Tag Archives: globalization

What Trump Means for Job Creation

As the election results rolled in, it became increasingly clear that America — and the world — would never be the same. The American people overlooked all of Republican nominee Donald Trump’s faults and elected him to office in the belief that he will fix the nation’s deep-seated problems of inequity and injustice. And they rebelled against the business interests and corruption that they believed Hillary Clinton represented.

Trump’s victory was enabled by technology — everything from his use of social media to Clinton’s email scandals to Russian hacking. But advancements in technology and how they reshape our economy may also keep him from delivering on some of the major promises that made him so popular during the campaign season.

The truth is that, over recent decades, the rich have been getting richer. Power has shifted to Wall Street and business. Globalization has caused the loss of millions of jobs in the U.S. Some white Americans have also been terrified at the changing complexion — and values — of the country. Trump very smartly played to these fears and promised his supporters what he knew they wanted: greater economic opportunity by bringing back jobs shipped overseas.

See also: How Technology Breaks Down Silos  

But those jobs, many in the manufacturing sector, are increasingly done by technology. Machines are learning to do the jobs of manufacturing workers; artificial intelligence-based tools are mastering the jobs of call-center and knowledge workers; and cars are beginning to drive themselves. Over the next decade, technology will decimate more jobs in many professions, inequality will increase and more people will be disadvantaged.

Some robots already cost less to operate than the salaries of the humans they replace, and they are getting cheaper and better. Boston Consulting Group predicts that, by 2025, the operating cost of a robot that does welding will be less than $2 per hour, for example. That’s more affordable than the $25 per hour that a human welder earns today in the U.S., and even cheaper than the pay of skilled workers in the lowest-income countries. Trump may be able to keep immigrants out, but how will he stop the advance of robots?

Uber and many other companies are working on developing cars and trucks that don’t need a driver in the driver’s seat. According to the American Trucking Associations, approximately 3 million truck drivers were employed in the U.S. in 2010, and 6.8 million others were employed in other jobs relating to trucking activity, including manufacturing trucks, servicing trucks and other types of jobs. So roughly one of every 15 workers in the country is employed in the trucking business. According to the U.S. Bureau of Labor Statistics, roughly another 300,000 people work as taxi drivers and chauffeurs. We could be talking about millions of jobs disappearing in the early 2020s.

And then there is the “gig economy” that has some businesses shifting toward part-time, on-demand employment. Uber has already done this to taxi drivers, and other technology companies are doing it to a wide range of jobs. A study by software company Intuit predicted that, by 2020, 40% of American workers will be independent contractors, temps or self-employed, and that full-time jobs will be harder to find. We are talking about 60 million people in this category. The problem is that not only do such part-time workers lack reliable full-time jobs and sick pay, but they are not entitled to health insurance and longer-term benefits. Even if Obamacare continued, they would not be able to afford it.

The remedies that are being proposed are to impose trade barriers. But closing the doors to foreign trade won’t bring jobs back. It will only slow the global economy and hurt American exports, thereby shrinking the U.S. economy and accelerating job loss.

See also: Technology and the Economic Divide

The silver lining to this dark cloud is that these technology advances also provide solutions to the problems of humanity, such as a lack of energy, food, education and healthcare. The production costs of clean energies, such as solar and wind, will keep falling until they are almost free. With artificial intelligence-based applications, we will have digital doctors advising us, and advances in medicine will allow us to live longer and healthier lives. Robots will do our chores; digital tutors will teach us skills. It becomes possible to provide for everyone’s needs. But all of this requires understanding the cause and effects of inequity and applying more carefully the technologies that are going to change the equation.

We now need a nationwide conversation on how we can distribute the prosperity we are creating. We must create equity and fairness in our legal, justice and economic systems. And, recognizing that technology will disrupt entire industries and wipe out millions of jobs, we must ease the transition and pain for the people most affected and least prepared.

The Insurance Renaissance, Part 2

A few weeks ago, in our opening blog series on the Insurance Renaissance, we discussed how the climate of change we saw in the Renaissance of the 1400s holds lessons for the current state of insurance. In both periods, we see the epicenters of change and innovation.

For insurers, the Renaissance is more than an analogy. It represents a real pattern of cultural shift with insurance business implications. Its hallmarks are now repeating themselves. For example, today we see digital use and globalization as potent business drivers. If global barriers to communication hadn’t fallen, and new technologies hadn’t become so prevalent, it is unlikely that we would be in the midst of such groundbreaking change. The lowering of barriers during the Renaissance brought about similar change.

During its beginnings, Florence was in the midst of a trading boom that brought new money, goods and ideas into the region from Western Europe, Greece, Arabia, Egypt, Persia and China. Banks grew. Florence became the financial center of Italy and the broader region. Trade routes reduced provincial barriers. Shipping improved. A system of insurance was even in practice, protecting Italian cargoes on their voyages as early as 1300.

These cultural crossings (networks!) resulted in leaps forward in art and science. Ideas were currency just as important as textiles and spices. Innovations in practical sciences, such as mathematics and architecture, benefited from broader thinking. It was funded and driven by the new wealthy — a trading class that hadn’t previously existed in quite the same way. Today, we are seeing a similar influx of money and a new class of insurance technology investment. The Sydney Morning Herald, covering a report on disruption by PwC, recently stated it this way:

“The insurance industry has largely remained the same in the past 100 years, but the sector is in for its biggest shakeup as investors continue to pump billions of dollars into ‘insurtech,’ fueling sweeping changes through technology.

“Insurance is the second-most disrupted industry today thanks to a growing number of start-ups and technology companies eyeing slices of the insurance pie.”

So, where insurers previously may have had great ideas, they now have ideas + technology (InsurTech) + financial resources + people/talent to pursue their ideas. At the same time, with no barriers to access, no legacy systems to hold them back and access to robust insurance cloud platforms, start-ups and greenfields from within and outside the industry are becoming new, innovative players. For organizations that wish to remain competitive, the questions then become:

How do we adapt with ease to the change and disruption?
Can we reimagine the possibilities of doing things differently?
What do we need to do technologically to seize the opportunities in a shifting market?

The new pursuit of agility, innovation and speed

Business innovation and digital readiness is a real, palpable, bankable asset. Organizations that plan to fuel their own growth, create partnerships and generate innovative products need to quickly consider and shift gears to transform to the digital age, highlighted in our Future Trends: A Seismic Shift Underway report. Simplifying environments to bring consumers closer to service and closer to the point of sale will help. Modernizing environments to generate and test products faster is vital. Transforming business operations, using data for continual improvement and opening every available channel are goals worth setting. To thrive, large or small, the new organization needs agility so that it can quickly capitalize on the innovative ideas found by mixing itself in the marketplace.

Insurance, once somewhat isolated, is now becoming part of the digital mix. Like adding an Indian voice track to a French pop tune with a rap beat, the results can be pretty hip. Where can insurers find inspiration in the cross-industry digital mix? How do they spontaneously get inspired?

The short answer is, “Look around.” But the real answer is, “Look nearly anywhere, and you will find innovation.” Genius moments happen most often in environments where groups of people are in touch with industries, geographies, technologies and groups outside of their own environments. Those groups include, of course, consumers. Looking at consumer purchase patterns across all industries will give insurers a new view of how to reach them.

For example, recent Google research found that nearly 20% of smartphone users research or purchase products while they are in bed in the morning or evening. Mix this fact with the idea that consumers are also looking for multiple quotes and good information on insurers and you can understand how mobile-ready aggregators (such as PolicyGenius) are on the rise.

Urbanites who seldom drive don’t want to pay high auto premiums. They might rather opt out of driving altogether. Mix that trend with telematics capabilities, and a pay-per-mile insurance product (such as MetroMile) makes tremendous sense. It doesn’t take real genius to see genius opportunities. It just takes time spent observing customer and market trends and marrying those trends to technological capabilities.

Customers are also increasingly moving their retail purchases to online purchases. That’s great news for insurers who have never been terrifically suited for retail-type sales anyway. What insurers need is face time at the right time, when someone recognizes his or her need for it. Hence, we see insurers increasingly partnering with companies that can buy them face time with products that match up with timely needs. Digital capabilities, integrated data capabilities and agile administration will all assist insurers as they reach into the mix to find their unique niche of opportunities. The same InsurTech that is causing the formation of insurance start-ups and is funded by venture capital is available to traditional insurers. In many or most cases, established insurers are in a better position to capitalize on it by simply prioritizing their need for innovation — deciding that their organizations will be centers of innovation.

See Also: The 5 Charts on Insurance Disruption

Insurers can tap into further ideas by looking at product trends in foreign countries, tapping into the expertise of technology partners, working cooperatively with universities to hold innovation days, partnering with companies outside the industry like automotive, retail and more and spending concerted time looking at the road ahead. In all these cases, insurers will find innovative encouragement by inviting ideas from outside the organization to transform the culture and ultimately the business. After all, it is the Renaissance within each individual insurance company that will provide innovation, excitement and opportunity to compete. So pursue agility, innovation and speed … and join the Insurance Renaissance rapidly unfolding.

How to Remove Fear in Risk Management

Someone is looking over your shoulder, and you know who it is. If you’re the CEO, it’s your board and shareholders. On the factory floor or in the cubicles, it’s the foreman or the supervisor. But just as often these days, the sources of anxiety and caution confronting risk managers may not be corporate employees at all. Rapidly shifting technology that is often difficult to understand and measure, unfamiliar demographics, expanding globalization, and ever more stringent regulatory compliance requirements are now part of an anxiety- producing stew that organizations’ risk managers must understand and deal with. All these forces threaten a corporation’s revenue, margins, profitability, and overall competitiveness more quickly and unpredictably than ever.

Consequently, if you are an internal auditor – the person responsible for assessing and helping improve the risk management process – your chair these days may feel more like a hot seat. Which of the decisions daily barraging a modern corporation should be the higher priorities? And how, in a business world of frequent disruption, will you, your superiors, and those who report to you weigh and mitigate the waves of serious risks facing the company nonstop? What are the most important metrics to use for any given risk issue? Can the company rely solely on its in-house staff to analyze and resolve unforeseen and often unforeseeable problems?

Just as important, how will the enterprise as a whole handle these issues and make necessary decisions? How does company culture get in the way of using risk management effectively, to reach the decisions that will help the company grow and become more competitive, and how can sustainable risk management (SRM) assist?

Company managers often are not encouraged to exercise independent judgment, even when they are the acknowledged experts. Without transparency and effective multilevel communications in their company, managers are likely to be wary of crossing unseen boundaries, suspect that hidden agendas are controlling important decisions, or feel isolated and unsure of the enterprise objectives that should help guide their decisions. Moreover, anxiety about making important decisions is common in organizations that don’t give their decision-makers the tools and data required to make intelligent risk analyses. Without confidence that they understand the risks associated with a decision, and in a culture where the consequences of a bad outcome are punitive, managers understandably are likely to be cautious.

Behind employees’ hesitation to make and express independent judgments or to make decisions can be a corporate culture of mistrust, caution, and covering one’s backside. In other words, a culture of fear – fear of losing face, losing a contract, losing revenue, losing political advantage, losing a job.

A culture of isolation and timidity defeats collaboration, creativity, transparency, and the ability of a corporation to objectively analyze the broad range of risks it faces each day. It can render the internal audit function far less effective and useful than it should be and can be. In this environment, the internal audit function may mistakenly be seen solely as a means of uncovering errors, assigning blame, and enforcing penalties. Managers may be understandably reluctant to provide anything other than the most general and diluted information about their operations and decisions.

One need not wade through the scientific research about the impact fear has on decision- making to understand how destructive it can be. The brain has separate centers for processing fearful and rewarding experiences. As Dr. Gregory Berns, director of the Center for Neuropolicy at Emory University, has explained, “The most concrete thing neuroscience tells us is that when the fear system of the brain is active, exploratory activity and risk-taking are turned off.” Good decisions in this state are unlikely. “Fear prompts retreat. It is the antipode to progress,” said Berns. “Just when we need new ideas most, everyone is seized up in fear, trying to prevent losing what we have left.”

In this way, fear can nullify or dilute a company’s risk management processes. An effective SRM program, however, encourages and supports an environment that minimizes fear, reduces uncertainty, and increases transparency and confidence in decision-making throughout the enterprise.

Barriers to Solutions

It may seem that established tenets of good corporate governance already include rooting out the fear, indifference, lack of collaboration, and siloed decision-making that stand in the way of optimizing risk management. After all, most companies talk an excellent game when it comes to collaboration and open and honest risk analysis. Too few, however, have developed the internal mettle to tolerate it.

Starting with assessing corporate culture and change management practices, internal auditors can play an important role in transforming the boilerplate talk into sustainable programs. They can provide unbiased, to-the-point assessments, independent of internal politics. The problems they find and the solutions they recommend can be critical for a company seeking to develop the capacity for SRM. But whether from too much caution and resignation or just fear of change, many internal auditors say the structure of their jobs discourages them from alerting their companies to critical gaps in risk assessment and mitigation.

A recent global study by The Institute of Internal Auditors (IIA) Research Foundation spotlights some of the problem areas. Not even two-thirds of the surveyed chief audit executives (CAEs) said they consult with division or business heads when they develop audit plans. Only slightly more than half said they consult with audit committees. There may be many reasons for this audit-in-isolation phenomenon, but it commonly occurs in companies that do not value the risk management process and therefore do not prioritize it. The phenomenon occurs in companies where key players are not encouraged to speak up.

Just one-third of audit plans are updated three or more times a year, the study found. This means that CAEs may be overlooking important changes in the business environment. No wonder only 57 percent said that their internal audit departments were “fully aligned or almost fully aligned” with the enterprise strategic plan. This kind of exclusion signals that leadership does not embrace the people responsible for monitoring management of the company’s risk and that the audit function is not seen as a critical part of the management process.

Our experience with clients reflects these findings and shows that risk management professionals themselves may be at least partially responsible for the isolation and erosion of their programs. They could assume, for instance, that the value and relevance of SRM are obvious and not consistently sell a program that’s underway, neglecting to point out its continuing value, highlight its successes, and develop metrics that are easily understandable.

The program itself may not be as inclusive as it should be. Sometimes risk management processes are not designed to seek out and incorporate the views of front-line employees. Any effective SRM process, however, must reach into the depths of company operations. At the same time, employees at all levels often are not trained well in how to assess and evaluate risk. Employees may be able to calculate some risk in dollar terms without appreciating that they also should be looking at, for example, threats to customer satisfaction, employee safety, and regulatory and contract compliance.

Too often, as well, an unappreciated or ineffective risk management program does not account for the unique characteristics and business objectives of the corporation. Organizations sometimes employ a cookie-cutter approach to developing a risk management framework that’s not calibrated to address essential and distinctive company attributes.

Sometimes risk reporting to the board and top executive levels may be so extensive and detailed that no one reads the reports. Or risk reporting may be so superficial that its assessments and proposed solutions carry little weight. When risk management is not seen as a source of continuous improvement for the organization, risk management funding may be erratic or inadequate, its staffing just an afterthought, and its placement in the corporate hierarchy too isolated to be effective.

Working Toward a More Viable Program

An SRM program protects and advances the organization’s primary business objectives. To do their job effectively, risk management leaders must be included as members of the executive management team. Their inclusion helps to ensure that consideration of risks is incorporated into every significant strategic decision.

It is also possible that a company and its leadership simply are not prepared for the important cultural shift required to champion SRM. All too typically, executives are experts at shifting blame, pointing fingers, and covering their reputations when something goes wrong or hard decisions must be made.

SRM requires a no-blame environment, a collaborative process in which personnel work together to assess and solve problems without fear that their careers will suffer or they will lose the confidence of their peers. A frank and constructive assessment of an operational failure, for instance, is possible only when, instead of trying to find fault, the evaluation concentrates on solutions to keep the failure from happening again. This collaborative approach is not common enough in modern corporations.

Why SRM Is Worth It

The benefits of developing an open, fearless, and transparent SRM program ripple through every level of the enterprise. The program helps ensure that the company can perform with confidence and agility in the face of unpredictable events and shifting economic conditions. It supports the development of accurate, timely, and relevant metrics that reduce uncertainty in decision-making. It provides an effective process for dealing with emerging technologies, surprising moves by competitors, market uncertainties, natural disasters, and even internal scandals. When the program is working, the board, C-suite executives, and managers at all levels understand the kinds of risks the company must deal with and then use that awareness when making their decisions.

An active and embedded SRM program, visibly supported by leaders, regularly refreshes the managers’ awareness and stimulates their insights concerning the shifting market and business conditions that pose the greatest risks to the company’s operations. Employees work collaboratively with their supervisors and are asked to help solve missteps rather than being blamed or punished for them.

SRM offers continuing opportunities to save costs and improve productivity. It can reduce operational and material losses and waste and spotlight process improvements. SRM more closely aligns people, assets, processes, and technology with the organization’s business strategies. It also reassures the board and other stakeholders that compliance issues are being addressed and that company assets and reputation are being protected. The results – which we see time and again – include increased growth, improved profitability, and higher staff morale.

The Growing Disruption in Auto Ecosystem

DISRUPTION IN THE AUTOMOTIVE ECOSYSTEM: What to Expect, and How to Survive and Win

 

For the purposes of this paper, and to explain the codependencies and inter-industry impacts, we’ve chosen to define the auto ecosystem as including all business segments affected by the automobile, including: auto manufacturing, auto buyers and drivers; collision repairers; aftermarket suppliers, including parts providers; auto insurance companies and their policyholders; and the deep and extensive claims and services supply chain that supports them, such as the technology and information provider segments. Given the broad scope and complexity of the component topics, we have identified and provided a degree of depth on each one, but by no means should this information be considered exhaustive.

The entire auto ecosystem is in the midst of significant disruption, and the dizzying pace of change will only continue to accelerate. This disruption is the result of the convergence of upstream upheaval in these sub-segments of the auto ecosystem:

• “new consumer” behavior and expectations

• technology evolution, including mobility and the Internet of Things

• the digital data gold rush and the adoption of advanced analytics

• globalization integration, collaboration and supply chain consolidation in the automotive ecosystem

• collision repair industry consolidation

Over the last 30 years, the auto repair and automotive aftermarket segments were part of a steady and inevitable evolution. During this long-term progression, the auto physical damage industry adapted to a myriad of business innovations, technology enablers, program and process changes and product and service introductions. Some resisted these innovations as either real or perceived business disruptions or dis-intermediation while others embraced them as opportunities to be leveraged for business, market and strategic transformation.

The 2007/2008 “Black Swan” event, the U.S. recession, affected our entire economy and loomed large and ominous for a number of years. This became the foundation for today’s unmatched auto physical damage industry transformation. It triggered the start of unprecedented structural change within the U.S. and Canadian auto repair and aftermarket segments. This changing landscape became part of four distinct, yet connected, marketplace phases: contraction, consolidation, convergence and constructive transformation, which continue today.

Additionally, these four phases are being affected by a confluence of numerous, dynamic and impinging forces, which have both disruptive and transformational influences on today’s stakeholders. Some of the more influential external impact factors include:

• globalization

• private equity investment

• accident safety and avoidance technology

• predictive analytics

• telematics and integrated claims process models

• insurer multiple-shop operator, strategic performance-based, direct repair program (DRP) contracts

• new and hybrid direct repair program models

• OEM- certified networks’ influence in the repair process

• morphing demographics

• multi-system operators (MSOs), growing market dominance and insurance carrier acceptance

• repair segmentation

• national technician shortage

• complex vehicle technology and proliferation of advanced materials

• urbanization

• increased complexity in insurance company DRP participation requirements

Consequently, the traditional process of linear thinking, with its straightforward cause-and-effect structure, is giving way to a more realistic and more complex multi-dimensional thinking pattern that heightens the understanding of the frequency, acceleration and degree of change. It is important, in light of this, to build and leverage a strategic alliance ecosystem with customers, suppliers, competitors, investors and business partners to maintain and grow a collaborative brain trust. This shared commitment will help to co-create and foster constructive change within an organization in an attempt to influence its uncertain environment for the mutual benefit of all strategic partners.

Evidence of disruption in the auto insurance industry and its extensive supply chain is plentiful and portends even greater change. Long-standing leaders in the U.S. auto insurance industry have lost significant market share to more innovative consumer-centric carriers. Advanced analytics and telematics technologies have combined to enable new forms of insurance products, including usage-based insurance. The Internet of Things, including the connected car, will amplify this trend going forward and literally change the fundamental nature of insurance and risk management products, solutions and servicing. For example, consumers are now shopping for and purchasing auto insurance, and submitting and receiving claim payments, on their smartphones. Fueled by the entry of large and growing pools of private equity capital, rapid industry consolidation is occurring across several supply chain segments including the once highly fragmented collision repair industry and alternative parts supplier markets.

In this dynamic environment, we believe that the ultimate leaders and winners in 2015 and beyond will be those companies that most successfully focus and execute on the development of compelling personal mobility solutions; transform product development and distribution around the new consumer; leverage data and analytics across the enterprise; think, plan and execute globally; and aggressively collaborate, partner and affiliate as effectively as possible.

The new consumer, mobility and the internet of things

Today’s consumer is totally unlike that of the past, and they have created new challenges and opportunities for all participants in the automotive ecosystem, in particular for auto insurers. This new consumer, epitomized by Millennials, has embraced mobile technologies and the social media they support. This phenomenon has fundamentally changed how insurance is branded, marketed and sold. Moving forward, this same mobility will enable insurers to design completely new types of insurance products and manage risks much more effectively for policyholders and themselves.

The most disruptive group of mobility technologies is the rapidly emerging Internet of Things, much of which is controlled today by industry outsiders. The potential impact on numerous aspects and multiple lines of insurance, as well as on the rest of the auto ecosystem, is enormous.

Of related concern to the insurance industry should be the potential for these outsiders to leverage this valuable information to enter the business and become competitors. Some recent acquisitions include Facebook’s purchase of the fitness and location app Moves, Monsanto’s acquisition of crop insurance and data company Climate Corp. (which was started by former Google executives) and Google’s acquisitions of the connected home devices and security company Nest and the Israeli location-mapping service Waze. Verizon acquired Hughes Telematics in 2012.

The data generated by all of these businesses, which was never before so digitally available, can be combined with advanced analytics to accurately establish and manage individual and property risks. The ability to successfully acquire, control and effectively translate and use all of this data will determine the insurance industry’s digital gold rush winners and losers of the future.

Impact of OEM globalization

The impact of automotive industry globalization is pervasive within the automotive and aftermarket industries. It is one of the more significant continuing influential macro factors within the larger constellation and confluence of simultaneous conditions affecting the auto physical damage landscape. For example, the change caused by how vehicle manufacturers are aggressively re-engineering and consolidating their light vehicle platforms is evident in the worldwide auto manufacturing transformation underway; General Motors is planning to reduce in 10 years its current 26 global production platforms to just four by 2025. This globalization of cars and its many OEM implications will continue to drive significant change throughout the entire property and casualty auto insurance and auto physical damage aftermarket supply chain.

One of the key drivers of this manufacturing transformation is the National Highway Traffic Safety Administration’s CAFE standards, which require average manufacturer fleet fuel consumption to drastically improve from today’s 30.2 miles per gallon to 54.5 miles per gallon by 2025. By the 2016 model year alone, there will be approximately 250 new and different vehicle debuts and redesigns from both U.S. and foreign manufacturers. Ultimately, achieving strategic goals and objectives such as reducing fuel consumption and gas emissions by improving fuel economy and reducing the environment’s carbon footprint reflect the current megatrends end game.

As the OEMs drive to innovate globally, there will be intended and unintended outcomes involving the use of many new materials, engine downsizing, alternative powertrains, advanced integrated electronics, telematics and new repair technologies and processes, and producing light-weight vehicles. These innovations will be seen as a disruption by some, while being embraced by others who seek to leverage these global influences for future growth and competitive advantage.

Other ecosystem and supply chain industry consolidation

Another globalization perspective is being driven by increasing international trade and investment by private equity and strategic buyers involving an explosion in mergers and acquisitions within the property and casualty insurance and auto physical damage industries in the U.S. and throughout the world.

The following is a partial list of some of the more relevant recent M&A activity by U.S. and international companies in this ecosystem:

• CCC Information Services acquires telematics and UBI solutions provider DriveFactor

• Hartford-based Insurity acquires Montreal-based Oceanwide

• Patriot National’s Technology Solutions unit acquires Vikaran Solutions in Pune, India

• Uber acquires control of Metromile (PAYD) insurance, U.S.

• Google acquires CoverHound, an insurance aggregation website, U.S.

• Google’s Nest unit buys Dropcam

• Fosum buys Meadowland, a first-ever acquisition by a Chinese insurer of a U.S. insurer

• Alliant Insurance Services of the U.S. buys the U.S. agency business of Australia’s QBE

• Majesco acquired Cover-All Technologies and Agile Technologies, U.S.

• Symphony Technology Group acquires Aon e-Solutions from Aon (UK)

• ACE (Bahamas) buys Fireman’s Fund U.S. personal lines business

• Vista Equity acquires TIBCO for $4.3 billion, U.S.

• Onex (Canadian private equity firm) acquires York Risk Services for U.S. $1.325 billion, U.S.

• Element Financial (Canada) acquires U.S.-based PH&H fleet management business for U.S. $1.4 billion

• Mapfre Insurance, Spain, acquires Commerce Insurance and MiddleOak personal lines, U.S.

• QBE Insurance, Australia, acquires Balboa Insurance, U.S.

• Travelers Insurance, U.S., acquires Dominion Insurance, Canada

• Desjardins Insurance, Canada, acquires State Farm Canada, U.S.

• Boyd Group, Canada, acquirers Gerber Collision and Glass, U.S.

• OMERS, Canada, acquires Caliber Collision Centers, U.S.

• UniSelect, Canada, acquires Finish-Master, U.S.

• Solera, U.S., acquires Velexa Technologies, UK

• Solera, U.S., acquires CAP Automotive, UK

• Belron, South Africa, acquires Safelite Glass, U.S.

• LKQ, U.S., acquires EuroParts, UK

• UBM, UK, acquires Advanstar-Motor Age and Auto Body Repair News ABRN, U.S.

• The Carlyle Group (owners of Axalta and investors in Service King) acquires Nationwide Accident Repair Services of the UK

These acquisitions reflect the growing trend of an increasingly integrated global insurance and automotive economy resulting in an extension of business and market international strategies, introduction of new, innovative and disruptive technologies and processes, and brand expansion while also managing resource and risk diversification.

The digital data gold rush/ advanced analytics

We have entered a “digital Gold Rush” era – a modern version of the California Gold Rush of 1849 – with the gold being digital data, which is beginning to flow in torrents. This has huge implications for the insurance industry, and not least for property and casualty claims. Digitization is already having an impact across the claims technology and services supply chain, forcing supplier consolidation and compressing customer service cycle and response times to near real time. These forces will affect property and casualty claims technology, as well as information and services provider segments, which have historically been highly fragmented and privately owned and operated. National consolidation, volume aggregation and the infusion of sizable technology investments led by professional management teams offer significant medium-term rewards to the participants.

The most potentially disruptive group of digital technologies of all is the rapidly emerging “Internet of Things” or “M2M” (machine-to-machine) technology, with its potential impact across multiple lines of insurance. Of related concern to the industry should be the potential for non-traditional competitors to leverage M2M data and enter their business. An example is Google’s acquisition of the connected home devices and security company Nest Labs. The data acquired in all of these businesses, never before so digitally available, will be combined with advanced analytics to accurately establish and manage individual and property risks.

These powerful forces are all converging to drive mergers and acquisitions activity to unprecedented levels in the property and casualty insurance claims technology ecosystem, attracting increasing numbers of private equity and strategic investors, and providing attractive exit opportunities and strategic alternatives for participants, all while creating exciting new and innovative technology-enabled capabilities for insurers, agents, brokers and consumers.

Private equity and collision repair industry consolidation

The first two phases of the current collision repair industry structural transformation, contraction and consolidation, are part of a four-phase model consisting of contraction, consolidation, convergence and constructive transformation. These first two phases began to emerge and quickly expand after the start of the recession in December 2007. Simultaneously, private equity groups turned their attention to the collision repair industry; they looked under the hood and liked what they saw.

Private equity firms were on the hunt to find alternative investments that could yield comparative or better returns than were currently available during the trough and slow recession recovery between 2007 and today. Additionally, their interest is backed and driven by unprecedented amounts of strategic buyer, private equity and pension fund dry powder/cash-seeking investments that can drive higher valuations and returns on their capital invested. The current private equity investor groups competing in the consolidation of the auto repair industry are identified in the chart below.

There are a number of factors affecting the continued attractiveness of investing in the collision repair industry.

• the collision repair industry’s structural transformation is still early to mid-stage

• the stigma from consolidation’s failed first attempt during the early 2000s is now fully erased

• excess strategic and private equity capital continues to seek high-return, quick-turn investments, which are characterized by recurring revenue, free cash flow and attractive returns on invested capital

• aggressive MSO consolidator and private equity competition

• debt financing is inexpensive and available

• collision repair management teams realize the benefit of strategically partnering with investors to more quickly grow and develop market share

• $32 billion addressable collision repair industry size

• high barriers to new entrants associated with the MSO consolidator model

• business complexity

• mature management teams

• performance-based insurance DRP contract requirements

• brand recognition

• demonstrated economies of scale

• rising operational excellence with lean-based process environment

• replicable acquisition and integration models

• leveraging and expanding technology enablers

• insurance industry strategy aligned with MSO consolidator strategy

p1

As consolidation continues to drive collision repair industry contraction, four MSO consolidators, ABRA, Boyd/ Gerber, Caliber and Service King stand out as the primary buyers or disruptors vying for multi-location and multi-region platform acquisitions. More nascent strategies are focused on market density and coverage through “build outs or tuck-ins,” acquisition of individual shops, constructing “green fields” and “brown fields” and utilizing franchise models in smaller tier markets.

The growth of MSO consolidators associated with these transactions has in all cases had private equity backing. When viewed in the context of an approximate $32 billion auto repair marketplace, there is room for further consolidation in what is still an oversupply of repairers within the approximately 33,000 U.S. auto repair locations.

The transfer of just more than $1.5 billion in multiple-location operator (MLO) platform transaction repair revenue from 2012-2014 excludes three large recapitalizations that included Caliber in 2013 and ABRA and Service King in 2014. If these recapitalizations were included, the total transfer of MSO consolidator revenue would have been slightly more than $3 billion, or approximately 10% of the industry’s annual revenue. Additionally, the MSO segment representing at least $20 million in annual revenue included 80 MSO organizations processing $6.3 billion in annual revenue at year-end 2014. How long private equity continues its aggressive funding of MSO consolidators is uncertain.

Supply chain consolidation in the auto insurance ecosystem

Beyond the collision repair segment, an unprecedented and powerful number of forces are converging to drive mergers and acquisitions activity in the North American property and casualty insurance claims and technology “ecosystem” to historically high levels, including:

• claims supply chain rationalization and consolidation

• rising adoption and deployment of big data and analytics solutions

• insurance product commoditization and the resulting business transformation

• an influx of private equity capital (already raised and seeking to be deployed in the sector)

• expectations of a continuation of a steadily improving economy with the prospect of lingering low interest rates

We expect these forces to amplify competition among well-capitalized strategic players and private equity participants who seek to create scalable and defensible positions in the industry. The implications for smaller, less capitalized, regional or technology- challenged competitors are meaningful.

Claims supply chain consolidation

The area in which we expect the greatest potential for increased activity in 2015 and beyond is within the claims supply chain. The property and casualty insurance claims ecosystem is composed of thousands of small local and independent firms as well as larger regional, national, and global vendors and business partners that provide mission-critical products and services to the claims operations of the property and casualty insurance industry, including:

• insurance technology and IT services, system integrators, core system and claims management software solutions and database and information providers, including communication, repair estimating and body shop management systems

• claims technology vendors (document management, compliance, data quality, payment systems, etc.)

• collision and auto glass repairers

• collision repair parts suppliers

• insurance replacement rental car providers

• third-party administrators and claims business process outsourcing firms

• claim services, including independent auto and property adjusters and appraisers and catastrophe services

• insurance defense attorneys

• auto and casualty claims management solution providers

• salvage vehicle auctioneers and towing services

• insurance staffing firms

• insurance claims investigation firms

p2

One of the subsectors most affected by these factors is the highly fragmented and inefficient collision repair and parts business. Many of these are local, privately owned businesses with limited technology capabilities and management talent. National consolidation, often driven by private equity, can lead to expense rationalization, upgraded information technology systems, improved management and the ability to better respond to upstream customer pressure and improved pricing. By way of example, since its founding in 1998, LKQ (NASDAQ: LKQ) has consolidated the automotive repair alternative parts market in North America and elsewhere to become the largest provider of alternative collision replacement parts and a leading provider of recycled engines and transmissions, with annual revenue approaching $7 billion. In 2014, LKQ acquired Keystone Automotive, a leading distributor of aftermarket parts and equipment.

Additionally, one of the other important trends is the development of an electronic parts procurement and e-commerce solution for the large $15 billion, and still highly fragmented and inefficient, North American auto repair parts supply chain.

For smaller providers in the claims supply chain, now may be the time to consider combining with a larger, better-capitalized player, especially given the trend toward vendor management by insurance companies. A “going it alone” strategy will be increasingly risky as larger, national players will garner more market share by offering better pricing, superior technology solutions and greater geographic coverage than “mom and pop” operations.

Claims information provider expansion and consolidation

North American insurance industry auto and property claims operations, including their auto collision repair and property partners, primarily use the products and services of three claims information providers, each of which has expanded its offerings into automotive claims-related markets.

CCC Information Services: Private equity-backed CCC Information Services (Leonard Green & Partners plus TPG Capital), a database, software, analytics and solutions provider to the auto insurance claims and collision repair markets, recently acquired Auto Injury Solutions, a provider of auto injury medical review solutions. This follows the earlier acquisition of Injury Sciences, which provides insurance carriers with scientifically based analytic tools to help identify fraudulent and exaggerated injury claims associated with automobile accidents. In December 2014, CCC acquired the assets of Actual Systems of America, including its interest in Pinnacle Software, an automotive recycler and yard management system provider, which will enhance its fast-growing TRUE Parts alternative collision repair parts procurement platform. In May 2015, the company further extended its insurance claims solution capabilities by acquiring telematics driving data and analytics provider DriveFactor.

Mitchell International: In 2014, Mitchell International, a provider of technology, connectivity and information solutions to the property and casualty claims and collision repair industries, acquired pharmacy claims management software vendor Cogent Works as well as Fairpay Solutions. Fairpay’s service offering includes workers’ compensation, liability and auto cost containment and payment integrity services. These assets will expand Mitchell’s solution suite of property and casualty insurance-focused bill review and out-of-network negotiation services as it complements its 2012 acquisition of National Health Quest. Mitchell was acquired in 2013 by KKR & Co. (NYSE:KKR).

Solera, Inc.: The breathtaking series of recent U.S. and foreign automotive service industry and data acquisitions in 2014 by Solera (NYSE:SLH) includes the Czech and Slovakian vehicle valuation provider IBS Automotive, the UK vehicle valuation firm CAP Automotive, the insurance and services division of PGW (including LYNX, GTS and Glaxis), the claims-related business of UK-based Sherwood Group (Valexa Technolgies), AutoPoint (U.S.) and AutoSoft (Italy). HyperQuest (U.S.) was acquired in 2013 along with Distribution Services Technologies and Services Repair Solutions (U.S.), Serinfo (Chile), Pusula Otomotiv (Turkey), Ezi- Works/CarQuote (Australia) and APU Solutions in 2012. Since its initial public offering in 2007 (originally backed by private equity firm GTCR), Solera has completed 30 acquisitions globally and grown its revenue to more than $1 billion.

Over the next 12 months, we expect these information providers to expand in several directions through internal product development supplemented by strategic acquisitions. This expansion will likely include:

• deeper integration with claims management core systems

• introduction of new tools and services utilizing advanced analytics for use cases across the entire auto and property claims process

• deeper and wider integration with third-party companies in the auto and property claims supply chain, specifically including collision repair parts procurement

• further development of auto casualty and workers’ compensation medical management networks and services and cost containment solutions.

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Predictions for 2015 and beyond

• The macro influencers of contraction, consolidation and convergence, combined with the intensity and high velocity of change among the confluence of simultaneous events, will continue to overlay and affect the structural change and the continuing constructive transformation currently happening within the entire automotive ecosystem.

• Property and casualty insurance carriers will develop new forms of highly customized and contextual insurance coverage tied to policyholders’ real-time needs.

• Property and casualty insurance carriers will sell micro-insurance and risk management services to customers based on digital connections to their bodies, automobiles, homes and other personal property; collectively composing the Internet of Things,

• Insurance carrier supply chain partners will increasingly assume claims servicing and resolution responsibilities and may well assume some or all of the associated risks in exchange for guaranteed transaction volume.

• Direct repair assignments through customer choice among the top 10 property and casualty auto insurers continue to grow, and many now have an assignment conversion rate of more than 50% to their DRP providers

• Analytics will evolve to change every aspect of insurance, including marketing, distribution, underwriting, pricing, claims and billing

• The pace and scope of supply chain consolidation within the auto insurance ecosystem will accelerate sharply in 2015 as existing players move to protect and grow their market shares. New, well-capitalized and more consumer-savvy players will enter the market with an array of powerful digital assets. Investors will continue to gravitate to the space, betting on attractive short-term upsides and adding fuel to the fire.

• MSO consolidators will continue to execute on their platform acquisition growth and development strategies. They will supplement their multi-regional and national growth with a combination of single repair center acquisitions, Brown field and green field build outs and franchise expansion to improve coverage and density in existing major and smaller markets.

• The traditional insurer-repairer business model, which is focused on an estimate exchange process, is likely to be transformed within three years and supplanted by a process driven by mobile technologies coupled with predictive analytics. This will reduce and eventually eliminate the need for repairer-carrier estimate exchanges for an increasingly higher percentage of claims.

Conclusions

• The ultimate leaders and winners in 2015 and beyond will be those companies that most successfully focus and execute upon the new realities identified in this report. They will also leverage a strategic alliance ecosystem in which they team up for success. They will accomplish this with customers, suppliers, competitors, investors and business partners as part of a collaborative brain trust where all are committed to co-create and change their organizations and their uncertain environments to their individual and mutual benefit.

• In this dynamic environment, we believe that the ultimate leaders and winners in 2015 and beyond will be those companies that most successfully focus and execute on the development of compelling personal mobility solutions and transform product development and distribution around the new consumer. They will leverage data and analytics across the enterprise, think, plan and execute globally and aggressively collaborate, partner and affiliate as effectively as possible.

• The auto parts supply chain, one of the most fragmented of all segments in the ecosystem, and until now characterized by numerous competing parts search and procurement platforms, will finally begin to consolidate in the hands of just a few well-capitalized, highly experienced and strategically positioned information and software providers.

• The ability to successfully acquire, control and effectively translate and leverage all of these new streams of data into actionable information and insights will determine the insurance industry’s digital gold rush winners and losers of the future.

• The area in which we expect the greatest potential for increased disruption in 2015 and beyond is within the claims supply chain.

• For smaller providers in the claims supply chain, now may be the time to consider combining with a larger, better-capitalized player, especially given the trend toward vendor management by insurance companies. A “going it alone” strategy will be increasingly risky as larger, national players will garner more market share by offering better pricing, superior technology solutions and greater geographic coverage than “mom and pop” operations.

• Many of the trends associated with the beginning of a slow, long-term, downward slope of future accident frequency such as the proliferation of accident avoidance technology, urbanization, car sharing, Uber, connected vehicles and telematics are already cooked into the expanding equation and future auto insurance and repair model reflecting reduced auto accidents and fewer repairable vehicles with new and hybrid insurance coverage offered by fewer surviving insurers.

This was originally published in the U.S. in ABRN in the July 2015 edition and in Canada in Collision Repair Magazine in the August 2015 edition.

Insurance at a Tipping Point (Part 2)

This is the second in a series of three articles. The first is here.

With the entire insurance industry at a tipping point, where many of the winners and losers will be determined in the next five to 10 years, it’s important to think through all the key strategic factors that will determine those outcomes. Those factors are what we call STEEP: social, technological, environmental, economic and political.

In this article, we’ll take a look at all five.

Social: The Power of Connections

The shifts in customer expectations present challenges for life insurers, many of which are caught in a product trap in which excessive complexity reduces transparency and increases the need for advisers. This creates higher distribution costs.

A possible solution lies in models that shift the emphasis from life benefits to promoting health, well-being and quality of life. In a foretaste of developments ahead, a large Asian life insurer has shifted its primary mission from insurance to helping people lead healthier lives. This is transforming the way the company engages with its customers. Crucially, it’s also giving a renewed sense of purpose and value to the group’s employees and distributors.

Further developments that could benefit both insurers and customers include knowledge sharing among policyholders. One insurer enables customers to share their health data online to help bring people with similar conditions together and help the company build services for their needs. Similarly, a DNA analysis company provides insights on individual conditions and creates online communities to pool the personal data of consenting contributors to support genetic studies.

A comparable shift in business models can be seen in the development of pay-as-you-drive coverage within the P&C sector. In South Africa, where this model is well advanced, insurers are realizing higher policyholder retention and lower claims costs.

This kind of monitoring is now expanding to home and commercial equipment. These developments are paving the 
way for a move beyond warranty or property insurance to an all-’round
 care, repair and protection service. These offerings move the client engagement from an annual transaction to something that’s embedded in their everyday lives. Agents could play
 an important role in helping to design aggregate protection and servicing.

In banking, we’ve seen rapid growth in peer-to-peer lending; the equivalent in insurance are the affinity groups that are looking to exercise their buying power, pool resources and even self-insure. While most of the schemes cover property, the growth in carpooling could see them play an increasing role within auto insurance.

Technological: Shaping the Organization Around Information Advantage

More than 70% of insurance participants in our 2014 Data and Analytics Survey say that big data or analytics have changed the way they make decisions. But many insurers still lack the vision and organizational integration to make the most of these capabilities. Nearly 40% of the participants in the survey see “limited direct benefit to my kind of role” from this analysis, and more than 30% believe that senior management lacks the necessary skills to make full use of the information.

The latest generation of models is 
able to analyze personal, social and behavioral data to gauge immediate demands, risk preferences, the impact of life changes and longer-term aspirations. If we look at pension planning, these capabilities can be part of an interactive offering for customers that would enable them to better understand and balance the financial trade-offs between how much they want to live off now and their desired standard of living when they retire. In turn, the capabilities could eliminate product boundaries as digital insights, along with possible agent input, provide the basis for customized solutions that draw together mortgages, life coverage, investment management, pensions, equity release, tax and inheritance planning. Once the plan is up and running, there could be automatic adjustments to changes in income, etc.

Reactive to preventative

The increasing use of sensors and connected devices as part of the Internet of Things offers ever more real-time and predictive data, which has the potential to move underwriting from “what has happened” to “what could happen” and hence more effective preemption of risks and losses. This in turn could open up opportunities for insurers to gravitate from reactive claims payer to preventative risk adviser.

As in many other industries, the next frontier for insurers is to move from predictive to prescriptive analytics (see Figure 2). Prescriptive analysis would help insurers to anticipate not only what will happen, but also when and why, so they are in a better position to prevent or mitigate adverse events. Insurers could also use prescriptive analytics to improve the sales conversion ratio in automated insurance underwriting by continually adjusting price and coverage based on predicted take-up and actual deviations from it. Extensions of these techniques can be used to model the interaction between different risks to better understand why adverse events can occur, and hence how to develop more effective safeguards.

figure-2

Environmental: Reshaping Catastrophe Risks and Insured Values

Catastrophe losses have soared since the 1970s. While 2014 had the largest number of events over the course of the past 30 years, losses and fatalities were actually below average. Globally, the use of technology, availability of data and ability to locate and respond to disaster in near real-time is helping to manage losses and save lives, though there are predictions that potential economic losses will be 160% higher in 2030 than they were in 1980.

Shifts in global production and supply are leading to a sharp rise in value at risk (VaR) in under-insured territories; the $12 billion of losses from the Thai floods of 2011 exemplify this. A 2013 report by the UN International Strategy for Disaster Reduction (UNISDR) and PwC concluded that multinationals’ dependencies on unstable international supply chains now pose a systemic risk to “business as usual.”

Environmental measures to mitigate risk

Moves to mitigate catastrophe risks
 and control losses are increasing. Organizations, governments and UN bodies are working more closely to share information on the impact of disaster risk. Examples include R!SE, a joint UN-PwC initiative, which looks at how to embed disaster risk management into corporate strategy and investment decisions.

Governments also are starting to develop plans and policies for addressing climatic instability, though for the most part policy actions remain unpredictable, inconsistent and reactive.

Developments in risk modeling

A new generation of catastrophe models is ushering in a transformational expansion in both geographical 
breadth and underwriting applications. Until recently, cat models primarily concentrated on developed market peak zones (such as Florida windstorm). As the unexpectedly high insurance losses from the 2010 Chilean earthquake and the 2011 Thai floods highlight, this narrow focus has failed to take account of the surge in production and asset values in fast-growth SAAAME markets (South America, Africa, Asia and the Middle East). The new models cover many of these previously non-modeled zones.

The other big difference for insurers is their newfound ability to plug different analytics into a single platform. This offers the advantages of being able to understand where there may be pockets of untapped capacity or, conversely, hazardous concentrations. The result is much more closely targeted risk selection and pricing.

The challenge is how to build these models into the running of the business. Cat modeling has traditionally been the preserve of a small, specialized team. The new capabilities are supposed to be easier to use and hence open to a much wider array of business, IT and analytical teams. It’s important to determine the kind of talent needed
 to make best use of these systems, as well as how they will change the way underwriting decisions are made.

Emerging developments include new monitoring and detection systems, which draw
 on multiple fixed and drone sensors.

Challenges for evaluating and pricing risk

Beyond catastrophe risks are disruptions to asset/insured values resulting from constraints on water, land and other previously under-evaluated risk factors. There are already examples of industrial plants that have had to close because of limited access to water.

Economic: Adapting to a Multipolar World

Struggling to sustain margins

The challenging economic climate has 
held back discretionary spending on life, annuities and pensions, with the impact being compounded by low interest rates and the resulting difficulties in sustaining competitive returns for policyholders. The keys to sustaining margins are likely to be simple, low-cost, digitally distributed products for the mass market and use of the latest risk analytics to help offer guarantees at competitive prices.

The challenges facing P&C insurers center on low investment returns and a softening market. Opportunities to seek out new customers and boost revenues include strategic alliances. Examples could include affinity groups, manufacturers or major retailers. 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
 now see alliances as an opportunity to strengthen innovation. Examples include the partnership between a leading global reinsurer and software group, which aims to provide more advanced cyber risk protection for corporations.

Surprisingly, only 10% of insurance CEOs are looking to partner with start- ups, even though such alliances could provide valuable access to the new ideas and technologies they need.

SAAAME growth

Growth in SAAAME insurance markets will continue to vary. Slowing growth 
in some major markets, notably Brazil, could hold back expansion. In others, notably India, we are actually seeing a decline in life, annuity and pension take-up as a result of the curbs on commissions for unit-linked insurance plans (ULIP). Further development in capital markets will be necessary to encourage savers to switch their deposits to insurance products.

As the reliance on agency channels adds to costs, there are valuable opportunities to offer cost- effective digital distribution. Successful models of inclusion include an Indian national health insurance program, which is aimed at poorer households and operates through a public/private partnership. More than 30 million households have taken up the smart cards that provide them with access to hospital treatment.

The already strong growth (10% a year) in micro-insurance is also set to increase, drawing on models developed within micro-credit. The challenge for insurers is the need to make products that are sufficiently affordable and comprehensible to consumers who have little or no familiarity with the concept of insurance.

Rather than waiting for a market-wide alignment of data and pricing, some insurers have moved people onto the ground to build up the necessary data sets, often working in partnership with governments, regional and local development authorities and banks and local business groups.

Urbanization

The urban/rural divide may actually be more relevant to growth opportunities ahead than the emerging/developed market divide. In 1800, barely one in 50 people lived in cities. By 2009, urban dwellers had become a majority of the global population for the first time. Now, every week, 1.5 million people are added to the urban population, the bulk of them in SAAAME markets.

Cities are the main engines of the global economy, with 50% of global GDP generated in the world’s 300 largest metropolitan areas. The result is more wealth to protect. Infrastructure development alone will generate an estimated $68 billion in premium income between now and 2030. Urban citizens will be more likely to be exposed to insurance products and have access to them. Urbanization is also likely to increase purchases of life, annuities and pensions’ products, as people migrating into cities have to make individual provision for the future rather than relying on extended family support.

Yet as the size and number of mega-metropolises grow, so does the concentration of risk. Key areas of exposure go beyond property and catastrophe coverage to include the impact of air pollution and poor water quality and sanitation on health.

Tackling under-insurance

A Lloyd’s report comparing the level 
of insurance penetration and natural catastrophe losses in countries around the world found that 17 fast-growth markets had an annualized insurance deficit of $168 billion, creating threats to sustained economic growth and the ability to recover from disasters.

Political: Harmonization, Standardization and Globalization of the Insurance Market

Government in the tent

At a time when all financial services businesses face considerable scrutiny, strengthening the social mandate through closer alignment with government goals could give insurers greater freedom. Insurers also could be in a stronger position to attract quality talent at a time when many of the brightest candidates are looking for more meaning from their chosen careers.

Government and insurers can join forces in the development of effective retirement and healthcare solutions (although there are risks). Further opportunities include a risk partnership approach to managing exposures that neither insurers nor governments have either the depth of data or financial resources to cover on their own, notably cyber, terrorism and catastrophe risks.

Impact of regulation

Insurers have never had to deal with an all-encompassing set of global prudential regulations comparable to the Basel Accords governing banks. But this is what the Financial Stability Board (FSB) and its sponsors in the G20 now want to see as the baseline requirements for not just the global insurers designated as systemically risky, but also a tier of internationally active insurance groups.

The G20’s focus on insurance regulation highlights the heightened politicization of financial services. Governments want to make sure that taxpayers no longer have to bail out failing financial institutions. The result 
is an overhaul of capital requirements 
in many parts of the world and a new basic capital requirement for G-SIIs. The other game-changing development is the emergence of a new breed of cross-state/cross-border regulator, which has been set up to strengthen co-ordination of supervision, crisis management and other key topics. These include the European Insurance and Occupational Pensions Authority (EIOPA) and the Federal Insurance Office (FIO) in the U.S.

Dealing with these developments requires a mechanism capable of looking beyond basic operational compliance at how new regulation will affect the strategy and structure of the organization and using this assessment to develop a clear and coherent company-wide response.

Technology will allow risk to be analyzed in real time, and predictive models would enable supervisors to identify and home in on areas in need
 of intervention. Regulators would also be able to tap into the surge in data and analysis within supervised organizations, creating the foundations for machine-to-machine regulation.

A more unstable world

From the crisis in Ukraine to the rise of ISIS, instability is a fact of life. Pressure on land and water, as well as oil and minerals, is intensifying competition for strategic resources and potentially bringing states into conflict. The ways these disputes are playing out is also impinging on corporations to an ever-greater extent, be this trade sanctions or state-directed cyber-attacks.

Businesses, governments and individuals also need to understand the potential causes of conflict and their ramifications and develop appropriate contingency planning and response. At the very least, insurers should seek to model these threats and bring them into their overall risk evaluations. For some, this will be an important element of their growing role as risk advisers and mitigators. Investment firms are beginning to hire ex-intelligence and military figures as advisers or calling in dedicated political consultancies as part of their strategic planning. More insurers are likely to follow suit.

The final article in this series will look at scenarios that could play out for insurers and will lay out a way to formulate an effective strategy. If you want a copy of the report from which these articles are excerpted, click here.