Tag Archives: global insurance

Capturing Hearts and Minds

This article is an excerpt from a white paper, “Capturing Hearts, Minds and Market Share: How Connected Insurers Are Improving Customer Retention.” In addition to the material covered here, the white paper includes specific recommendations on how to improve retention.

To download it, click here.

Insurers currently operate in a challenging environment. On the financial side, premiums are stagnant and interest rates low, and many cost-cutting measures have already been enacted. On the other hand, customer empowerment is growing. Customers are finding the information and offers they need to switch providers more freely than in the past – customers whom insurers can ill afford to lose.

For many carriers, the key to preserving customer relationships still lies in personal interaction, executed through traditional distribution and service models with tied agents and brokers. For some customer sets – those who strongly favor personal interaction – this business model works well. Yet a growing segment of customers, especially those 30 years old and younger, differ in some key aspects. While they still look for help and advice, they seek personal contact in the context of a holistic, omni-channel experience; they communicate and find information whenever, wherever and however they want. And even traditional customers appreciate if their agents have broader and faster access to the information and specialists they need on a case-by-case basis.

How can insurers keep – and even expand – these diverse customer sets, old and young alike? What factors drive retention and loyalty? To explore these questions, we surveyed more than 12,000 insurance customers in 24 nations about relationships with their insurers, what they perceive as valuable and in what ways they would like to interact and obtain new services going forward.

We found that while insurers understand well how to cover risks, they often fail to engage their customers on an individual basis. Even though insurance is complex, customers want to be involved, emotionally and rationally. When insurers act on this knowledge, customer share can rise.


The churn challenge

As a rule of thumb, the cost of acquiring new customers is four times that of retaining existing ones. To grow market share, insurers need new customers. But for the balance sheet, retention has a much larger impact.

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For a long time, the insurance industry did not consider this lack of trust a problem. In the highly asymmetrical pre-Internet world, there was a necessary gatekeeper to information and knowledge about risks and coverages: the insurance intermediary. For insurers, the intermediary’s trusted personal customer relationship was a guarantee of fairly reliable renewals and low customer churn – thus, keeping the most profitable customers.

The technological innovations of the digital age have altered this picture. Information asymmetry is diminishing. Although many customers still seek advice on insurance matters, the empowered digital customer does not need to rely solely on the gatekeepers of old for information. With communication being swift and ubiquitous, misinformation is quickly uncovered, leading to a steady erosion of trust, even with the personal adviser and insurer.

We have come to expect that only 43% of our survey respondents trust the insurance industry in general – a number that has stayed fairly stable since our first survey in 2007 – but only 37% trust their own insurers to a high or very high degree. Most customers are neutral, with 16% actually distrusting their providers.

As we have often seen in past studies, trust varies widely by market and culture. For example, only 12% of South Korean customers responded that they trust their insurers, compared with 26% in France, 43% in the U.S. and 51% in Mexico.

Low trust translates to high churn. Even though 93% of our respondents state that they plan to stay with their current insurers for their recently acquired coverage through 2015, almost a third came to that coverage by switching insurers. Why? Most commonly (for 41% of respondents), their old insurers couldn’t meet their changing needs (see Figure 1).

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The pattern of increasing customer empowerment and decreasing information asymmetry is continuing. New and non-traditional entrants to the insurance market are taking advantage of the opportunities of digital technologies. For example, Google recently launched an insurance comparison site for California and other regions of the U.S. This presents a real threat to both online insurers and traditional providers – not because of the comparison option itself, but because Google has collected a huge amount of information about each individual through his or her surfing habits, thus allowing better personalization and higher-value offers.

The three dimensions of retention

What do insurers need to do to increase trust and customer retention with the intent of improving both the top and bottom lines? The findings of our survey point to three courses of action:

    • Know your customers better. Customer behavior is affected by experiences and underlying psychographic factors. Insurers need to know and understand customers better, not only as target groups but as individuals. Insurers also need to get their customers involved, rationally and emotionally.
    • Offer customer value. As overused as the term is, a strong and individualized value proposition is exactly what insurers need to provide to their customers. Value is more than price; it includes many factors, including quality, brand and transparency.
    • Fully engage your customers across access points. As Millennials become a significant part of the insurance market, speed and breadth of access has begun to matter much more than in the past. Insurers need to engage their customers as widely as possible, from in-person interactions at one extreme all the way to digital interaction models such as those made possible by the Internet of Things.

Customer perception and behavior

Ever since the Internet has become a viable way to shop for goods and services, much discussion has centered on the matter of price. In theory, insurance products are easy to compare, so shouldn’t the cheapest one win out?

This view assumes that, aside from the price, all else is equal. If that were true, price would indeed be the sole tie-breaker. In reality, though, all else is never equal. Insurance is a product based on trust, for which perception matters. Perception, and thus customer behavior, is shaped by the individual customer’s attitudes and experiences. Understanding a customer on an individual basis helps a carrier tailor these experiences by communicating the “right way.”

To classify our respondents according to their attitudes, we used the same psychographic segmentation as in previous studies (see Figure 2).

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One size seldom fits all

Overall, our respondents stated that the three most important retention factors are price (63%), quality of service (61%) and past experience (33%) – leading back to the price as the main tie-breaker. Yet a closer look across segments paints a more diverse picture: For a demanding support-seeker, quality is by far the most important (74%), while a loyal quality-seeker bases his renewal intentions on past experience more strongly than any other group (43%).

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Assuming an insurer is targeting all these customer segments, it will need a diverse set of customer communication options, as each segment requires approaches tailored to its specific preferences (see Figure 3). This figure shows the five most-used insurance search options in the three segments where we are seeing the biggest shift among Millennials, who represent future customers.

The power of emotional involvement

Our data show that appropriate communication with customers sets off a positive chain reaction. First, it increased the use of that type of interaction. Customers perceived the interaction as more positive, and ultimately this increased emotional involvement with their providers – the “heart share” of our study title. Finally, emotional involvement is strongly connected to customer loyalty, so increasing involvement from medium to high had a dramatic impact on the loyalty index (see Figure 4).

What is the right way to communicate and increase involvement? As seen in Figure 3, the answer is “It depends,” so there is no one right approach for all customers. But using current technology – specifically, social media analytics – can help insurers improve involvement.

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With this tool, providers can “listen” to various online sources, understand how they are seen by customers, uncover trends and quickly tie this knowledge to specific actions. Providers can combine the findings of social media analytics with psychographic segmentation and an individual customer’s place within the segmentation; the latter gained via more traditional customer analytics. With this customer view, insurers can even go beyond the personalized knowledge their tied agents tend to have: As customer wants and needs change and they articulate it on social channels, insurers will know and can react in close to real time.

Social media analytics

Social media analytics is a set of tools that allow insurers to analyze topics and ideas that are expressed by their actual or potential customers through social media. This can be on an individual basis, or per customer group. Through social media analytics, insurers can apply predictive capabilities to determine overall or individual attitude and behavior patterns, and identify new opportunities.

This article is an excerpt from a white paper, “Capturing Hearts, Minds and Market Share: How Connected Insurers Are Improving Customer Retention.” In addition to the material covered here, the white paper includes specific recommendations on how to improve retention.

To download it, click here.

Major Regulatory Change in Asia-Pacific

The global insurance industry is undergoing significant regulatory change, with regulators in the more developed markets endeavoring to synchronize their efforts. Similar occurrences can be observed in the Asia-Pacific region, where a number of countries are reviewing and undergoing changes in their approach to insurance regulation and holistic risk management. Most notably, a number of regulators are either introducing risk-based capital (RBC) or revisiting their existing RBC frameworks. The maturing regulatory approaches in Asia-Pacific will be a significant factor in managing systematic risk and enhancing policyholder protection.

Asia-Pacific is different

While the proposed RBC framework in Asia-Pacific may have similarities with the European Solvency II standard, there is wide disparity in the level of sophistication and application. Many of the changes are being driven by local market nuances, such as characteristics of the insurance products being sold and maturity of the insurers who operate in the various jurisdictions.

For example, Australia has recently implemented its second-generation solvency regime. Singapore and Thailand are consulting with the industry on second- generation RBC frameworks, while others such as China and its Hong Kong SAR are considering moving in that direction. These moves are particularly encouraging in providing a regulatory framework that will allow for a degree of consistency, especially for those insurers that have multiple offices across the region.

In addition to the changes in reserving and solvency calculations, a number of regions are also strengthening their risk management efforts (e.g., China with C-ROSS). This exemplifies how regulators are paying more attention to embedding risk management activities in the business. They look to ensure that senior management has sufficient oversight to allow them to consider and discharge their fiduciary responsibilities. It is important that organizations have an operational infrastructure and that the risk profile is within business risk appetite levels.

What does this mean for insurers?

Advances in regulation in the Asia-Pacific region
are far-reaching. The implications are expected to improve the way businesses will operate to create long-term sustainability. These implications, in our view, will affect product offerings, investment strategy, capital utilization, risk transfer opportunities and infrastructure.

In particular, we foresee several implications:

• Robust regulatory framework will provide comfort to the overall financial soundness of the insurance industry. However, the cost of regulatory compliance is expected to increase significantly.

• Changing regulations will provide more room for innovation and incentives to enhance or change organizational metrics. Better-managed companies will potentially benefit from lower capital requirements, making their products more attractive.

• Companies traditionally focusing on new business value will have to rethink the continuing profitability of past years and will need to understand options available for in-force value management. This will be particularly crucial given that existing forms of new business may be capital-intensive.

• A better understanding of the business risk profile will be needed. This will necessitate implementing sophisticated techniques in modeling/optimizing risk- adjusted returns and outlining a more systematic process for risk appetite.

• Investment will be required to enhance the modeling and reporting systems to meet regulatory timelines.

• Convergence of regulations toward RBC will also mean that there is less disparity between local and foreign players. This will make Asia-Pacific insurance markets potentially more attractive for foreign investments. Moreover, customers may eventually benefit from new ideas and solutions from both foreign and domestic insurers. This will create a healthy competitive market place for policyholders.

Challenges and opportunities

Based on experience in more developed insurance markets, changes in regulations produce both challenges and opportunities for insurers. In the short term, it is anticipated that there will be more investment demands on insurance companies. Insurers have the prerogative to make the best use of these investments to define long-term opportunities.

In Europe, for example, some insurers have used Solvency II as a means to further enhance their risk management systems, capital allocation mechanisms and reporting infrastructure, and redefine their key performance Indicators. This, in turn, has convinced shareholders and analysts that investments because of regulatory changes should not be for mere compliance, but rather as a means of enhancing competitive advantage. We believe that insurers in Asia-Pacific should draw upon the experiences and challenges in more developed markets to establish an approach for Asia-Pacific markets that considers regulation, economic nuances and the purchasing behavior of policyholders.

Looking ahead

There will be many changes within the industry over the next few years, and companies will need to consider the operational implications for their businesses. Based on our conversations and experience in the region, we see an increasing number of insurers making adjustments to their future business plans and investment needs. Some of these modifications are tactical, such as enhancing their existing processes, while others have the potential to have a wholesale effect on entity rationalization and strategic initiatives, such as capital optimization.

We are very engaged with the regulators, industry bodies and insurance companies in the emerging discussions and are helping insurers to consider these regulatory changes with a strategic mindset.

China

The China Insurance Regulatory Commission (CIRC) has adopted a factor-based solvency system similar to Europe’s Solvency I regime. It is composed of internal risk management, solvency reporting, financial analysis and supervision, regulatory intervention and bankruptcy remediation. This solvency regulation system was built from 2003 to 2007.

Over the past 30 years, the Chinese insurance market has become one of the fastest-growing in the world, and its complexity and risk have increased accordingly. The existing static solvency system no longer properly reflects asset and liability risks facing insurance companies. Therefore, it has limitations in providing good guidance for insurers to improve risk management quality and capabilities.

Globally, there is a trend toward more risk-oriented regulation and governance, such as Europe’s Solvency II, the US NAIC’s solvency modernization initiative and Singapore’s RBC 2.

Developing a new solvency system for mainland China would not only meet local market needs but could also provide pragmatic and invaluable experience for other emerging markets, as well as the international insurance community.

Australia

Australia has two primary supervisory authorities, the Australian Prudential Regulation Authority (APRA) and the Australian Securities and Investments Commission (ASIC). Both bodies have authority over the entire retail financial sector, comprising deposit-taking institutions, life and non-life insurance companies, friendly societies and superannuation schemes. APRA is responsible for the licensing and prudential regulation of financial institutions, while ASIC deals with consumer protection issues.

The most significant recent enhancement to the regulatory regime is the capital adequacy framework and draft conglomerate supervision. This is supplemented by a corporate governance regime.

Hong Kong

The insurance industry in the Hong Kong SAR has witnessed considerable growth in the past decade. As of Oct. 14, 2014, there were 155 authorized insurers in Hong Kong, including
44 long-term insurers, 92 general business or non-life insurance companies and 19 composite insurers (i.e., life and non-life insurers).

In Hong Kong, the Office of the Commissioner of Insurance (OCI) is the Insurance Authority (IA) under the Insurance Companies Ordinance (ICO) and oversees the financial conditions and operations of authorized insurers. The OCI is part of the Financial Services and the Treasury Bureau of the Hong Kong Government.

India

The Indian life insurance industry has witnessed a phenomenal change in the last 14 years since it was opened to private players. It experienced strong growth (a CAGR of 30%) for almost a decade, until a wave of regulatory changes capped charges for unit-linked products. This compelled insurers to shift focus from unit-linked investments to traditional protection products, significantly slowing industry growth. With reduced shareholder margins on unit-linked plans, sales of traditional products have increased and now constitute at least half of new life insurance business, whereas unit-linked plans are facing negative growth.

General insurers have seen growth of 16% CAGR over the past decade. This is attributed to the evolving regulatory environment, new private companies entering the market, changing demographics, greater disposable income and business development in the corporate sector. In fact, growth was significantly higher in the financial year 2012–13 — up 24%, primarily as a result of policies sold and rate adjustments.

Against the backdrop of a relatively underpenetrated market, there is a significant potential for sustainable long-term growth. Currently, there are 24 life insurance and 28 general insurance companies in the market. A few mergers and acquisitions are in the pipeline.

The industry today is in a state of flux. Surrounded by political uncertainty, slower economic growth, regulatory changes and increased competition, insurance companies are looking to increase profitability, manage expenses and improve persistency.

Indonesia

Indonesia is one of Southeast Asia’s largest economies and presents a huge untapped market for the insurance industry. An expanding middle class and the young demographics of the population is creating a vast platform for savings and investment products, and as life insurance continues to show exponential growth, the microinsurance market is gaining traction with low- income consumers.

Against this backdrop, the Indonesian insurance industry is being shaped by changing regulations and stricter capital requirements that are aimed at introducing greater transparency and stability. In this transformed regulatory landscape, there are more new entrants to the market and greater opportunities for mergers, acquisitions and joint partnerships.

Malaysia 

Malaysia has a well-developed, stable economy that continues to attract insurers. The GDP is growing at nearly 6%, and unemployment and inflation are relatively low. Demographics and strong economic growth have helped to develop a strong market for takaful insurance and bancassurance. In recent years, the country has undertaken wide-ranging reforms aimed at improving regulatory efficiency and opening the door to greater competition in financial services.

The Malaysian insurance industry, like others in the Asia-Pacific region, is struggling with depressed investment returns, higher volatility in capital markets and increased pressure on the cost of capital. Against this business landscape, the industry appears to welcome regulatory changes. However, there are also concerns that some of these changes are diverting attention from key issues, such as improving portfolio returns and new business.

Singapore

The Monetary Authority of Singapore is finalizing the risk calibration and features of the RBC framework, with implementation expected from Jan. 1, 2017.

The RBC framework for insurers was first introduced in Singapore in 2004. It adopts a risk-focused approach to assessing capital adequacy and seeks to reflect most of the relevant risks that insurers face. The minimum capital prescribed under the framework serves as a buffer to absorb losses. The framework also facilitates an early intervention by the Monetary Authority of Singapore (MAS), if necessary.

While the RBC framework has served the Singapore insurance industry well, MAS has embarked on a review of the framework (coined “RBC 2 review”) in light of evolving market practices and global regulatory developments. The first industry consultation was conducted in June 2012, in which the MAS proposed a number of changes and an RBC 2 roadmap for implementation.

South Korea

The regulatory authority for the Korean financial services industry, the Financial Supervisory Service (FSS), introduced RBC in April 2009. In replacing the Solvency I requirement, the RBC scheme aims to strengthen the soundness and stability of the overall insurance industry.

In the rapidly changing insurance market, FSS has to review the RBC regime continuously to ensure that it serves the intended purpose. This effort included some changes in 2012, such as subdividing capital classes and categorizing risk factors in accordance to the types of risks transferred to insurance companies. Moreover, FSS enhanced the RBC calculation methodology by adding reverse margin risk as part of interest rate risk in 2013 and by raising the confidence level of risk factors for insurance risk early in 2014.

In light of the recent enhancements, some insurance companies’ solvency margin ratio has fallen below the FSS’s recommended ratio of 150%. As a result, these insurers have had to raise capital through alternative options such as issuing subordinated bonds.

Thailand

The Office of Insurance Commission (OIC) implemented a risk- based capital (RBC) framework and gross premium valuation (GPV) regime in Thailand in September 2011.

The OIC rolled out two phases of parallel tests before the actual implementation of the RBC framework to gauge the impact on insurers and to gather industry response. The solvency requirement was also increased from 125% at the initial implementation to 140%. This became effective Jan. 1, 2013, to give insurers more time to respond to the changes.

In 2011, the Thai regulator granted temporary RBC exemptions and relaxed some of the restrictions. This was an effort to help local general insurers overcome financial difficulty caused by flood losses that occurred that year, as the floods coincided with implementation of the RBC framework.

The OIC rolled out two phases of parallel tests before the actual implementation of the RBC framework to gauge the impact on insurers and to gather industry response.

Opportunities in Latin America

The Latin America insurance outlook for 2015 is generally favorable, with high-single-digit premium growth across the region presenting complex risks and opportunities. Although real economic growth has slowed recently in the largest markets of Brazil and Mexico, stronger economic growth and inflation in some areas continue to drive premiums. Long-term trends (reduced poverty, shrinking unemployment and a population increasing above the pace of most mature markets) are bolstering consumer demand for insurance products.

In general insurance, catastrophic risks from floods, hurricanes and earthquakes are driving premium growth in a number of Latin American countries. Premiums peak following major losses as demand increases and supply becomes more costly. In contrast, the underwriting cycle slowly reduces premium rates after benign catastrophe-loss periods, such as those experienced in the last few years. The development of efficient distribution systems to increase insurance market penetration and encourage product acceptance remains a critical challenge.

As economic, political and regulatory environments evolve inconsistently across the region, inflation risk continues to persist at varying levels. While Chile’s, Peru’s and Colombia’s annual inflation rates averaged 2% to 3% from 2009 through 2013, Argentina’s and Venezuela’s percentages were the highest in the region. Argentina’s battles with its creditors, and its governmental hand in business, have destabilized its currency. In contrast, Mexico’s government remains stable and is progressing with reforms to modernize insurance and other business sectors.

From a tax perspective:

  • Brazil imposes the highest income tax in the region, with insurer profits taxed at 40%. Popular products include health insurance and term life insurance, as well as auto and property covers, which are sold by independent brokers. Tax incentives for retirement accumulation plans are growing in popularity.
  • Mexico’s tax incentives, promoting retirement savings and a reasonable income tax structure, are contributing to growth. In a country where third-party auto liability coverage is mandatory in several cities, auto insurance generates the highest premiums.
  • The scenario is similar in Chile, where auto insurance is also compulsory and characterized by intense price competition. Provisional life and retirement products are part of the national social security system. Approximately half of all insurers are subsidiaries of international firms. Although an open market has led to stability and a competitive balance, insurers continue to adapt in the wake of earthquakes and other natural disasters.
  • In Argentina, independent agents and brokerage firms account for an estimated 75% of total premiums. The nationalization of private pension funds in 2008 changed the insurance industry structure, sharply reducing the size of the life and annuity market and the number of insurers in the country. Argentina imposes a high income tax burden, with profits taxed at 35% and a 10% dividend withholding tax.
  • Colombia, the fifth largest Latin American insurance market,
    is partially focused on investing in infrastructure to encourage demand for guaranty bonds. Automobile insurance, compulsory personal auto accident protection and reinsurance and earthquake insurance are the most important product lines. The industry aims to develop catastrophe insurance markets and enhance risk models, hoping that a stable commercial market will help deter government response to gaps in market coverage.
  • Peru has upgraded its economy in recent years to manage its rapid growth. Significant changes are being made in consumer protection, tax legislation and new regulation. Peru’s growth forecast is 6% this year, compared with predicted growth of 1.5% for Brazil and 1.1% for Mexico. Many foreign companies are considering Peru as a safe and desirable country for investment.

The Latin America insurance environment is becoming more similar to mature markets. Strong economic growth rates and regulatory reforms in the past decade(s) have attracted a number of global insurers, reinsurers and insurance brokers to the region. Mergers and acquisitions continue to help these global players build their positions. And cross-regional expansion efforts by Latin American-based insurers have increased their size and market reach, as well. These deals are enhancing insurers’ capabilities in product development and risk management. The implementation of new Solvency II insurance capital management regulations in 2015 is expected to result in a shift toward greater insurance industry consolidation and increased sophistication in risk management.

Low penetration rates in Latin America are caused by a number of factors and afford significant room for growth if economic expansion continues. Factors include:

  • Wealth disparity
  • Insufficient tax incentives for retirement products
  • Lack of knowledge among the general population about the value of insurance

Also contributing to potential opportunity is the changing perception of insurance as a necessity or investment, rather than a cost. This comes about with a change to the region’s income disparity, which in most countries is shrinking. Brazil is expecting double-digit declines in premiums across many low-hazard markets. In this heightened competitive environment, many insurers believe they can accelerate premium growth by targeting rapidly growing market clusters.

In comparison, Argentina is experiencing high inflation, tight regulation and a fluctuating economic market; nevertheless, insurance is a fast-growing industry that continues to show resilience in premiums and tolerance for expansion in a challenging environment. Argentina and Venezuela also have strict foreign-exchange control regimes. These generally do not allow residents to pay dividends or inter-company services/royalties outside of the country — in some cases, also limiting the deductibility of certain payments.

In general, it is worth discussing the value added tax (VAT) system in these countries,which is a key concern for insurers.TheVATpaid on the local purchase or importation of goods or services constitutes “input VAT” that typically should be credited against the “output VAT” generated on the taxable sale of goods or services. VAT should not be a cost of doing business. However, VAT is often an unexpected cost when entering a market. In the case of Latin American insurers with VAT taxable and non-taxable activities, the VAT calculation methodology is complex and usually generates some level of irrecoverable VAT.

Some products sold by insurance companies are exempt from VAT, meaning that any VAT incurred on the local purchase of goods or services becomes an irrecoverable cost for the insurance company (although deductible for local corporate income tax purposes). For example, the following are exempt:

  • Argentina’s life insurance and workers’ compensation policies
  • Mexico’s life and pension insurance
  • Certain insurance contracts in Chile, including those related to international trade, insurance of assets located outside of Chile and earthquake-related coverage

Brazil deserves a separate analysis because Brazilian insurance companies are subject to Social Integration Program (PIS) and Contribution for the Financing of Social Security (COFINS) taxes on gross revenues, at a combined rate of 4.65%. PIS/COFINS are not a VAT type of tax but, rather, they are paid on a cumulative basis: any PIS/COFINS paid by the local insurance company is not a recoverable cost. Brazil has a state VAT (ICMS) and a federal VAT (IPI), but these taxes do not apply to the sale of insurance products.

Property/casualty, auto insurance, professional liability, environmental and finance solutions are generally subject to VAT in Latin America, so any VAT paid should be fully recoverable for the local insurance company.

In addition to the VAT, some Latin American countries impose additional layers of indirect taxes that should be carefully reviewed by local insurers (e.g., gross revenue taxes, taxes on financial transactions, net worth taxes and stamp taxes, among others).

Global Outlook for P&C, Life-Annuity

In 2015, the macroeconomic environment across much of the world shows significant improvement, with GDP rising in many countries and both the middle class and high-net-worth populations expanding in number and financial resources. These factors bode well for the global outlook for international property-casualty and life-annuity insurance companies.

Key challenges in 2015 include rising competition, generally soft pricing conditions and tight profit margins. To effectively surmount these problems, many insurers are investing in technological solutions that improve front-end sales, distribution and customer service and enhance back-end operational efficiency and expense management.

If one word could sum up the focus of insurers in 2015, it is “technology.” Many insurers are investing in digital platforms that strengthen their relationships with customers across all product classifications and geographies. Their goal is to empower both businesses and consumers to better shop for insurance, making products more transparent, easier to understand and compare.

Across all regions, insurers are capitalizing on data analytics, cloud computing and modeling techniques to sharpen their market segmentation strategies, reduce claims fraud and strengthen underwriting and risk management. They are also investing in technology solutions to optimize processes, increase collaboration across the enterprise and demonstrate capital adequacy and financial solvency for regulatory compliance purposes.

Now that much of the world has returned to more stable economic conditions, it makes eminent sense for property-casualty and life-annuity insurance companies to invest in digital solutions that widen margins and provide competitive differentiation. But technology is a two-edged sword, as the shocking number of data breaches clearly demonstrates. Thus, one last important “spend trend” in 2015 for international insurers—cyber security.

Our comprehensive global outlook explores the various challenges and opportunities confronting global insurance organizations in 2015. In this report, we offer our perspective on the property-casualty and life-annuity insurance markets in Asia-Pacific, Canada, Europe, Latin America and the U.S.

 Asia-Pacific
  • Although insurers in Asia-Pacific are likely to confront deteriorating economic conditions in 2015, growth prospects remain solid for life and non-life insurance products, with GDP projected to rise 5.5%.
  • Rising real estate and financial asset values are enabling insurers throughout the region to produce higher premium volume from the increased protection levels.
  • The growth of the middle class and high-net-worth population in Asia-Pacific presents the opportunity for insurers to increase their sales of personal lines insurance products, as well as health insurance.
  • Commercial lines insurance prospects remain strong, given the region’s elevated catastrophe risk, the rise in infrastructure and home building across much of Asia- Pacific and a low insurance penetration rate.
  • Insurers are challenged to invest in data analytics and modeling capabilities, as well as Internet and mobile digital sales, distribution and customer service solutions, given an increasingly technologically sophisticated population.
  • Regulations addressing insurer solvency, capital and risk management are moving to the front burner, in addition to consumer protections in the areas of data privacy and security.
 Canadian Property and Casualty
  • Profit margins for property-casualty insurance companies in 2015 are challenged by continuing low interest rates and GDP growth, the volatile investment climate and expense increases from needed infrastructure improvements.
  • A major competitive opportunity for insurers is to strengthen their relationships with customers, effectively putting them in focus across all product classifications and geographies, while digitally empowering them to better shop for and compare insurance products.
  • A key challenge in 2015 for Canadian property-casualty insurers is to improve the industry’s low level of consumer trust by integrating distribution and communication channels and providing more transparent information.
  • Opportunities to improve both commercial and personal lines sales and optimize growth are available to insurers that invest in technologies, such as cloud computing, mobile solutions and business collaboration software.
  • Building an enterprise data excellence infrastructure via more robust data analytics and predictive modeling will help insurers pinpoint new growth opportunities, optimize claims outcomes, reduce the incidence of claims fraud and mitigate bottom line risks.
  • Regulatory pressures in 2015 include demands on property-casualty insurers to become more disciplined in their risk management, capital planning and operational oversight.
 Canadian Life
  • Although providers of life insurance and annuities in Canada have endured several years of constrained growth, opportunities exist to improve competitive standing by providing products to underserved consumer markets.
  • A key challenge for insurers in 2015 is the need to develop more robust mobile digital technologies, data analytics
    and social media strategies to address growing consumer expectations of more refined product sales and distribution.
  • To boost sales revenue, providers of life insurance and annuities in Canada must make their products easier to understand and compare, in addition to streamlining the transaction process.
  • To enhance customer experience and enable self-service features, life insurers must consider the value of a digital platform enabling the sharing of information with and among intermediaries and consumers.
  • A key opportunity in 2015 for life insurers is to develop solutions absorbing the longevity risks of pension plan actions to lower risk, which are driven by improvements in life expectancy and the low-interest-rate environment.
  • Regulatory pressures continue to intensify, putting the onus on life insurers to improve their compliance and control functions, implementing more robust governance programs to address key business risks.
 U.S. Life-Annuity
  • Growth prospects are promising for U.S. providers of life insurance and annuities, as the overall economy improves, consumer wealth increases and interest rates creep higher.
  • Key challenges in 2015 include growing competition, especially from new capital entrants seeking to disrupt traditional market positions with new models and market approaches, aligning with rising customer expectations.
  • To succeed in this environment, providers of life insurance and annuities must expand their digital capabilities with new Internet, social media and mobile tools that empower customers and distributors with self-service features, while also making insurance products easier to understand, compare and buy.
  • A major opportunity to widen margins exists for insurers that leverage big data and the cloud to transform back offices systems and processes; these decisions must be weighed against the cyber security risks and regulatory issues they present.
  • As many consumers turn to online banking and investment services to manage their finances, they will seek similar opportunities from providers of life insurance and annuities, presenting opportunities for insurers that develop online advice and transactional models.
  • A continuing challenge in 2015 is the need to navigate the wide array of complex capital solvency and risk management regulations enacted in the aftermath of the financial crisis and overseen by competing regulatory authorities with different demands.
 U.S. Property-Casualty
  • Despite slow-to-rebound interest rates and inflationary medical and food costs, strong performance for U.S. property-casualty insurers is expected, with combined ratios returning to those in the years before the financial crisis.
  • A key challenge includes slow premium growth, which continues to be inhibited by rising competition, an overabundance of capital and inexpensive reinsurance, the latter a consequence of low insured catastrophe losses the last two years.
  • The soft pricing conditions are constraining profit margins, compelling insurers to focus on expense management and operational efficiency, reducing costs through technology upgrades, process optimization, selective offshoring and enhanced risk management.
  • The use of data analytics and modeling techniques to improve underwriting and back-office processes remains a potent opportunity for U.S. property-casualty insurers to bolster their competitive standing.
  • On the distribution front, insurers will optimize the channel mix, adding distribution outlets and expanding aggregator and direct-to-consumer models, while providing consumers with enhanced product price transparency and real-time support and service.
  • To address the evolving array of capital solvency and risk management regulations, and achieve compliance with different regulatory authorities, property-casualty insurers will need to invest in more skilled management and data analytics resources in 2015.
 Latin America
  • Insurer growth prospects are generally favorable, although market demand for property-casualty and life insurance products is evolving at different rates, given disparate economic factors across the region.
  • The expansion in Latin America’s middle class and high net worth populations, as well as the region’s technologically savvy younger generations, create opportunities for providers of automobile insurance and mobile technology warranties.
  • As more homes and office buildings are built throughout the region, the need to insure these structures from the damaging effects of natural disasters is a positive trend for commercial property and homeowners insurers.
  • A key challenge for many insurers in 2015 is the need to modernize their operations and distribution models to adapt to rising business and consumer expectations of digital, mobile and Internet interactions, particularly for commercial lines of insurance where intermediaries retain control.
  • On the regulatory front, regions are addressing global standards on capital solvency and risk management
    on different timetables, putting the onus on insurers to continually monitor and evaluate these developments to exploit a competitive advantage.
  • As competition throughout Latin America intensifies
    in 2015, insurers that best leverage data analytics
    and predictive modeling techniques to improve their underwriting and management of risks have the opportunity to make more profitable business decisions.
 Europe
  • European insurers will continue to be challenged on both sides of the balance sheet in 2015, as economic recovery throughout the region is overshadowed by low business investment rates, slower global growth and heightened competition in many classes of business.
  • There is a greater responsibility for insurance companies to interact with the customer, provide a range of digital communication channels, encourage loyalty and brand awareness and tailor products and services to individual needs.
  • A growing number of insurers are scaling up their analytical capabilities to be in a better position to use data in a more connected way, drawing meaningful insights at virtually every stage of the insurance life cycle from customer targeting to product design and pricing, underwriting, claims and reporting.
  • Regulatory initiatives will require greater transparency regarding the information provided to customers, revisions to relationships with distributors and greater governance and oversight over new and existing products.
  • Finance is under pressure to show it can be a better business partner in planning, budgeting and forecasting, adding more value while also responding to regulatory requirements and tax challenges.

For the full EY report from which this was excerpted, click here.

Insurance CEOs See Wave of Disruption

The insurance marketplace is transforming, creating openings for some and challenges for others. According to the PwC Global CEO Survey of insurance industry CEOs, 59% of insurance CEOs believe there are more opportunities than there were three years ago, but 61% see more threats.

The fact that people are living longer and have more wealth to protect presents insurers with an opportunity. The threats to insurers include mounting commoditization, the squeeze on margins and increase in self-insurance. These threats reflect both intensifying price competition and difficulties in conveying the true value of the coverage that insurers sell. Regulation is creating upheaval and more costs on the one side and diverting attention from other strategic challenges on the other.

Disruption on multiple fronts

Insurance CEOs believe that new regulation, increasing competition, technological developments and changes in distribution will have more of a disruptive impact over the next five years than CEOs in almost all other industries.

Realizing the digital potential

Insurance CEOs recognize how digital technology can help them sharpen data analytics (90%), strengthen operational efficiency (88%) and enhance customer experience (81%).

Yet are they making the most of digital’s potential? Most insurers are still primarily focused on e-commerce — doing what they already do just via a different channel. Leaders are using digital to engage more closely with customers, fine-tune underwriting and develop customized risk and financial solutions. They’re also pushing back frontiers in areas like real-time risk monitoring, more active risk prevention and lowering the cost of life and pensions options for younger and less wealthy consumers.

Questions to ponder:

  • Can you meet the challenge of a changing business environment, including from technology and other financial services (FS) companies?
  • Is change a threat or an opportunity?

Seeking out complementary capabilities

Nearly half of insurance CEOs plan to enter into a joint venture or strategic alliance over the next 12 months. Two-thirds see these tie-ups as an opportunity to gain access to new customers (much more than in other FS sectors).

Business networks, customers and suppliers are seen as the most important focus for strategic collaborations. Examples could include affinity groups or manufacturers. A further possibility is that one of the telecoms or Internet giants will want a tie-up with an insurer to help it move into the market.

More than 30% of insurance CEOs see alliances as an opportunity to strengthen innovation and gain access to new and emerging technologies. Yet two-thirds currently do not have plans to partner with start-ups, even though such alliances could provide valuable access to the new ideas and technologies they need.

Attracting fresh ideas and skills

A rapidly changing market requires a more diverse workforce with new talents. 80% of insurance CEOs now look for a much broader range of skills than before. At the same time, they recognize the challenges; 71% — even more than last year — seeing the limited availability of key skills as a threat to growth.

Diversity is now recognized as a key way to enhance business performance, innovation and customer satisfaction. Nearly three-quarters of insurance CEOs have a strategy to promote talent diversity and inclusiveness or plan to adopt one. But nearly 40% have no plans to seek out talent in different geographies, industries or demographic segments.

Questions to ponder:

  • How could collaboration help you reach new markets and sharpen innovation?
  • Is your definition of diversity broad enough to identify and hire tomorrow’s workforce?