The insurance industry must turn its head to a number of critical business issues. Here we identify some of the issues we think are likely to make waves over the next 12 months:
There hasn’t been a great deal of clarity in what will happen to the EU legal structure post-Brexit. Indeed, the UK insurance market has been largely left in the dark.
Regulators have required firms to be prepared for Brexit but cannot provide any guidance on the timetable or what shape Brexit will take. Organisations have therefore had little choice but to prepare for the worst case scenario – a ‘disorderly crash landing’ in March 2019. By necessity, they’ve needed to (re)familiarise themselves with World Trade Organisation (WTO) rules. However, these rules are predominately in relation to market access for trading goods, which is not the immediate concern for financial services.
Will the negotiations enable the EU to accept the proposed UK post-Brexit regulatory regime? If not, must businesses effectively determine, without delay, to de-risk the possibilities of this occurring by preparing to relocate relevant business operations?
General Data Protection Regulation (GDPR)
The countdown to compliance with the GDPR, which replaces the Data Protection Act, is now well and truly on as the 25 May 2018 deadline looms. The industry will need to have greater control over the data it holds and validation for why it is held and for how long.
The key question is: How close are businesses to meeting its requirements and deadlines?
There is now no room to defer action. The insurance market must urgently look at the way it treats personal data, to assess and understand organisational exposures and take steps to develop and implement GDPR compliant documentation, processes and systems. A maximum fine of €20 million or 4% of annual turnover for a severe breach alone should be enough to motivate any insurer into action.
The announcement in February 2017 from the UK Ministry of Justice (MoJ) to move the Ogden ‘Discount’ Rate from 2.5% to -0.75% was a monumental event. Simply observing the first quarter and half-year results throughout the market was evidence enough to see the financial impact it had.
However, in a victory for the insurance market, the Government announced in September that the discount rate could be set between 0% and 1% under new draft legislation.
Persistent ‘soft market’
A competitive insurance landscape requires strict cycle profit management. This means cutting expenses and reserve releases to balance low investment returns and low technical pricing of all direct classes of insurance.
2017 was a year with significant losses, such as the floods from storms Desmond, Eva and Frank. For some insurers it will be difficult to make a profit, with compromises needing to be made between increased retentions and decreasing insurance costs.
Perhaps profitable opportunities can be found in the expansion of the boundaries of insurability? The growing economy is leading to emerging risks worldwide in the areas of technology, environment, society and politics. These can be mastered by means of new insurance solutions to mitigate risk potentials.
There can be little doubt that the UK regulatory regime is more developed, better resourced and more intensive than ever before. This is demonstrated by the recent announcement of the FCA’s investigation into the wholesale market in the UK and the provisions relating to the Senior Managers Regime coming into force in 2018.
More than ever, business leadership is being challenged to balance objectives with the regulatory imperatives. The good news is that in most instances there are some concrete steps that can be taken to effectively and safely achieve this balance. Prevention, detection and remediation activities have a big part to play. What is clear, however, is that a ‘head-in-the-sand’ approach is unacceptable.
Insurance Distribution Directive (IDD)
While proposals to delay implementation continue, the IDD is currently due to be transposed into UK domestic law by 23 February 2018. The government has made it clear that the UK will implement the IDD, regardless of the ongoing Brexit negotiations.
The directive was developed with the aim of levelling the playing field for insurance distributors, while at the same time significantly raising conduct standards, improving consumer protection and enabling effective competition. The proposed changes are significant and will inevitably require processes to be updated, which is likely to take some time.
The FCA has made clear that it thinks businesses should be preparing for the changes now, so that they are prepared for the new regime as soon as it comes into force.
In the coming years, artificial intelligence (AI) and robotics will be the transformation enablers.
In some cases, embracing these technologies will mean finding better ways of accomplishing the same ends as before. In others, it will mean pursuing ends that were previously unachievable. It remains to be seen as to the cost-savings and efficiencies that the insurance industry could achieve once the potential of AI/robotics have been unlocked. It is also difficult to foresee any future implications for staffing as a result of any disruption. It is, however, a sure bet that early adopters will reap the greatest rewards in terms of relevance and profitability.
Regulators are demanding ever more embedded levels of capital to avoid any risk of a regulatory capital shortfall. The upside of these solid levels of capital is that insurers are now looking for ways to deploy this surplus. The downside is that with greater deal activity the market can fall victim to a fear of missing out. This, in turn, may lead to excessive valuations and impulsive risk taking.
Business, government and our everyday lives are becoming ever more digitised and dependent on electronic connectivity. This is subjecting them to a constantly evolving series of operational and information cyber risks.
By simply reflecting on the WannaCry and Petya cyber incidents, the potentially devastating consequences of such attacks on global corporations can be understood.
In terms of the insurance industry, the ratings agency Fitch released a Press Release in November, entitled “Cyber Influence on Insurer Ratings Mostly Gradual”, within which it said:
“Cyber insurance represents a relatively small percentage of insurers’ business and insurers are taking a cautious approach to growing coverage, given the uncertainty about cyber claims potential and how to price claims.”
New product development
2017 was an interesting year, with precarious economics and social division making the world a fragile place.
There is pressure on insurance companies to make products available and to deliver services that meet social need and new price expectations. The industry must stay ahead of the curb to design the appropriate products, to sell them in an accessible manner and at a reasonable price.
If you no longer matter to your customers, they will leave you and race to your competitors. Relevance is a moving target. Adapting and evolving with new industry trends as well as realigning go-to-market tactics are fundamental to staying competitive. Innovate to survive.
This article was written by William Chapman-Smith, legal counsel, Allianz UK.