown by the Italian market, citing the nation’s 2.4 million connected cars (as of the start of 2016), compared with 3.3 million in the U.S. and 0.6 million in the U.K.

However, to compare IoT progress in blanket fashion across different national markets and insurance lines can be like comparing apples and oranges with pears and plums, given the uncategorizable variety of the problems IoT solves and the sheer number of different business models it enables.

In Italy, for example, telematics boxes have been mandatory in all new cars for several years now, as a result of legislation aimed at reducing fraudulent whiplash claims. Such legislation does not currently exist in the U.K., but, as we have pointed out, the U.K. telematics market could be considered a front-runner in other respects.

“Italy is recognized as the most advanced auto insurance market at the global level for telematics. Leveraging the experience of the auto business, the country is affirming its position as a laboratory for the adoption of this new paradigm by other business lines.” — Matteo Carbone, founder and director at Connected Insurance Observatory

Leaving aside the question of who leads and who trails, one thing is certain: that IoT-based solutions for insurance, both within the auto line and beyond, are only going to become more prevalent as the unit cost of sensors comes down and the demonstrable savings from the technology rise further.

“The cost of technology is coming down all the time, and customer understanding is going up,” Halkett says. “So the business model becomes easier and easier for a wider portion of the market. Consumers in other countries will more readily adopt these sorts of technology-led products, and insurance markets are becoming more sophisticated, as well.”

To continue with our auto focus, we can see how the advantages of in-car telematics – whether we are talking road safety, lower premiums or counter-fraud – are advantages for people of every age in every market, so there is no fundamental limit on the applicability of the technology.

“At some point in time, everyone is going to get connected. People will feel more empowered as they have a greater control on preventing risk events. This will be the origin of the new business model. In some countries, insurers don’t have a high level of trust because they are establishing conditions and changing prices, and the relationship is only one way. This is going to change, because in the future clients will have their data as an asset.” — Cecilia Sevillano, head of partnerships, Smart Homes, at Swiss Re

This is not to say that the specific use cases will be the same everywhere. Halkett believes that the technology will bring about a bigger quantum leap, from a road-safety and world-health point of view, in those countries where infrastructure currently lags.

“I think when you stand back and start looking at the benefits of telematics, there’s an awful lot that could be used in different markets for very different reasons,” she says.

“For example, if you look at the accident alert service and it tells you when someone has had a serious road accident – that would be so useful in rural areas in poorer countries which perhaps do not have the same infrastructure or the same emergency services as we do in the U.K. And to have that pinpointed alert would be even more valuable in countries where not everyone has a mobile phone and hospitals are perhaps less accessible.”

This is a classic case of high-end technology bringing the full benefits of insurance to the lower-end market, a recurring theme across our other regional profiles, as well; underdeveloped markets, especially when they lack the burden of legacy systems, have a chance to catch up with and even leapfrog more established markets.

Margaris believes that this will be the case, not just for IoT adoption but for innovation more generally, in those parts of Europe that are currently less developed.

“The truth of the matter is that in less affluent countries you will see a faster adoption of insurtech because it’s cheaper and more personalized than what the incumbent insurance players offer,” he says. “Furthermore, I believe that the richer the countries, the less there is a need by consumers to adopt the cheaper business models that are offered by fintech and insurtech startups. So, therefore, I would say, the more developed the country, the longer it will take for innovative technology and business models to be adopted.”

Looking beyond Europe for other emerging markets with leapfrogging potential, Margaris points to Africa as a ready-made example, referring specifically to mobile technology:

“Look at Africa, where with a normal phone – not even a smartphone – you can already transfer money, you can do anything,” he comments. “Because with low incomes, you will find a greater need for innovation.”

This forms an unfavorable contrast with some established markets, and Margaris sees his native Switzerland as a case in point:

“In Switzerland, where I live, there is a lesser need for innovative business models because people have enough money. Not everyone is well-off, of course, but in general, there’s such a comfort level that people say, the status quo works well, so we don’t need to go for fintech or insurtech solutions that are or might be cheaper or better.”

Margaris picks out insurtech and AI as two growth areas towards which sizeable investments are currently flowing, with London and Berlin being the premier European hubs. As for how the insurer-insurtech confrontation will play out, he points to the case of fintech – which has a couple of years’ lead on insurtech – as a likely indicator of how things will go here as well.

See also: Global Trend Map No. 16: Regions  

“If we look at fintech, which is in a more advanced phase than insurtech, you see a clear trend of cooperation, meaning partnership or outright buying by incumbents. I think this will also happen to the insurtech space,” he explains.

While this prognosis (cooperation winning out over competition) is generally positive for insurers, Margaris believes that in some ways insurers have it more difficult than banks:

“Banking has the same issues, but banks are much more experienced with customer interaction on a daily basis, while, with insurance, usually you talk to an insurance agency once a year, like when you have a claim. So legacy technology and the insurtech industry as a whole is worrisome for the insurance industry, but it’s also an opportunity.”

“Insurtech will offer new ways to harness IoT potential, with use of AI and machine learning. Through partnerships with these startups, incumbents can definitely accelerate their modernization. And this is a win-win situation as insurtechs have technological expertise and, in return, insurance leaders can provide them the one resource which they lack: money.” — Minh Q Tran, general partner at AXA Strategic Ventures

This compromise between incumbents and new entrants, at least for now, stems from the fact that neither has all the ingredients to win outright. While we pointed out the two trump cards of insurtechs in Part I our our Europe profile (price and personalization), let’s now examine the advantages enjoyed by incumbent insurers.

“Insurers have the customers, they have the money and they have the brand,” Margaris says. “They can adapt quickly and say: OK, let’s take the cutting-edge technology, and we can make it happen.”

He gives the pharma industry by way of an analogy:

“The pharma industry spends billions on R&D and innovation. At the end, most of them – the big pharma players – who have much more experience in this field of innovation, they buy biotech companies and integrate. Because what the big guys do well is selling and distribution. If you give an insurance company a great product, they know how to make the most out of the potential. Incumbents and insurtech startups have to play to each other’s strengths.’

Halkett agrees that traditional insurers have plenty to offer as part of any insurance model of the future, in particular the sheer volume of data, insights and expertise that they have at their disposal. However, she questions whether today’s incumbents are structured in such a way as to make the most out of these assets.

There may need to be a move away from a centralized model toward more of an ecosystem play, with the insurer overseeing different components of a technology stack. Insure the Box is itself an example of this, being owned as it is by Aioi Nissay Dowa Insurance Europe, which is the ultimate bearer of risk and also has a long-standing partnership with automotive OEM Toyota.

“The insurtech discussion all too often centers on the premise that shiny new startups will win at the expense of the tired old incumbents. Many see the battleground between them being at the distribution end of the customer journey. For me, the insurtech opportunity extends all the way along the value chain.” — Nick Martin, fund manager at Polar Capital Global Insurance Fund

At the end of the day, it is not a case of either/or with the partnership and insurtech-domination models, and we are likely to see some insurtechs eventually make it big alongside insurer-insurtech tie-ups.

“It will happen. We’ve seen the Googles, Amazons, Facebooks of this world, and we’ll see the same thing occur in insurtech, whereby some will become huge players. However, I believe we will see more partnerships or acquisitions because it’s very hard to scale,” Margaris concludes.

As ever, you can read ahead straight away and gain access to all our global trends, key themes and regional profiles, by downloading your complimentary copy of the full Trend Map whenever you like.

Global Trend Map No. 17: Europe

These regional profiles are taken from our inaugural Insurance Nexus Global Trend Map, an in-depth quantitative-qualitative account of insurance and insurtech trends the world over. (You can access all seven of our regional profiles straight away by downloading the full Trend Map here.)

Our Europe profile combines quantitative insights derived from our global survey, some of which we covered in our previous post introducing our regional profiles, and qualitative perspectives from our two in-region commentators:

  • Switzerland-based venture capitalist Spiros Margaris (InsureScan.net, moneymeets and kapilendo)
  • Charlotte Halkett, former general manager of communications at U.K.-based telematics provider Insure The Box (now MD of Buzzvault at Buzzmove)

First, a quick overview of the salient stats from our survey, as they manifested themselves in Europe..

Key Stats: a Quick Recap

— i) The External Challenges: Europe

In Europe, the top three external challenges facing the insurance industry as a whole follow the global trend we outlined in our earlier post on industry challenges: technological advancement, changing customer expectations and digital channel capabilities.

Looking further down the table, some points of note are the higher position attained by increased regulation and the lower positions of new emerging risks and catastrophe risk. Compared with some of the other regions we examine, like Africa and Asia-Pacific, Europe is relatively sheltered from natural catastrophes and the associated risks that they bring, which possibly explains the lower scores we find for new emerging risks and catastrophe risk.

— ii) The Internal Challenges: Europe

Internally, the top challenges are close to the global trend we outlined in our earlier post on industry challenges: Lack of innovation capabilities and legacy systems take first and second place, with siloed operations edging out finding and hiring talent for third place.

— iii) Insurer Priorities: Europe

Our discussion on Europe falls into five broad chapters, the first two of which we cover in today’s post:

  1. Growth opportunities in a relatively saturated market
  2. The European consumer and Europe’s early adopter status
  3. How European insurers can deliver on their customer promise with new tech
  4. Dynamic, real-time insurance and IoT
  5. Progress on developing connected insurance models across the continent

Chapters 3-5 of our Europe profile will be presented in our next post.

See also: 10 Insurtechs for Dramatic Cost Savings  

1. Old Problems — New Solutions

While Europe, with a population of 750 million people, is a larger market than North America, it is still less than a fifth of the size of what we estimate for our Asia-Pacific region (4 billion). We therefore expect Europe to be relatively well-aligned with North America in terms of the range of market opportunities on offer.

That said, Europe does comprise a broader spectrum than North America, including some of the world’s leading economies (U.K., Germany, France) alongside more emerging markets (like much of the former Soviet bloc), which are not as advanced per se but offer attractive growth opportunities.

As is the case globally, low interest rates are hurting insurers’ investment outlook and forcing them to refocus on their core underwriting business. In Europe, this situation is compounded by a stringent regulatory environment (Solvency II), which makes running a profitable investments business harder still.

“Solvency II regulation is good, but in the kind of environment where we have low interest rates, it makes it much harder for insurers to find opportunities to make money,” comments Swiss-based VC Spiros Margaris.

This is borne out in the survey stats we gathered on regulation, which we presented in our earlier post on regulation:

  • Among our key regions, Europe leads on regulation as a priority area
  • In our regulation section, a relatively high proportion of European respondents indicated that regulation was impeding progress at their organizations “a lot,” with Solvency II and the Insurance Distribution Directive (IDD) being identified by European respondents as cause for concern
  • Also, consistent with our other regions, a large majority of European respondents believed regulation was posing more of a challenge to their organizations currently than during the previous 12 months

“European carriers have a raft of incoming regulation to implement and prepare for… In addition to the implementation of Solvency II, we can also point to the IAIS’s Insurance Capital Standard (ICS) slated for 2020, the introduction of International Financial Reporting Standards (IFRS) and the transposition into national law of the Insurance Distribution Directive (IDD) in time for 2018.” — James Vincent, general manager at Insurance Nexus

Interest rates and regulation make it imperative for insurers to seek growth and profit opportunities elsewhere. And while there does exist a low-end market opportunity in Europe, this is nowhere near on the scale we see in Asia-Pacific, Africa and LatAm. This means that, in the main, insurers must focus on established demographics and look either for entirely new risk categories or for ways to serve their clients’ existing risks better and more extensively.

A key emerging risk area on the commercial side is cybersecurity. This isn’t entirely new as a risk category but looms larger and larger for any company operating with customer data (i.e. every company). Unfortunately, cyber risk is not an easy category of risk to insure, given the wide range of dependencies involved, spanning everything from reputational damage to share-price hits. It is partly for these reasons, Margaris says, that many insurers have been reluctant to jump on the cyber bandwagon, at least for now.

Cybersecurity is also an issue that insurers are on the receiving end of, insofar as they steward vast quantities of customer data, all of which must be secured. Consistent with our other regions, a majority of European (re)insurers are very concerned about information security breaches, as we saw in our earlier post on cybersecurity; fortunately, a majority also have mitigation plans and have adjusted their security strategy to reflect the rise of new digital platforms.

Beyond exploring completely new risk categories, like cybersecurity, insurers in Europe will find fresh profits by focusing on what they have always done – only better.

Retention of existing business is therefore of primary importance, and we did indeed find a high focus on customer loyalty among European insurers in our post on marketing and customerCcentricity. Part of this also involves increasing the lifetime value of customers already on the books, with around half of European respondents indicating that they have a strategy to bundle and upsell products based on customer lifestyle analytics, consistent with our other regions, as we recounted in our section on product development.

“There is an abundance of capital available in the global economy, and right now money is cheap. There is minimal value in continually driving down price and adding further competition to a saturated market place. Putting digital at the core of distribution strategies will allow previously untapped markets to be exploited for a relatively low cost, allowing that capital to be deployed more effectively.” — Gareth Eggle, head of insurance at Flint Hyde

Additionally, though, growth for European insurers will come from going after new customers in the established demographics, and this will require carriers to better adapt their existing products to the sorts of risks people want to insure against and to offer them at an appropriate price. While this new drive toward customer-centricity will, generally speaking, result in lower premiums (insurance is not a designer item, and less is always more from a price perspective), it also allows greater scale and, ultimately, lower operating costs.

If we take the U.K. motor-insurance market as an example, we see that there is plenty of old business to be better served and new business to be won. Charlotte Halkett, speaking from her experience as general manager at telematics provider Insure The Box (Charlotte is now MD of home-line Insurtech Buzzmove), mentions that the cost of motoring in the U.K. is a particular challenge and draws attention to unlimited liability as well as to various government-influenced changes, such as the Odgen Rate, which disproportionately affects younger drivers less-well-placed to front the cost of auto insurance.

It is this opportunity – not just to improve driver safety but to bring down the cost of motoring – that Insure The Box is taking full advantage of. By monitoring driver behavior through telematics, the company is able to encourage safer driving behaviors and ultimately guide motorists to lower premiums. We will explore their usage-based insurance (UBI) model in our next post.

While Insure The Box forms part of an incumbent insurer’s technology stack through its parent company Aioi Nissay Dowa Insurance Europe, it is unlikely that the new play for personalized, customer-centric insurance will work out solely for the benefit of incumbents. Indeed, the opportunity is already attracting many new market entrants (like insurtechs), which represent a serious threat to legacy insurers’ hitherto cozy models.

Margaris gives a high-level explanation as to why insurtechs are such a threat to traditional players:

“Consumers will ask themselves why is it so much cheaper with an insurtech company and why does it cost so much at the insurer’s end? So there will increasingly be a margin pressure. The example I often present: If somebody gives the milk away for free, will you go to the deli and pay $1? You’ll say, I get it free there. I want to stay with you, but I’m not going to pay you a dollar for it. And that’s what fintech/insurtech does, it piles on margin pressure.”

Even if insurers can get the price of their products down, Margaris still believes insurtechs have an edge due to their stronger customer credentials.

“If insurtech companies provide solutions that feel very personalized, customized to the user’s needs, people will feel like what their insurance company is offering is so old-fashioned,” he says. “So there will be dissatisfaction with the incumbent services that they’re getting, and of course pressure not to pay up for that.”

Much of the difference between old-fashioned and newfangled comes down to the user interface. In this regard, Margaris compares the old and the new in insurance with the old and the new in software:

“If we go back 15 years and look at the user experience with software then – nowadays, you’re left asking, how did people use it? But at that point we thought it was cutting-edge. Now, though, people don’t want to think about what they’ve got to do, everything has to be seamless.”

Price and personalization (the two Ps) are the two key areas that insurers have to work on as they square up to new market entrants. We will see later on in our Europe profile that insurers’ ability to lower premium prices in fact goes hand in hand with improving personalization – in the sense that more frequent customer touchpoints and interactions provide the very data insurers need to price accurately and to offer the incentive of lower prices still.

“Anyone who believes that business will stay as in the past, will face a so-called ‘Kodak’ moment and will not survive increasing competition. There is an urgent need to systematically deal with innovation and challenge the current offering or even business model.” — Monika Schulze, global head of marketing at Zurich Insurance

2. Europe as Early Adopter

The trends we have just outlined – falling investment returns and a renewed drive toward customer-centricity – all manifest themselves, in some way or another, in the other markets we examine. But how does Europe compare with other markets?

Throughout this report, we have characterized the current disruption sweeping through the insurance industry as being customer-driven. We further identified its roots in the growth of digital outreach and distribution channels, not just in insurance but in the online economy more generally (a case in point being online retail), in the sense that these open up formerly captive markets to fleet-footed digital competitors.

“From IoT in the field to analytics and emerging AI solutions at the back end, European carriers are grasping with both hands everything the technology community has to offer in their bid to win the race for the customer. This promises to be a very exciting period for solution providers!” — Guy Kynaston, commercial director at Insurance Nexus

Europe is not just a heavily disrupted market but one in which insurers are showing themselves relatively well-equipped to deal with this, compared with our other key regions (this comes, of course, with the caveat that the European market varies substantially from country to country in ways we can only explore here at a relatively high level!).

In our post on marketing and customer-centricity, we characterized Europe and Asia-Pacific as exhibiting a marginally more problematic insurer-customer relationship than North America. In Europe’s case, we pointed to the high priority score that it achieved for customer-centricity (56 compared with North America’s 51). Our thesis was that higher customer expectations in the region were driving customer-centricity to the very top of the European priority rankings.

In line with our view that changes to distribution are intimately tied up with disruption in insurance, we expected to find a relatively shaken-up distribution landscape in Europe. A few thoughts on this:

  • The digital direct-to-customer channel is well-established in Europe (as we saw in our post on distribution, if any region is a laggard, it is North America)
  • Affiliate partnerships have a long tradition in Europe, for instance with Tesco insurance in the U.K., and a majority are increasing their distribution through these channels
  • We know anecdotally that aggregator impact is high in Europe, likely a consequence of the volume of direct business and the plethora of digital channels

While distribution disruption is what fundamentally enables customer disruption, these two trends are ultimately bound together with consumers, once empowered, setting ever higher precedents for distribution. Halkett gives a brief overview, from a U.K. perspective, of this consumer/distribution complex:

“The U.K. consumer is a very early adopter of things like online retail purchasing, and that means that new entrants can get to their market much more easily than in other markets.”

She continues: “The U.K. insurance market has been the most innovative for many years. They were the first to have direct insurance and the first to then start widescale adoption of aggregators, and now insurtech leads in the U.K., as well.”

Aggregators, in particular, allow new entrants to get in front of a vast number of consumers with minimal upfront cost. Halkett recalls how it was the aggregator route that first brought her former employer, startup Insure The Box, to prominence:

“We started with almost no brand, no marketing spend, we got onto our first aggregator and that meant that lots of consumers could see our proposition very, very quickly. That’s how you find those early adopters, and that’s how the ball starts rolling. The U.K. consumers are very willing to try different financial products this way.”

Aggregators are particularly well-established in the motor-insurance sector, and Halkett estimates that the percentage of U.K. customers that use an aggregator before taking out a policy is in the 80% range and that this rises into the high nineties for young drivers.

Based on the two lines of inquiry we have pursued in this chapter on “Europe as an early adopter” (high customer priority and a wide-open distribution landscape), we conclude that disruption has definitely arrived in Europe, and that the European market may be marginally ahead of the North American market.

We feel similarly about Asia-Pacific, although it appears that the disruption wave is only just breaking over this market. On the other hand, it is our conviction that European (re)insurers have already gone some way toward establishing a new normal and are relatively well-equipped to deal with disruption.

One key measure that speaks for this is the fact that it is Asia-Pacific, not Europe, that trails on cross-channel consistency. If Europe is marginally ahead here, this would suggest that European insurers’ omnichannel strategies – a reaction to disruption – have gone some way toward flattening out the fractured distribution landscape. Similarly, we can point to the lower prominence, compared with Asia-Pacific, of the chief customer officer role in Europe among recent or imminent appointments.

The lower importance of the chief customer officer appears at first glance hard to square with the high priority that Europe currently accords to customer-centricity. However, rather than chief customer officer and other customer-related job roles being unimportant in Europe, we might conclude instead that they are simply not of recent creation. In Asia-Pacific, by comparison, which we have suggested is only now feeling the full force of customer-driven change, chief customer officer is the stand-out new job title.

See also: Global Trend Map No. 9: Distribution  

Intuitively, we expect job roles to get created when the perception of a market threat is at its highest, in some sense as a knee-jerk reaction. If we infer from our job-role stats that chief customer officer is currently all the rage in Asia-Pacific but was last year’s role in Europe, the implication is that the wave currently breaking over Asia-Pacific broke over Europe a short time ago and that Europe is marginally further along with its journey toward tomorrow’s new normal.

The key stat to bear in mind here is the disruption score relating to lost market share that we introduced in our insurtech perspectives section: Only a small minority of carriers in Europe (23%) reported that they are currently losing market share to new entrants. We already emphasized the psychological component of this score in our insurtech perspectives post, so – at least in terms of how European (re)insurers perceive their own market – Europe is in less deep trouble than Asia-Pacific, where 47% of (re)insurers believed they were losing market share.

“I think European insurers are not panicked yet that the insurtech companies will destroy their business,” Margaris says. “We haven’t seen much business deterioration through insurtech companies yet, but it will happen, that’s certain.”

It would therefore appear that Europe is not so much the most disrupted of our key regions as the longest-disrupted. In line with this reasoning, it is Asia-Pacific that could be termed the most disrupted, in the sense that it is being hit by a storm that Europe has entered already, and North America the least disrupted, in the sense that the storm has not (quite!) broken yet. We explore the nature of disruption in the APAC and North American markets in greater detail in our coming dedicated profiles on these regions.

None of this is to imply that the material level of disruption in Europe is declining or that the storm has been ridden – far from it – just that insurers have gone further to take it on board. Indeed, as Margaris has pointed out, more business deterioration is likely on its way. There is also no reason for markets to develop in a linear fashion, with innovations (and threats) arriving onto the market in a constant stream, so relative confidence among insurers today could turn into (or back into) panic pretty much overnight.

For the time being, though, we believe we have discerned a slight innovation lead in Europe, which we explore further in our next post, in which we cover off the remaining chapters in our Europe profile:

  • How European insurers can deliver on their customer promise with new tech
  • Dynamic, real-time insurance and IoT
  • Progress on developing connected insurance models across the continent

 

How to Seize the Opportunities in 2016

This keynote address was delivered to the EY/Insurance Insider’s Global Re/Insurance Outlook conference at the Hamilton Princess Hotel in Bermuda.

It’s a pleasure to be here this morning. I appreciate being invited to offer some thoughts on the state of our industry and where we seem to be headed.

If you’ll indulge me for a few minutes, I’m going to look back at 2015 before I look forward to 2016. It feels like the right thing to do, given the year we’ve had.

I don’t know about all of you, but for me 2015 has come and gone in the blink of an eye.

And what a year it’s been.

You could invoke Dickens and say: It was the best of times. It was the worst of times.

This was the year that a youthful head of state swept into office in Canada on a promise of “sunny ways” – and it was the year that terror ripped through a nightclub in Paris, and a Christmas party in San Bernardino, CA, shattering our personal sense of security.

It was the year that the pope declared a Holy Year of Mercy, and it was the year that more than a million refugees streamed out of the Middle East and into Europe, in a desperate attempt to escape a jihadist war.

It was the year that almost 200 nations signed a landmark agreement to address climate change, and it was the year that another once-in-100-year flood lashed northern England for the second time in less than 10 years.

It was the year that the concept of “the singularity” – when human computing is overtaken by machines – became a distinct possibility.

It was also a year when driverless cars, packages delivered by drone and 3D printing became tangible realities.

Here in Bermuda, 2015 was the year that signaled the demise of a brand name close to my heart – that would be ACE – as M&A fever reshaped the island’s market landscape. It was also the year that the Bermuda Monetary Authority pulled off a coup – seven years in the making – by getting the European Commission to grant us Solvency II equivalence.

2015 was the year when Millennials – the generation born between the late ’80s and the turn of this century – became the largest demographic ever. Think about it. More than half the world is now under the age of 30.

And it was the year when we truly began to exit a world driven by an analog mindset and woke up to the fact that we’re living in a digital age. Labels like digital immigrants and digital natives were used to describe two of the four generations now making up our labor force.

I was invited to speak at a number of different venues this year, and, at each, I tried to describe this sense of being between two worlds.

I’d like to share some of the highlights with you, as I think these issues are going to be key to transforming our industry.

The first speech I gave this year was called “Risk in 140 Characters.”

I was speaking to a group of Millennials in London, and I used Twitter as an example of stripping out inefficiencies to get to the core of a business model. I challenged them to figure out how we can leverage technology to make our industry more efficient.

I also challenged them to spread the word about the industry to their peers. Millennials don’t think much of insurance as a career. With 400,000 positions opening up in five years in the U.S., this lack of interest is creating a talent crisis.

The next speech was “Can We Disrupt Ourselves?”

I spoke to the International Insurance Society in New York a few weeks after I spoke to the Millennials in London, and described some of the game-changing forces our industry is facing – driven by disruptive technology.

I challenged this group – who represent executive management – to figure out how to attract a new generation to our industry, AND to figure out how to work with them. The solution to our disruption will come from the digital natives among us.

Then there was “Where Are the Women? One Year Later.”

In 2014, I gave a speech called “Where Are the Women?” I asked why there aren’t more women in the C-suites and boardrooms of the insurance industry.

This year, I looked at whether much has changed in a year – the answer is no – and what might be done.

The short answer is that people like me – the white males who dominate our industry – need to make gender parity and diversity a priority, and mean it.

A speech I gave to St. John’s University’s School of Risk Management was called “The Canary in the Coal Mine.”

St. John’s organized a day-long conference on issues facing the industry. I talked about M&A, alternative capital and the changing roles of brokers, cedants and reinsurers.

I also addressed the talent crisis, making the point that Millennials are the canaries in the coal mine.

If we don’t pay attention to what they’re telling us about our workplaces and work policies – and this includes our attitude toward diversity and inclusion – they’re going to continue to snub our industry. And we can’t afford to let that happen. Not only are they our future workforce, they’re our current and future customers.

An address to 400 top producers of a brokerage firm was called “Do You Know How to Think Like a Unicorn?”

In Silicon Valley, companies backed by a $1 billion or more in capital are called unicorns, and those backed by more than $10 billion are called “decacorns.” There are more companies with this level of capitalization now than at any other time.

And remember, most of these are tech start-ups, many of which are behind the disruption that’s transforming our world.

I told the brokers that, in the digital world, they need to know their clients’ business, and their clients’ risks, better than the CEO does.

There’s currency in knowing how to interpret data, and brokers have a great opportunity to develop specialized skills that they can monetize.

That’s where the real value-add is.

According to a recent study by IBM, C-suite executives around the world are kept awake at night worrying about being ambushed by so-called digital invaders.

More than 5,000 executives participated in the IBM study. More than half of them told researchers that, above all else, they fear being “Uberized” – blindsided by a competitor outside their industry wielding disruptive technology.

While loss activity, interest rates and pressure on terms and conditions will always affect underwriting and financial performance, it’s now a given that technology and talent will determine who will succeed and who will fail.

So, I asked the brokers: do you know how to think like a unicorn?

I was told later that this firm is now describing itself as a technology company whose product is insurance – so I guess they took my suggestions to heart.

So this year, I focused on five main themes:

  • We still have rampant inefficiency in the way much of our business is conducted.
  • We’re threatened by technological disruption.
  • We have unprecedented risks for which there are no actuarial data.
  • The roles we play are being reinvented in real time.
  • And we have a looming talent crisis.

Not a pretty picture, and not for the faint of heart.

But what scope for innovation!

I really do believe this is one of the most exciting times to be working in this industry in the 40 years since I joined it.

We enter 2016 with the hope that terms and conditions will improve, and the expectation that industry consolidation will continue.

[The recent increase] in interest rates could mean that our capital may take a hit, but we’re likely to earn greater investment income over time, leading to increased revenue.

But these are the traditional hallmarks of a market cycle. This is the easy stuff.

There’s nothing easy or traditional about what’s facing our industry right now. Those of us who cling to the old way of doing business aren’t going to make it.

It’s the manner in which we navigate from the analog to the digital – how we move between two worlds – that will set our future course. This is going to take bold, courageous moves, some leaps of faith and a willingness to fail as often as we succeed.

I think it’s telling that [in November] about 200 industry representatives and entrepreneurs gathered in Silicon Valley to figure out how to change the traditional insurance model.

They felt we need to flip the value proposition from protection to prevention, using data analytics to define the characteristics of a risk and identify how to avoid it.

A report on this conference described it this way:

“One of the biggest challenges for successful executive teams is to reframe a company’s purpose away from its past greatness, and toward a different future.”

We’ve been an industry where past is prologue. But for many of the risks we’re facing, there is no past.

It really shouldn’t matter. We’re awash in data, but data pure and simple isn’t the point.

We need to harness data to predict the future – in other words, adopt the prevention mindset.

The issue isn’t simply gathering massive quantities of data. We need to take the data we have and know how to ask the right questions, and refine the right algorithms, to get the analysis we need to provide our products quickly and efficiently to a world doing business on smart phones.

To create the best risk solutions, we need to redefine the relationships we have with each other and build new organizational ecosystems. This is no time for staying in our traditional comfort zone.

And as an industry whose purpose is to secure the future, we have a collective obligation to address the massive protection gap between the developed and emerging economies.

In 2014, there were an estimated $1.7 trillion in losses. $1.3 trillion of that number was uninsured.

With collaborative undertakings like Blue Marble, the microinsurance consortium that was launched this year, we can begin to close this gap. This not only helps prevent disaster for the underserved, it helps build a sustainable planet.

I know we can figure out how to re-create our workplaces, finding ways to meld the experience and traditional perspective of Baby Boomers like me with the open, diverse, purpose-driven focus of Millennials.

This might be one of our greatest challenges, because it aims straight at the heart of our industry’s old-school DNA.

By the way, I like that Millennials are purpose-driven – because what industry can more rightfully lay claim to purpose than insurance?

As I said in one of my earlier speeches, insurance should be catnip to a Millennial.

Several of us are banking on that being true by supporting an awareness program to let the younger generation know that this is a great career choice.

I’ve been joined by Marsh’s Dan Glaser and Lloyd’s Inga Beale in signing a letter urging our fellow CEOs to put their companies’ weight behind this initiative.

The first phase of this plan is an Insurance Careers Month that will be launched in February 2016. This is primarily a U.S.-based project because that’s where the urgent need is, but other markets will be participating, too. We were aiming to enlist the support of at least 200 carriers, brokers, agents and industry partners – and at last count we had almost 260 signed up. The response has been great.

So, in closing:

It HAS been quite a year.

The way we live and work is changing faster than I think any of us thought possible. We have some amazing challenges and opportunities ahead of us – here in Bermuda, and in the countries where many of us do business.

I’m excited about where we’re going and how we’ll get there, and I hope you are, too.

I believe it’s the best of times.

In the meantime, I hope you all have a great morning of provocative thought and discussion, and I wish you a safe, happy and healthy holiday season.

The Defining Issue for Financial Markets

For anyone who has spent time on the open sea, especially in a small craft, you know the sea can be quite the moody mistress. Some days, the gale winds are howling. Some days the sea is as smooth as glass. The financial markets are quite similar.

In late August, the U.S. equity market experienced its first 10% price correction in four years. That ended the third longest period in the history of the market without a 10% correction, so in one sense it was long overdue. But, because the U.S. stock market has been as smooth as glass for years now, it feels as if typhoon winds are blowing.

Cycles define the markets’ very existence. Unfortunately, cycles also define human decision making within the context of financial markets.

Let’s focus on one theme we believe will be enduring and come to characterize financial market outcomes over the next six to 12 months. That theme is currency.

In past missives, we have discussed the importance of global currency movements to real world economic and financial market outcomes. The issue of currency lies at the heart of the recent uptick in financial market “swell” activity. Specifically, the recent correction in U.S. equities began as China supposedly “devalued” its currency, the renminbi, relative to the U.S. dollar.

Before we can look at why relative global currency movements are so important, we need to take a step back. It’s simply a fact that individual country economies display different character. They do not grow, or contract, at the same rates. Some have advantages of low-cost labor. Some have the advantage of cheap access to raw materials. Etc. No two are exactly alike.

Historically, when individual countries felt the need to stimulate (not enough growth) or cool down (too much inflation) their economies, they could raise or lower country-specific interest rates. In essence, they could change the cost of money. Interest rates have been the traditional pressure relief valves between various global economies. Hence, decades-long investor obsession with words and actions of central banks such as the U.S. Fed.

Yet we have maintained for some time now that we exist in an economic and financial market cycle unlike any we have seen before. Why? Because there has never been a period in the lifetime of any investor alive today where interest rates in major, developed economies have been set near academic zero for more than half a decade at least. (In Japan, this has been true for multiple decades.) The near-zero rates means that the historical relief valve has broken. It has been replaced by the only relief valve left to individual countries — relative currency movements.

This brings us back to the apparent cause of the present financial market squall — the supposed Chinese currency devaluation that began several weeks ago. Let’s look at the facts and what is to come.

For some time now, China has wanted its renminbi to be recognized as a currency of global importance — a reserve currency much like the dollar, euro and yen. For that to happen in the eyes of the International Monetary Fund (IMF), China would need to de-link its currency from the U.S. dollar and allow it to float freely (level to be determined by the market, not by a government or central bank). The IMF was to make a decision on renminbi inclusion in the recognized basket of important global currencies in September. In mid-August, the IMF announced this decision would be put off for one more year as China had more “work to do with its currency.” Implied message? China would need to allow its currency to float freely. One week later, China took the step that media reports continue to sensationalize, characterizing China’s action as intentionally devaluing its currency.

In linking the renminbi to the dollar for many years now, China has “controlled” its value via outright manipulation, in a very tight band against the dollar. The devaluation Wall Street has recently focused on is nothing more than China allowing the band in which the renminbi trades against the dollar to widen. With any asset whose value has been fixed, or manipulated, for so long, once the fix is broken, price volatility is a virtual guarantee. This is exactly what has occurred.

China loosened the band by about 4% over the last month, which we believe is the very beginning of China allowing its currency to float freely. This will occur in steps. This is the beginning, not the end, of this process. There is more to come, and we believe this will be a very important investment theme over the next six to 12 months.

What most of the media has failed to mention is that, before the loosening, the renminbi was up 10% against most global currencies this year. Now, it’s still up more than 5%, while over the last 12 months the euro has fallen 30% against the U.S. dollar. Not 4%, 30%, and remarkably enough the lights still go on in Europe. Over the last 2 1/2 years, the yen has fallen 35% against the U.S. dollar. Although it may seem hard to believe, the sun still comes up every morning in Japan. What we are looking at in China is economic and financial market evolution. Evolution that will bring change and, we assure you, not the end of the world.

Financial market squalls very often occur when the markets are attempting to “price in” meaningful change, which is where we find ourselves right now.

What heightens current period investor angst is the weight and magnitude of the Chinese economy, second largest on planet Earth behind the U.S. With a devalued currency, China can theoretically buy less of foreign goods. All else being equal, a cheaper currency means less global buying power. This is important in that, at least over the last few decades, China has been the largest purchaser and user of global commodities and industrial materials. Many a commodity price has collapsed over the last year. Although few may realize this, Europe’s largest trading partner is not the U.S., it’s China. European investors are none too happy about recent relative currency movements.

Relative global currency movements are not without consequence, but they do not spell death and destruction.

A final component in the current market volatility is uncertainty about whether the U.S. Fed will raise interest rates for the first time in more than half a decade. Seriously, would a .25% short-term interest rate vaporize the U.S. economy? Of course not, but if the Fed is the only central bank on Earth possibly raising rates again that creates a unique currency situation. Academically, when a country raises its interest rates in isolation, it makes its currency stronger and more attractive globally. A stronger dollar and weaker Chinese renminbi academically means China can buy less U.S.-made goods. Just ask Caterpillar and John Deere how that has been working out for them lately. Similarly, with a recent drop in Apple’s stock price, are investors jumping to the conclusion that Apple’s sales in China will fall off of the proverbial cliff? No more new iPhone sales in China? Really?

The issue of relative global currency movements is real and meaningful. The change has been occurring for some time now, especially with respect to the euro and the yen. Now it’s the Chinese currency that is the provocateur of global investor angst. Make no mistake about it, China is at the beginning of its loosening of the currency band, not the end. This means relative currency movements will continue to be very important to investment outcomes.

We expect a stronger dollar. That’s virtually intuitive. But a stronger dollar is a double-edged sword — not a major positive for the near-term global economic competitiveness of the U.S., but a huge positive for attracting global capital (drawn to strong currencies). We have seen exactly this in real estate and, to a point, in “blue chip” U.S. equities priced in dollars, for years now.

In addition to a higher dollar, we fully expect a lower Chinese renminbi against the dollar. If we had to guess, at least another 10% drop in the renminbi over next 12 months. Again, the price volatility we are seeing right now is the markets attempting to price in this currency development, much as it priced in the falling euro and yen during years gone by. Therefore, sector and asset class selectivity becomes paramount, as does continuing macro risk control.

Much like a sailor away far too long at sea, the shoreline beckons. We simply need to remember that there is a “price” for being free, and for now that “price” is increased volatility. Without question, relative global currency movements will continue to exert meaningful influence over investment outcomes.

These are the global financial market seas in which we find ourselves.

Solvency 2: An Outcome Very Different Than Planned

The original intention of the EU's Solvency 2, the regulatory requirement for capital held by insurers, was to create a framework that inspired policyholder confidence and restore trust. The real outcome was to force insurers to undertake massive programs of data management at costs that, for some Tier 1 insurers, have exceeded $200 million. Some insurers said they would pass the cost on to their customers, which I’m sure wasn’t the intention.

In what was arguably worse, the cost became so great that other useful programs were put on hold because of this burning regulatory platform. The knock-on effect has been to create delay especially in customer-facing activities (which would have had a far better impact in improving confidence and trust).

Some international insurers suggested that the requirements might prevent them from trading in Europe – creating a “Fortress Europe” – but Solvency 2 seems to be emerging in multiple guises around the globe, in China, Latin America, South Africa and of course the U.S. in the form of RMORSA.

There’s lots written on this topic, such as http://www.solvencyiiwire.com/, and I won’t bore you, but as I looked out at the faces at a major conference in the U.S. where I spoke recently, I recognized the look I saw in many insurers in Europe in 2008 — that of not really knowing what was going to hit them.

Insurers were to discover that more than 80% of both cost and implementation time was absorbed in data management, 15% on analysis and the small balance on risk reporting. Yet the reporting element proved to be the only part visible – reminding me of an iceberg analogy, with the reporting being that part of the ‘berg visible above the waterline.

Comparing risk and regulation to an iceberg is interesting, and as I looked around the room at the conference, I wondered how many attendees were ready for what would be, for them, a long and difficult passage. But not, I hope, a Titanic one…