Insurance Business Pulse, 2013 2015 - ey.com · boost consumer confidence and attract investors....

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1 Insurance Business Pulse, 2013–2015 Exploring the top 10 risks and opportunities faced by global insurance organizations

Transcript of Insurance Business Pulse, 2013 2015 - ey.com · boost consumer confidence and attract investors....

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Insurance Business Pulse, 2013–2015Exploring the top 10 risks and opportunities faced byglobal insurance organizations

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Executive summaryThe Insurance Business Pulse report identifies thetop 10 risks and opportunities faced by insuranceorganizations today and in the next few years,based on a survey of executives at 65 companiesacross the globe, representing both emerging anddeveloped markets.

The findings make clear that insurance companiesmust adjust to the new environment of lowerreturns on assets and stricter regulation oneverything from capital allocation to commissionrates and customer care. In their search forgrowth, insurers are confronted with a shortage ofskills, new threats, concerns about operational andreputational risk, and higher consumerexpectations. Of course, the risks and challengesalso represent opportunities for insurers to drivetransformation and gain competitive advantage.The results can be used as a roadmap fornavigating significant challenges and a benchmarkto guide strategic decision-making.

The key findings:

Insurance Business PulseTop 10 risks and opportunities, 2013–2015

► Companies are renewing customer focus tomeet demand — one individual at a time.

► Flexibility must be built into all aspects of thebusiness to achieve cost competitiveness.

► Regulation could lead to more effective riskmanagement and help bolster stakeholderconfidence in the industry.

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Business model innovation is number 10 risk in 2015

Risk ranking 2013 2015 Opportunity ranking 2013 2015

Macroeconomic trends 1 2 Improved distribution and productdevelopment 1 3

Regulation 2 1 Promoting fair outcomes for customers 2 2

Eurozone debt crisis 3 4 Shifting sales to accommodate changingcustomer needs 3 1

Reputational risk 4 8 More effective enterprise-wide riskgovernance 4 4

Corporate governance failures 5 7 Growth in emerging markets 5 5

Cyber-risk and data security 6 3 Re-optimizing capital structures andredesigning asset liability strategies 6 6

Talent recruiting skills 7 5 Impact of global demographic changes 7 8

Impact of tax and accounting changes 8 9 Personalization of medicine andinsurance policies 8 10

Operational risk 9 13 Exponential growth of data andanalytical tools 9 6

Availability and cost of capital 10 6 Rise of social media tools 10 9

The Insurance Business Pulse survey identifies the top issues on theminds of insurance executives.

Insurance Business PulseTop 10 risks and opportunities, 2013–2015

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Cost competitivenessWorking with less

Stakeholder confidenceThe right response to risk

Operational agilityKeeping one step ahead

Customer reachMeeting demand one individual at a time

Since the 2008 fiscal crisis, obtaining capitalhas been more difficult — presenting starkchoices and making cost competitiveness amarket imperative. Tomorrow’s winners willbe those that have clear strategies regardingcapital-structure optimization and assetliability.

The fiscal crisis limited the ability of insurers toreach customers and dampened overall demand.However, the prospects are bright for companiesthat can revamp distribution and communicationschannels. “Re-launching the brand” will allowinsurers to reach new consumers as householdincomes grow in developing markets and engagenew segments in mature markets.

The top risks and opportunities can be organized around four key driversof growth identified by EY’s Growing Beyond program.

Insurance Business PulseTop 10 risks and opportunities, 2013–2015

Increasing regulation challenges insurers butalso presents opportunities to establish moreeffective risk management through effectiveenterprise-wide governance and also bolsterthe confidence of stakeholders. That’s acrucial point as insurers develop new productsaimed at consumer segments unfamiliar withpurchasing insurance.

In the current environment, predicting and reactingto change can be a major source of competitiveadvantage. However, insurers must have a realisticsense of their agility to better gauge their appetitefor variability and risk. The more agile a firm is, themore comfortable the board can be with strategiesaffected by changing conditions.

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Cost competitiveness► Sustaining companies’

economic viability

Customer reach► Maximizing potential

market opportunity forproducts and services

GreatestImpact

Stakeholder confidence► Allowing firms to build

stronger relationshipswith stakeholders

Operational agility► Improving organizations’

ability to deliver effectively ina quickly changing market

The risk and opportunity RadarAt the center of the radar are the risks and opportunities identified by survey respondents as having the biggest impact on majororganizations worldwide.

Insurance Business PulseTop 10 risks and opportunities, 2013–2015

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Macroeconomic trends

Eurozone debt crisisOperational risk

Reputational risk

Cyber-risk and data security

Impact of tax andaccounting changes

Availability andcost of capital

Regulation

Talent recruiting skills

Corporate governance failures

Less in2015

2013 ranking and expected2015 ranking

Up in2015

Samein 2015

• Less in2015

Cost Competitiveness Customer Reach

Operational AgilityStakeholder Confidence

The insurance sector needsto adjust to a newenvironment.

Where the risk is

Insurance Business PulseTop 10 risks and opportunities, 2013–2015

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Improved distribution andproduct development

Re-optimizing capital structures andredesigning asset liability strategies

Shifting sales to accommodatechanging customer needs

Exponential growth of data

Impact of global demographic changes

and analytical tools

Promoting fair outcomes for customers

More effective enterprise-wide riskgovernance•

Personalization of medicine andinsurance policies

Rise of social media tools

Growth in emerging markets •

Cost Competitiveness Customer Reach

Operational AgilityStakeholder Confidence

Growth opportunities arewithin reach for companiesthat improve customer reach,rethink risk management andembrace data innovation.

Where the opportunity lies

Insurance Business PulseTop 10 risks and opportunities, 2013–2015

Less in2015

2013 ranking and expected2015 ranking

Up in2015

Samein 2015

• Less in2015

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Imperatives for insurers

Macroeconomic trendsFlat interest rates and financial market instabilityThe slower pace of growth in many markets affects insurers’ abilityto provide coverage at an acceptable rate of return — as well as consumers’ need forcoverage. Macroeconomic trends are the top current risk because they fundamentallydistort efforts to identify, differentiate and retain new customer groups.

Meetcustomerneed forcoverage

Addressregulatorychangesacrossgeographies

Maximizecustomerprofitability

Seize thefee-for-serviceopportunity

Risks#1

Risk

Insurance Business PulseTop 10 risks and opportunities, 2013–2015

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RegulationExpanding scope and coordination among regulatory regimesInsurance companies have been preparing for the far-reaching impacts of Solvency II for several years. Thedirective — intended to standardize the European insurance market by aligning regulations across the borders ofEU member states — will provide greater global coordination of regulation. But it also presents a potentially difficulttransition as companies must implement substantial changes to meet SII requirements.

► Potential for worldwide impact ininsurance

► Uncertain implementation date

► Risk of delay to 2015 because ofEuropean Parliament action onOmnibus II

Solvency II

► Adjust equity portfolios

► Manage compliance costs

► Keep customer focus

Imperatives for insurers

#2Risk

Insurance Business PulseTop 10 risks and opportunities, 2013–2015

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Eurozone crisis: global concernsThe Eurozone debt crisis is both a consequence of the recent financial downturnand a potential trigger for future uncertainty.

► 0.1% contraction of EU GDP in 2013

► Governments “muddling” through

► High unemployment

► Consumer skepticism toward financial institutions

► Seize opportunities to build loyalty

► Enhance cross-selling capabilities

► Cultivate transparency and two-way consumercommunications

Imperatives for Insurers

Reputational risk: caught in the crossfireMultiplying regulations mean a greater chance of non-compliance, leading not only to fines and sanctions, but also tothe perception of lax ethics. The stakes are high as a lack oftrust and reduced loyalty among customers and shareholderscan have severe consequences for insurers.

#4Risk

#3Risk

Insurance Business PulseTop 10 risks and opportunities, 2013–2015

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Corporate governance failures:The need to maintain trustThe fallout from the financial crisis has led to a rise in shareholder activism and asense that complying with the letter of the law is not enough. Though there havebeen few examples of corporate governance failure in insurance (especiallycompared to banking), the central issue of trust remains critical to insurers.

► Rethink executive compensation

► Focus board on shareholder interests

► Make compliance function a proxy for regulators

► Recognize threats as strategic risks

► Look beyond IT impacts

► Align board, CROs and CIOs

Imperatives for insurers

Sophisticated hacking tools, the rising threat of state-sponsoredattacks, and concerns about mobile app security are among thereasons cybersecurity will be a top-three risk by 2015. Theintense focus on digital channels requires insurers to protectpersonal data.

Cyber-risk/data security:containing growing threats

Imperatives for insurers

#6Risk

#5Risk

Insurance Business PulseTop 10 risks and opportunities, 2013–2015

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► Maintain customer focus

► Coordinate compliance efforts

► Streamline and automate reporting processes

Imperatives for insurers

Systemic regulatory overhauls across the industry could have asubstantial impact on insurers’ cost competitiveness — a goodexample of “known” risks. However, uncertainty persists about thecoordination of standards across jurisdictions.

Impact of tax and accounting changes

Talent: attracting skills and retaining knowledgeCybersecurity and risk management. Technical and math skills. Analytical andmodeling abilities. Leadership, customer experience and sales strategies.Insurers must address significant gaps in their current talent base, while retainingexisting expertise. Add to that a critical shortage of actuaries, significant andunique recruitment issues in developing markets, and it’s no wonder thattalent-related issues are moving up the risk agenda of senior leaders.

► Attract younger more tech-savvy work force

► Retain existing expertise and institutional knowledge

► Optimize incentive compensation

Imperatives for insurers

Dodd-Frank+ IASB + FASB

=More complexity and potential

Loss of consumer focus

#8Risk

#7Risk

Insurance Business PulseTop 10 risks and opportunities, 2013–2015

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► Risk quantification

► Efficient compliance processes

► Scenario planning and stress testing

► Risk-informed decision making

► Visibility into IT risk

► Engage regulators and industry associations

► Communicate with investors

► Model revenue shifts

Imperatives for insurers

To remain cost competitive, insurers need to adapt businessmodels to the slower-growth environment — an imperative likelyto increase in importance by 2015. The industry’s enforced shiftaway from asset-based income streams has had a considerableimpact on attracting investors. Income generated by fee-basedservices will be subject to fluctuations within the wider economy.

Availability and cost of capital:How to attract investors?

New capabilities required:

#10Risk

#9Risk

Operational risk: new capabilities requiredThere is new urgency to quantify risk to meet new regulatory demands regardingconsumer protection and to establish positive feedback loops in operational riskmanagement, so that there is transparency into impacts on capital requirements.

Insurance Business PulseTop 10 risks and opportunities, 2013–2015

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New technology can power game-changing innovations.

Improved distribution and product developmentHave online research and price comparison sites replaced the agent and broker once and for all? Is personal interactiondead? No, but they have forever changed product development and distribution. The creative use of products anddistribution techniques can change customer behavior. Effective collation and analysis of data can enable carriers toperceive and target demand for new products, control the customer experience and manage costs.

Opportunities#1

Opportunity

Insurance Business PulseTop 10 risks and opportunities, 2013–2015

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As regulatory scrutinyincreases, trust remainsa source of competitiveadvantage.

Promoting fair outcomes for customersConsumers want and expect to trust their insurance companies. That’s why carriers must embrace the underlying principlesbehind fair outcomes, rather than just “checking the box” of compliance. Solvency II and other new regulations will helpboost consumer confidence and attract investors. But companies that focus on treating customers fairly are ahead of thecurve with both customers and regulators in instilling stakeholder confidence.

#2Opportunity

Insurance Business PulseTop 10 risks and opportunities, 2013–2015

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Shifting sales to accommodate changingcustomer needs and a fast-changing worldIt’s all about speed and agility if sales and marketing programs aregoing to detect and deliver against shifting customer sentiments.Firms that can integrate customer research, product developmentand sales strategy and streamline decision-making processes willgain competitive advantage and new revenue streams asinvestment income shrinks.

More effective enterprise-wide riskgovernanceRegulators, customers and other stakeholders need assurancethat insurers understand their risk exposure and know how tominimize it. Regulators want to know that insurers have enoughcapital on hand and strong internal processes to manage risk.That’s why the board must play a key role in improvingenterprise risk management(ERM).

#3Opportunity

#4Opportunity

Fierce competitionmeans the industrymust becomecustomer-friendlier.

Holistic ERM accountsfor many types of risks

Insurance Business PulseTop 10 risks and opportunities, 2013–2015

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Re-optimizing capital structures/redesigning asset liability strategiesFor insurers struggling with the cost of capital in the currentmacro environment, improving both structure and strategy isessential. The aging of the baby-boomer generation has seriouscapital expense implications. After years of generating revenue,the industry faces a long period of payouts, even as the youngergeneration contributes less to retirement savings.

#5Opportunity

#6Opportunity

149 millionEmerging markets

120 millionUS

16 millionEurozone

# of households earning above US$30,000 in 2020

Pensions and life insurance opportunity:by 2050, over 30% of China's populationand 20% of India's population will be overthe age of 60.

55.8%: revenue growth of totalinsurance, pension and saving bondsrevenues in Brazil, 2012–2015

The CRO, CFO and CIO must collaborate to create organizationalunderstanding of investment opportunities, asset risk and risk-

reward balance on yield.

A major geographic shift is underway in thebalance of consumer purchasing power.

Growth in emerging markets (especially the middle class)

Insurance Business PulseTop 10 risks and opportunities, 2013–2015

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Personalization of medicine andinsurance policiesThe completion of the Human Genome Project sparked a newdiscussion about the future of the healthcare and insuranceindustries. Truly personalized medicine and the shift from a one-size-fits-all mentality can shift how insurers engage withcustomers and design coverages. Privacy and ethical issuesloom large, but the game-changing potential is real.

#7Opportunity

Impact of global demographic changesAging populations present the industry with both challenges and opportunities that necessitate multi-layered thinking aboutmarket segmentation, operational impacts and other factors.

Long-term demographic shifts have short-term implications

#8Opportunity

Insurance Business PulseTop 10 risks and opportunities, 2013–2015

Shortageof nursinghomes inChina

Growth ofTakaful(Islamicinsurance)

Rise ofprivatelong-terminsurancein Japan

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Rise of social media tools fordistribution or collaborationTwitter and Facebook will never completely replaceface-to-face interaction, but social media can be used tocommunicate more directly and personally with consumers.Plus, it can improve the speed and scope of internalcommunication and contribute to operational flexibility.

#9Opportunity

Exponential growth of data and availabilityof advanced analytical toolsAs the cost of digital storage and processing power has dropped,customer data volumes have exploded. The best results areachieved by asking the right questions; analytics should be viewedas a creative, customer-facing enterprise — rather than anunwieldy IT initiative. The most successful insurers will be thosethat use data and analytics to designnew products and personalize the customer experience to addressthe perennial challenges of low loyalty and high acquisition costs.

Analytics enable personalization as seen in manyindustries

#10Opportunity

A new skill for carriers to master — reachingcustomers in 140 characters or less

Insurance Business PulseTop 10 risks and opportunities, 2013–2015

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Download the full report >www.ey.com/insurance/business-pulse

Global Insurance LeaderShaun Crawford+44 207 951 2172@ShaunCrawfordEY

Learn more

Insurance Business PulseTop 10 risks and opportunities, 2013–2015

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