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Insurance Industry Trends - 2015
A GlobAl And diGitAl PersPective: some reflections
Industry Meetings
Help create the future of your Industry
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IntroductIon 4
1. dIgItIzatIon In the context of InnovatIon 5
1.1 Big data and analytics: a transformation in Progress
1.2 getting to Know consumers and responding to their expectations:
Straightforward, understandable and customized Products in the digital age
2. gloBal PerSPectIve: Mature MarKetS and eMergIng MarKetS 82.1 the Industry’s different Starting Points and degrees of Significance
2.2 asia: economic and demographic Prospects. china, the country to Watch
2.3 the americas: Middle-class growth despite heterogeneity Between countries
2.4 europe, a consolidated Market With new challenges: regulatory changes and
demographic Prospects
2.4.1 Solvency II
2.4.2 Population aging, Sustainability of Pension Systems and health
concluSIonS 26
BIBlIograPhy 27
5th InSurance InduStry MeetIng 28
agenda
academic leadership and organization
Speakers
CONTENTS
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INTrOduCTION
1 soley, Jorge and Júlia Gifra, “the insurance sector. A global and digital perspective: some reflections,” iese business school, oP-272-e, 2015.
digitization, emerging markets, consolidated markets, regulatory changes, connected clients, innovation, personalized insurance, sustainable pensions and health systems, socioeconomic perspectives, and so forth. in the coming years, the insurance industry must confront various challenges in a context marked by disparate demographic trends across the different regions of the world as well as by increased competition among firms as a result of globalization and digitization.
the digitization process is undoubtedly one of the issues that will define the insurance industry’s evolution over the next decade. the transformative impact of technology and big data simultaneously presents opportunities and challenges for insurers. digitization is a global challenge both for companies operating on a national level in the insurance industry and for multinational companies operating in a global context since this process, to a greater or lesser degree, affects society as a whole. in fact, the information and communications technology (ict) industry has developed new technologies, products, services and solutions that promote a new way of living and a society of people living a “connected life.” All of this presents most industries and the insurance industry in particular with formidable challenges and big opportunities.
on the other hand, in addition to the digitization movement, we must account for globalization and the necessity for all insurers to adopt an increasingly global perspective rather than a merely national or regional
one. the insurance industry is very significant in economic terms in established markets, such as those of north America (United states and canada) as well as those of europe. However, at the same time, the rise of emerging markets opens up new possibilities. countries such as china and india and latin American countries have different economic and demographic realities and are open doors for growth opportunities in the industry. europe’s demographic and social environment certainly does not line up with the needs and products demanded by the newly established and rising middle classes of china or india nor does it match the reality in Africa, where the introduction of mobile phones and new and simple bank loan and credit facilities provide opportunities for the insurance industry.
our objective in this annual trends report1 is to summarize some of the major issues currently being debated by the insurance industry. We do not intend to address every single one of them but rather focus on some of the more important trends that were the subject of dialogue at iese’s 5th insurance industry meeting, organized in collaboration with ernst & Young.
in short, we cover the following two issues:
• digitization and its transformative impact on insurance firms in a context of innovation
• the necessity of adopting a global vision that accounts for the challenges and idiosyncrasies of established markets as well as the rise of emerging markets
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2 insurance Governance leadership network (July 2014), “leading in a digital World: strategy, risk, and business transformation,” e&Y, pp. 1-14. see also: the economist intelligence Unit (2015), “digital adoption in the insurance sector: from ambition to reality?”, pp. 1-10.
insurers are undergoing transformation and adapting to a digital context within a framework of innovation. this evolutionary process is the result of many factors, digitization being prominent among them, not forgetting others of great importance such as the very development of the insurance business, the willingness to provide cover for the customer’s life and all the associated risks, and increasing globalization.
it is clear that innovation in the insurance industry is growing alongside digitization and that it should not be limited to products but also cover their design processes and efficiency measurements. in this respect, we may already glimpse areas that are undergoing a process of innovation and transformation, such as:
• the ability to customize insurance offerings through digitization mechanisms
• the importance of advisory services in the field of customer management, both online and offline
• business processes and their efficiency measurements
• the extension of guarantees
• improvements in customer communication and experience in terms of quality and experience, both online and offline
• the bundling of insurance products
1. 1. dIgITIzaTION IN ThE CONTExT Of INNOvaTION
the insurance industry is a sector with a well-established technological foundation. for years, it has been investing in platforms, software and other technologies necessary for its day-to-day operations, which have given it a head start. However, this can also be a hindrance or difficulty when it is time to reinvent, since it is not easy to supplant or rethink certain structures that have been established from the very base.
naturally, the impact of digitization is not limited to this field but goes way beyond it. indeed, for the insurance industry, this process encompasses trends and issues that are not only related to the emergence of new technologies and applications that firms must integrate but also include other aspects such as changing customer preferences and the emergence of new competitors or partners.
in short, digitization affects or will affect the entire value chain. the e&Y analysis2 presented below graphically illustrates the implications that digitization and its various groundbreaking elements have on the value chain of the insurance process, starting from product development and management, via sales and distribution and on to underwriting, customer experience and claims.
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source: e&Y
of the various implications mentioned in the table, it is worth highlighting the need for segmentation, integrated omnichannel sales models, the obligation to plan new workforce and technological structures, and the ability to create new alliances and partnerships with technology companies.
What is the right digitization strategy? Are we better off creating new digital insurance companies from scratch or digitizing companies designed in an analog way? transformation is occurring more slowly in those insurers that are merely incorporating some information and communication services online. other firms are
investing in a wider-ranging transformation by integrating various sales and communication channels, adapting their commercial policies, creating more straightforward, understandable and comparable products, moving forward in big data analytics, and offering customized and higher-quality services. on the other hand, while some companies are investing in new technological capabilities, others are concluding agreements with third parties to meet their needs regarding big data, analytics, etc. some experts emphasize a growing trend in mergers, acquisitions and partnerships between insurers and technology companies.
Productdevelopment and
management
Customerexperience ClaimsUnderwritingSales and
distribution
Digitization’S imPaCt on the inSUranCe inDUStry’S valUe Chain
• new behavioral, granular data
• disruptive innovation from simpler products
• more transparency, information, customer education
• instantaneous information
• finer segmentation
• Price pressure, margin compression
• Greater scale, economies, provider consolidation
• new products and services
• strong customer relationships and data outside of insurance
• disintermediation
• stronger customer voice
• entry from adjacent markets
• rise in alternate distribution
• integrated omnichannel models
• changing workforce structure (agents, adjusters)
• Greater it investment
• instantaneous information andbig data
• Predictive and evaluative analytics
• Greater processing capabilities
• finer segmentation
• shrinking risk pools
• cherry-picking
• developement of markets for information
• rise in partnerships to increase data access
• information transparency
• Generational preferences
• Proliferation of channels
• stronger customer voice
• Greater responsiveness
• expanded customer knowledge
• Potential for greater reputational risk and opportunity
• straight-through electronic processing
• instantaneous information
• enhanced analítics and artificial intelligence
• decreased processing time
• cybersecurity and fraud risks
• streamlined processes
• economies of scale
• outsourcing
Forc
esim
plic
atio
ns
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1.1 Big Data and Analytics: A Transformation in Progress
1.2 Getting to Know Consumers and Responding to Their Expectations: Straightforward, Understandable and Customized Products in the Digital Age
one of this process’s most groundbreaking elements is undoubtedly the ability to access a wealth of data and information. big data’s advantages and potential are widely recognized: the companies that know how to administer and manage the available information and data will win out in terms of efficiency and competitive advantage. nevertheless, big data mean something provided the relevant details are obtained and analyzed – in other words, access to a lot of information without any type of organization has no value per se.
the challenge arises when it comes to filtering through the large amount of data and then systematizing and interpreting them so that the data can be considered an advantage and translated into successful business models, sales strategies or new and more efficient processes. companies in the industry are at various stages of implementation and have made different degrees of progress in big data management but they are all aware of big data’s importance. to an extent, their experience and background in actuarial science and risk analysis likewise makes data analytics a familiar environment.
it is imperative to understand the consumer in all industries but perhaps particularly so in insurance, since customers’ circumstances change over their lifetimes and they do not plan on retaining a single, standardized insurance scheme.
moreover, digitization increases users’ expectations and demands. on the one hand, customers want products that will improve their experience and meet their different needs – in other words, they want a tailored suit that is flexible and adjusts to the various stages of their lives. on the other, the almost constant virtual connectedness of consumers requires insurance firms to innovate and rethink their traditional approach to products, which to date have been designed from the technical perspective of the insurers themselves and which must now focus increasingly on the users’ demands. this means that insurance firms must evolve from their prior internal-driven focus to a customer-centered approach. And it seems that customers are no longer willing to adhere to standard terms and conditions when signing up with an insurer, nor do they want to receive a never-ending printed contract through the mail. consumers want personalized treatment, with insurance suited to their particular circumstances and all through a quick, simple and clear system.
to sum up, companies must understand and adapt to how customers want to interact with their insurer, the features they expect from their insurance company as well as the types of products and services that they demand: multichannel access; availability 24 hours a day, seven days a week, 365 days a year; a comprehensive, personalized, simple and useful service offering; transparency; trust; advisory services; flexibility in adapting to their different circumstances, etc.
All of this leads us to conclude that the digital transformation of insurance firms cannot be delegated to a single department of the company. rather, it requires strategic thinking about how to face this challenge, analyzing the changes that this transformation will mean from the firms’ point of view as well as from their customers’ point of view.
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3 c. González martínez and J.m. marqués sevillano (2011), “las entidades de seguros ante el nuevo entorno financiero,” Estabilidad Financiera, no. 25, banco de españa [bank of spain], pp. 127–139.
insurance companies play a very significant role in the financial stability of many countries: it is estimated that the volume of premiums that they managed globally accounts for around 6% of world GdP, while their investments and strategies are critical to capital markets.3
2. a glOBal PErSPECTIvE: MaTurE MarkETS aNd EMErgINg MarkETS
2.1. The Industry’s Different Starting Points and Degrees of Significance
nevertheless, the significance of this industry varies greatly, depending on the country and its economic and political environment. the tables that follow serve to give a brief overview of the industry and its major subsectors, life and nonlife, and illustrate its evolution both in countries belonging to the organization for economic cooperation and development (oecd) and in states that are not members of this organization.
on the one hand, the graphs for both the life and nonlife sectors show that only a third of oecd countries had positive growth in the most recently analyzed period. Unlike those countries, all the countries outside the oecd had positive growth rates.
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annUal growth oF inSUranCe PremiUmS: liFe SeCtor, 2012–2013 (aS a %)
source: ocde4
4 ocde (2014), “Global insurance market trends,” pp. 1–40.
Finland Portugal
ItalyTurkey
AustraliaHungary
MexicoIceland
Slovak RepublicSwitzerland
ChileSweden
GermanyFrance
EstoniaIsrael
DenmarkOCDE simple average
CanadaKorea
New ZealandAustria
Czech RepublicNorway
OCDE weigted averageSpain
SloveniaIrelandJapan
United StatesLuxembourg
GreeceNetherlands
United KingdomPoland
Belgium
South AfricaLatvia
SingaporeHong Kong (China)
MalaysiaIndonesia
El SalvadorColombia
NicaraguaCosta Rica
UruguayPanam
PeruHonduras
GuatemalaArgentina
Brazil
-30 -20 -10 0 10 20 30 40 50 60
oeCD contries
Selected african, asian and european countries
Selected latin american countries
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annUal growth oF inSUranCe PremiUmS: nonliFe SeCtor, 2012–2013 (aS a %)
EstoniaFinland
LuxembourTurkey
SwedenNew Zealand
MexicoAustralia
United KingdomCzech Republic
IsraelOCDE simple average
United StatesBelgiumGermany
OECD weighted averageSwitzerland
FranceHungaryAustriaCanadaPoland
ChileSlovak Republic
NorwayKorea
DenmarkSlovenia
SpainPortugalIcelandGreece
ItalyNetherlands
South AfricaIndonesia
LatviaMalysia
Hong Kong (China)Singapore
ArgentinaBrazil
PeruNicaragua
PanamaGuatemalaCosta Rica
ColombiaUruguay
El SalvadorHonduras
-15 -10 -5 0 5 10 15 20 25 30
oeCD contries
Selected african, asian and european countries
Selected latin american countries
source: ocde5
5 ocde (2014), “Global insurance market trends,” pp. 1–40.
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total groSS PremiUmS (liFe anD nonliFe), 2011(aS a % oF the total)
source: ocde, taken from c. González martínez and J.m. marqués sevillano (2011)6
this heterogeneity is not found only in the case of oecd and non-oecd countries but significant differences are also observed regarding the relative importance of life and nonlife premiums among the oecd member countries themselves. the following graph, containing data from 2011, illustrates the importance of both sectors in each of the countries.
6 González martínez and J.m. marqués sevillano (2011), “las entidades de seguros ante el nuevo entorno financiero,” Estabilidad Financiera, no. 25, banco de españa, pp. 127–139.
LuxemburgoJapón
IrlandaReino UnidoDinamarca
ItaliaPortugalFranciaBélgica
ChileUE-15Corea
AustraliaPolonia
HungríaNoruega
EslovaquiaIsraelOCDE
HolandaFinlancia
SueciaEspaña
SuizaRepública Checa
AlemaniaMéxicoGrecia
AustriaEstados Unidos
EstoniaCanadá
EsloveniaTurquíaIslandia
0 10 20 30 40 50 60 70 80 90 100
LIFE INSURANCE NONLIFE INSURANCE
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the reasons that explain the importance of the different sectors in each country vary in nature and depend on demographic, economic, regulatory, institutional and other factors. However, despite this variety of factors, there seems to be a certain consensus among experts, who consider some variables to be more important than others. for example, the fact that growth is much higher in the non-oecd countries than in the oecd countries is due to the insurance industry’s low rate of market penetration, below 5% in most of them. Particularly for life insurance, this degree of penetration is closely related to the income level of the countries subject to comparison – that is, the higher the income, the greater development of the life insurance sector. When a country sees increases in its income and the number of middle-class households, the life insurance sector grows as well. this is why we can see an increase in this sector in countries with low penetration levels but with growing middle classes, as illustrated by the above tables.
in addition to these general theoretical variables, we must also consider more specific explanations related to the characteristics of each case, since the different regulations, each country’s institutional framework, the greater or lesser impact of the financial crisis, and their socioeconomic and demographic context have undoubtedly conditioned the industry’s behavior in recent years, as well as its evolution.
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2.2 Asia: Economic and Demographic Prospects. China, the Country to Watch
According to forecasts by the international monetary fund (imf), Asia’s growth prospects for 2015 are around 5% of GdP. despite differences between the various countries, a clear growth trend can be observed in the continent.
source: imf (october 2014), World economic outlook, database
sources: * eY rapid-Growth markets forecast, July 2014sources: ** organization for economic co-operation and development (oecd) and trading economicssources: ***Asian development bank, Asian development outlook 2014
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this growth is essentially driven by increases in exports and the development of the real estate and infrastructure construction sectors, driven by the growing phenomenon of urbanization. All of these factors favor the growth prospects of the automotive, banking and insurance industries.
china is at the core of the countries with higher growth and opportunities for the insurance industry: the advent of a technologically sophisticated middle class with
disposable income contributes to these good prospects both in the field of life insurance as well as in the housing and automotive industries. in addition, the government is promoting new policies to encourage the establishment of healthcare systems in which the insurance industry can play a significant role.
the following data illustrate the sociodemographic context of china7 and the opportunities that can be created:
7 the chinese mainland, which does not include Hong Kong.
Population 1.367 billion
world ranking 1/186
rate of annual population growth (2013–2014) 0.50%
age distribution (as a %)
0–14 years 17.10%
15–65 years 73.30%
more than 65 years 9.60%
Urban population 723 million
Urban population (as a %) 53.17%
main cities
shanghai 22.9 million
beijing 19.5 million
chongqing 12.9 million
Guangzhou, Guangdong province 11.8 million
tianjin 10.8 million
migration 848,511
immigrant population (as a %) 0.06%
immigrants’ home countries and proportion of [immigrant] population (as a %)
south Korea 26%
Philippines 14%
brazil 14%
source: Prepared by the author on the basis of data obtained from the United nations Population division
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likewise, the distribution of disposable income by household type is also valuable information for understanding the scope of the chinese market. Presently, the number of households with an annual disposable income of up to $15,000 represents
8 iese and deloitte (2015), vademecum on food and beverage markets 2015. 9 United nations (2014), World Population Prospects: The 2012 Revision – Methodology of the United Nations Population Estimates and Projections, department of economic and social Affairs, Population division, new York.
source: Vademecum on Food and Beverage Markets 2015
45.3% (201,745,000 households), while those with a disposable income of more than $15,000 and up to $100,000 make up 52.2% (232,358,000 households), an increase of 10.2% from 2013.8
Number and Type of Households by Annual Disposable Income
45.3%
Lower Class Households with an annual disposable income of over US$500 (PPP) and up to US$15,000 (PPP) /‘000: 201,745
52.2%
Middle Class Households with an annual disposable income of over US$15,000 (PPP) and up to US$100,000 (PPP) /‘000: 232,358
2.5%
Upper Class Households with an annual disposable income of over US$100,000 (PPP) /‘000: 11,115
the 10-year demographic forecasts also indicate a degree of stability in its population pyramid, leading us back to the conclusions of the latest United nations report on sociodemographic and growth prospects (World Population Prospects: The 2012 Revision):9 china will not be the country with the highest population growth over the next decades, as it is estimated that the population of india will surpass that of the Asian giant until india reaches a population of approximately 1.6 billion by 2030. Although india will displace china
in terms of population, both will remain the planet’s two most populous countries. Apart from india, the countries that will grow most in the coming decades will be indonesia, Pakistan, the Philippines and the United states. in addition, the United nations estimates that developing regions, especially those of Africa and Asia, will grow more until 2050, while the total population of developed countries will mostly remain stable at around 1.3 billion people.
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CHINA IN 2025
INDIA IN 2025
Male Female
80M 60M 80M60M40M20M40M 20M 0M 0M
80+75-7970-7465-6960-6455-5950-5445-4940-4435-3930-3425-2920-2415-1910-145-90-4
Age Group
CHINA IN 2014
INDIA IN 2014
Male Female
65M 65M52M 52M39M 39M26M 26M13M 13M0M 0M
100+95-9990-9485-8980-8475-7970-7465-6960-6455-5950-5445-4940-4435-3930-3425-2920-2415-1910-145-90-4
Age Group
source: World bank10
source: World bank11
Male Female
40M40M 60M60M 80M80M 20M20M 0M0M
80+75-7970-7465-6960-6455-5950-5445-4940-4435-3930-3425-2920-2415-1910-145-90-4
Age Group
Male Female
65M 65M52M 52M39M 39M26M 26M13M 13M0M 0M
100+95-9990-9485-8980-8475-7970-7465-6960-6455-5950-5445-4940-4435-3930-3425-2920-2415-1910-145-90-4
Age Group
10 and 11 see: http://databank.bancomundial.org/data/databases.aspx
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source: imf (october 2014), World Economic Outlook, database
2.3 The Americas: Middle-Class Growth Despite Heterogeneity Between Countries
As with Asia, it is advisable to highlight the disparities between countries in the Americas, especially in latin America, where the differences are reflected in the economic growth projections, as illustrated by the imf forecasts:
While countries such as ecuador, Peru, mexico and colombia show positive growth rates, others such as Argentina and venezuela show negative rates.
this diversity is also reflected in the regulatory sphere and in the various regulatory reforms undertaken in each country, which, with varying degrees of sophistication, are affected in different ways by the implementation of regulatory regimes for financial reporting, solvency and risk measurement linked to thresholds based on solvency capital requirements and other technical provisions.12 even though there are no uniform international regulatory standards in the case of insurance, it can be pointed out that various international initiatives have been started with the aim of achieving greater
harmonization worldwide. for example, the international Association of insurance supervisors (iAis) is developing a common framework for global insurance groups. likewise, with respect to insurance accounting practices, it is worth noting that the international Accounting standards board (iAsb) has published proposals for the harmonization of insurer accounting practices with the aim of reducing the heterogeneity prevailing today.13 likewise, the adoption of the european directive solvency ii, mainly within the european Union, has influenced many latin American countries, which have incorporated it (with certain adjustments) as a regulation governing behavior in the markets.
12 e&Y(2013), “risk-based capital and Governance in latin America,” pp. 1–14.
13 for a more thorough analysis of the regulatory trends and their impact on the field of insurance, see J. Alonso et al. (June 2013), “tendencias regulatorias financieras globales y retos para las pensiones y seguros,” bbvA research, working paper 13/2013, pp. 1–27.
Please note:1. imf assigned Argentina inflation “n/A” due to data quality and government intervention. You can use it as noted or use the prior of 31% inflation with annotation.
2. the mXn exchange rate is 14.74 per Us$; we used the imf from october (the latest).
* imf assigned Argentina inflation “n/A” due to data quality and government intervention. oxford economics; eY rapid-Growth markets forecast July 2014 projected 31% inflation 2014 and 2015.
** As of september 2000 ecuador discontinued use of sucre (ecs) in favor of Us dollar.
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on the other hand, the heterogeneity to which we refer is also reflected in demographic trends and in the number of middle-class households and their growth in the various countries of the Americas. the following table presents the data for the period analyzed (2013–2014):
miDDle ClaSSeS*
Countries number of households in 2014 (thousands)
number of households in 2013 (thousands) var. 2013–2014
United states 66,073 66,216 -0.2%
brazil 37,670 36,616 2.9%
mexico 21,664 21,179 2.3%
Argentina 10,395 10,242 1.5%
canada 10,064 10,035 0.3%
colombia 7,353 6,877 6.9%
venezuela 5,974 5,822 2.6%
chile 4,867 4,764 2.2%
Peru 4,814 4,628 4.0%
ecuador 2,296 2,155 6.5%
denmark 2,157 2,146 0.5%
dominican republic 2,082 1,998 4.2%
Guatemala 1,832 1,741 5.2%
bolivia 1,034 932 10.9%
Uruguay 950 926 2.6%
costa rica 789 774 2.0%
* middle classes defined on the basis of the number of households with an annual disposable income of more than Us$15,000 (PPP) and up to Us$100,000 (PPP).
source: Vademecum on Food and Beverage Markets 2015
despite the enormous differences, we can see a positive growth trend for the middle classes of all countries, except for that of the United states, which nonetheless leads in terms of the number of households falling
within this range of disposable income. this fact can indicate opportunities for greater penetration of the region’s life and nonlife insurance markets.
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2.4 Europe, a Consolidated Market With New Challenges: Regulatory Changes and Demographic Prospects
2.4.1 Solvency II
As we noted earlier, insurance groups play a very significant for a country’s economy and financial stability. this role justifies the need to supervise these groups.14 the regulatory framework promoted in europe with the entry into force of the solvency ii directive sets out a new supervisory scheme as well as a paradigm shift in insurance group operations.
solvency ii aims to update and modernize the regulatory framework of the european insurance industry, in order to introduce a supervisory regime based on greater risk harmonization. in addition, it seeks to increase transparency and the amount of information provided to consumers, as well as to improve the control and marketing of new products.
this european directive was inspired by the model promoted in the field of banking via the basel iii reforms and has a structured based on three pillars. Pillar 1 focuses on the calculation of capital requirements, establishing quantitative requirements to calculate technical provisions and capital conditions. this new regulatory framework requires insurance firms to calculate the solvency capital requirement, minimum capital requirement, risk margin and valuation of liabilities. insurers may apply a standard formula or adopt their own internal models to satisfy these requirements, particularly the solvency capital requirement.
Pillar 2 of solvency ii focuses on risk models and supervision. As noted above, solvency ii sets out an institutional framework that features a new european insurance and pensions supervisor: the european insurance and occupational Pensions Authority (eioPA).
lastly, Pillar 3 covers transparency and market discipline, as well as the adaptation of insurance firms to reporting requirements related to supervision, information and the reports supplied.
the new regulations will come into force in January 2016, although deadlines for preadaptation and preparation for the new regulatory framework have already been established at the national level. in the case of spain, the General directorate of insurance and Pension funds [dirección General de seguros y fondos de Pensiones]15
has promoted and scheduled phases for the progressive implementation of all the changes that solvency ii involves. According to this institution, these modifications have been reflected by spain’s insurance industry, as shown by the fact that insurers’ solvency margins have increased by 18% since the start of the financial crisis and before the entry into force of the regulations.
this regulatory change undoubtedly represents the main challenge for european insurance firms, which face a genuine transformation in their management and business philosophy. this adaptation involves a shift in how companies are managed, as insurers will be required to disclose large amounts of data and information and they will need to hold own funds in accordance with their risks and the control they exercise over them. likewise, the reforms will entail a conceptual change in the functioning and operation of enterprises, new technical adjustments to the requirements and calculations that must be done, and a new supervision and reporting scheme. the various national supervisors will also face the challenge of controlling and directing this transformation process.
All of this requires a tremendous effort from an industry that, despite not having particularly suffered as a result of the financial crisis, has been affected by regulatory changes in recent years, not only by regulations targeting insurers in particular but also by the indirect impact of the banking industry reform.16 in this regard, some experts warn of potential regulatory excess and of the risk this would entail for the industry’s competitiveness in relations to companies from other settings such as the United states or Japan.
14 c. González martínez and J.m. marqués sevillano, op. cit.15 for more information, see http://www.dgsfp.mineco.es.16 on the latter issue, see J. Alonso, et al., op. cit.
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2.4.2 Population Aging, Sustainability of Pension Systems and Health
in addition to the challenges just mentioned, there are other significant challenges in the european market, related essentially to sociodemographic trends and the economic situation.
indeed, europe is presently facing a scenario of low interest rates and modest projections for economic growth. As illustrated by the population pyramids of some of the major european countries, the demographic prospects also pose the challenge of making the retirement pension models sustainable, as well as the public health systems, in a context marked by longevity and an increasingly aging population.
ITALy IN 2025
Male Female
3M 3M2M1M2M 1M 0M 0M
80+75-7970-7465-6960-6455-5950-5445-4940-4435-3930-3425-2920-2415-1910-145-90-4
Age Group
ITALy IN 2014
Male Female
3M 3M2.4M 2.4M1.8M 1.8M1.2M 1.2M0.6M 0.6M0M 0M
100+95-9990-9485-8980-8475-7970-7465-6960-6455-5950-5445-4940-4435-3930-3425-2920-2415-1910-145-90-4
Age Group
source: World bank17
17 see: http://databank.bancomundial.org/data/databases.aspx
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GerMANy IN 2014
FrANCe IN 2014
GerMANy IN 2025
FrANCe IN 2025
source: World bank19
source: World bank18
Male Female
4M 3M 4M3M2M1M2M 1M 0M 0M
80+75-7970-7465-6960-6455-5950-5445-4940-4435-3930-3425-2920-2415-1910-145-90-4
Age Group
Male Female
4M 4M3.2M 3.2M2.4M 2.4M1.6M 1.6M0.8M 0.8M0M 0M
100+95-9990-9485-8980-8475-7970-7465-6960-6455-5950-5445-4940-4435-3930-3425-2920-2415-1910-145-90-4
Age Group
Male Female
3M 3M2M1M2M 1M 0M 0M
80+75-7970-7465-6960-6455-5950-5445-4940-4435-3930-3425-2920-2415-1910-145-90-4
Age Group
Male Female
3M 3M2.4M 2.4M1.8M 1.8M1.2M 1.2M0.6M 0.6M0M 0M
100+95-9990-9485-8980-8475-7970-7465-6960-6455-5950-5445-4940-4435-3930-3425-2920-2415-1910-145-90-4
Age Group
18 and 19 see: http://databank.bancomundial.org/data/databases.aspx
Male Female
2M 1M 2M1M 0M 0K
80+75-7970-7465-6960-6455-5950-5445-4940-4435-3930-3425-2920-2415-1910-145-90-4
Age Group
Male Female
3M 3M2.4M 2.4M1.8M 1.8M1.2M 1.2M0.6M 0.6M0M 0M
100+95-9990-9485-8980-8475-7970-7465-6960-6455-5950-5445-4940-4435-3930-3425-2920-2415-1910-145-90-4
Age Group
SpAIN IN 2014 SpAIN IN 2025
source: World bank20
this is a significant challenge for spain in particular since, unlike other countries with mixed pension systems (with public and private contributions), the
spanish pension system21 is based primarily on public contributions, as the following graph shows:
THe SpANISH weLFAre STATe
source: spanish Association of insurance and reinsurance institutions (UnesPA)22
120,000
100,000
80,000
60,000
40,000
20,000
02007 2008 2009 2010 2011 2012 2013
21 for a complete overview of the insurance market in spain and a review of its various subsectors, see, among others: fundación mapfre (2013), “el mercado español de seguros,” pp. 1–62.22 see www.unespa.es
collective.Pension funds
collective.insurance
individual.Pension funds
individual.insurance
Public system
20 see: http://databank.bancomundial.org/data/databases.aspx
Executive Education — Industry Meetings 23
Insurance
INCoMe AND expeNSeS oF THe peNSIoN SySTeM IN THe AbSeNCe oF reForMS(% GDp, 2016–2071)
23 oecd (2013), Pensions at a Glance 2013: OECD and G20 Indicators, oecd Publishing.24 J.i. conde-ruiz and c.i. González (2013), “reforma de pensiones 2011 en españa,” institute of fiscal studies, pp. 9–44.
25 J. díaz-Giménez and J. díaz-saavedra (2009), “delaying retirement in spain,” Review of Economic Dynamics, 12(1), pp. 147–167.26 J.i. conde-ruiz and c.i. González, op. cit.27 Ibid., pp. 17.
As the oecd has already warned in its reports on this matter, the main challenges for the current pension systems in the organization’s different member countries are to ensure sustainability and prevent workers from becoming impoverished during their retirement. Given the demographic trends discussed above, the public pension systems are evidently under pressure since, according to projections, public spending on pensions as a share of GdP will increase from 10% (2010) to 14% (forecast for 2050). in its 2013 report,23 the oecd specifically indicates that future retirement pensions will generally be lower compared with today’s ones and that the impact will be greatest on workers with medium-level salaries since, on the one hand, there will be guaranteed minimum pensions for that part of the population with the lowest income and, on the other hand, those who make more will be able to supplement their pensions with other economic resources, thereby leaving the middle class in a more precarious situation.
in the case of spain, following the pension reform of 2011,24 the overwhelming consensus is that the current short and medium-term model requires revision and that it is necessary to engage in further dialogue on its viability in light of continued population aging and declining fertility rates. there are various studies – research and policy studies as well as official ones – that emphasize that, if certain reforms are not carried out, spending on pensions in spain will double in terms of the percentage of GdP over the next four decades. Professor Javier díaz-Giménez of iese has conducted an analysis of the possible delay of worker retirement25 and other authors, such as José ignacio conde-ruiz and clara i. González,26 illustrate the forecast for the pensions system in spain in four decades in terms of spending as a proportion of GdP and its viability (with or without reform). the following table shows the forecast spending on the pensions system over the next 40 years assuming no reforms are carried out and it highlights how spending increases:
source: J.i. conde-ruiz and c.i. González (2013)27
Income
TotalRG:
GeneralRegime
RETA: SpecialRegime for theSelf-Employed
Unemployment
Expenses
Total Retirement Widowhood/Widowerhood Disability
IESE Business School24
Industry Trends
these projections have led many industry experts, agents and employers28 to propose an increase in the weight of alternative contributions through other pension funds that would supplement the public system. for example, the oecd has highlighted the crucial role of private plans and the need to encourage them through pension schemes at both the personal and employment levels, since almost exclusive dependence on the public sector is not sustainable. in some countries such as the United Kingdom, companies and workers are obligated to allocate part of their earnings to private pension plans. other countries are also implementing this measure together with, for example, financial incentive schemes to encourage employees to remain longer in the labor market.
While the oecd countries have different retirement policies, all of them face a similar challenge: to make pension systems financially sustainable and to ensure they can guarantee that the population as a whole can have fair pensions. experts call upon the insurance industry to play a more active role in this field by proposing solutions that will promote compatibility between the public and private retirement pension systems.
Additionally, as we noted in our summary of the trends of 2014, population aging requires a more comprehensive and strategic approach that will facilitate dialogue about not only pension reforms but also in closely related areas such as health coverage and dependency.
According to data from the oecd once again, the percentage of private health spending in spain in relation to public health spending is 27%, and public health spending patterns over the past decade show a clear upward trend. the public health system generates a deficit year after year.
in relation to this issue, a degree of consensus has also been reached on the need to implement reforms that will ensure the system’s viability. those who highlight the urgency of reform question the model’s sustainability from a financial perspective but not its effectiveness from a welfare state perspective. likewise, reform supporters warn that the current publicly funded cost structure will gradually have to be adapted.
28 for example, see UnesPA’s studies and publications at http://www.unespa.es.
Executive Education — Industry Meetings 25
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from the point of view of the insurance companies, it appears a certain predisposition has arisen, since it is considered that collaboration between the public and private sectors is both appropriate and necessary. the companies argue that this cooperation is not only possible but also timely in the light of current events, as financial constraints and demographic forecasts call for the use of all available resources. they further argue that the insurance industry can contribute to the provision of effective and quality solutions, as long as all the stakeholders (the state, insurers and citizens) collaborate and there is consensus on the reforms that will be undertaken. the private sector’s rationale is logical and acceptable. on the one hand, it recommends an end to the ideological conflicts in the public health versus private health system debate, as the politicization of this debate creates confusion and misinformation. on the other, it calls for a paradigm shift marked by a comprehensive healthcare policy that is inclusive of all stakeholders and envisions a viable outlook for the future. this type of policy, in rationalizing the evolution of healthcare costs, employs all available resources, has the patient as the focus of the scheme,29 promotes prevention and prioritizes efficient risk management and patient categorization. Possible measures to achieve this transformation include the relaxation of regulations, the need to measure current costs properly, the attribution of broader authority and greater accountability to public management officials, and the promotion of greater competition in the management of the healthcare institutions under the authority of the national Health system [sistema nacional de salud].
in short, we may observe a trend, however slight, pointing toward new collaboration models that include the private sector within the framework of a publicly funded healthcare system. there is a great variety of ways to manage public services, and cooperation models should result from an effort and consensus among all the stakeholders, so that provision schemes can be configured that follow the model that is the best for each case. in any case, we must clarify that this is not a new trend, since there is previous experience of the collaboration between the public and private sectors that is already happening and which has provided some important examples. so, by way of example, in spain, 85% of state civil servants opt for a private system of healthcare cover through free insurance plans that have been arranged via the General mutual Program for officials of the state civil Administration (muface). there are also other instances of collaboration through administrative concessions and private-sector investment and management of public hospitals, among other models that work with a high degree of user satisfaction.
to sum up, collaboration between the public and private sectors in the areas of pensions and healthcare will be a trend that will gradually become consolidated in settings such as europe, characterized by the population’s longevity and the need to optimize all available resources to guarantee a welfare state for the citizenry.
29 in this respect, see the annual summary of healthcare industry trends of 2014: industry meetings (2014), “five ways to make patient-centric healthcare happen”, iese business school, pp. 1–30.
IESE Business School26
Industry Trends
• digitization in the insurance industry arises from the context of innovation and is transforming companies. it requires a strategic vision that considers not only its impact on each company and the appropriate measures to take but how it affects customers and what they expect from their insurers.
• digitization encompasses other trends and issues, such as the emergence of new technologies and applications that insurers will have to integrate, changes in customer preferences, and the emergence of new competitors and partners. synergies between insurers and technology companies will be a growing trend during the digital transformation process.
• big data provide great opportunities for the insurance industry, as this phenomenon allows insurers to know their customers better and promotes greater segmentation of products and services, which should eventually translate into products tailored to the needs of consumers in their various phases.
• Understanding the consumer is fundamental to the insurance industry, which must respond to the increasing demands of customers, who expect digital communication channels and straightforward, understandable and much more customized products.
CONCluSIONS
• in the context of the increasing globalization of the insurance industry, companies must continue to grow in consolidated and mature markets as well as in the new emerging markets that provide new opportunities.
• in europe, the keywords are: longevity and population aging, the sustainability of public pension and healthcare systems, technology, data, analytics and solvency ii.
• in north America, the keywords are: mergers and acquisitions, growth and regulation.
• in latin America, the keywords are: population growth, rising middle classes, regulatory differentiation and a disparate economic and democratic environment.
• in Asia, the keywords are: china, india, middle classes, big cities, and car and health insurance.
Executive Education — Industry Meetings 27
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BIBlIOgraPhy
Alonso, J., et al. (June 2013) “tendencias regulatorias financieras globales y retos para las pensiones y seguros,” bbvA research, working paper 13/2013, pp. 1–27.
bieck, c., A. marshall, and s. Patel (2014), “digital reinvention. trust, transparency and technology in the insurance World of tomorrow,” ibm institute for business value, pp. 1–17.
center for regulatory strategies and deloitte (2015), “forward look. top regulatory trends for 2015 in insurance,” pp. 1–7.
conde-ruiz, J.i., and c.i. González (2013), “reforma de pensiones 2011 en españa,” institute of fiscal studies, pp. 9–44.
díaz-Giménez, J., and J. díaz-saavedra (2009), “delaying retirement in spain,” Review of Economic Dynamics, 12(1), pp. 147–167.
e&Y (2015), “Global insurance outlook,” pp. 1–73.
e&Y (July 2014), “leading in a digital World: strategy, risk, and business transformation,” insurance Governance leadership network, pp. 1–14.
ernst & Young (2013), “risk-based capital and Governance in latin America,” pp. 1–14.
fundación mapfre (2013), “el mercado español de seguros,” pp. 1–62.
González martínez, c., and J.m. marqués sevillano (2011), “las entidades de seguros ante el nuevo entorno financiero,” Estabilidad Financiera, 25, banco de españa, pp. 127–139.
imf (october 2014), “World economic outlook,” database.
KPmG (2015), “Perspective: trends driving the insurance m&A landscape in 2015,” pp. 1–14.
oecd (2014), “Global insurance market trends,” pp. 1–40. oecd (2013), “Pensions at a Glance 2013: oecd and G20 indicators,” oecd Publishing.
United nations (2014), World Population Prospects: The 2012 Revision – Methodology of the United Nations Population Estimates and Projections, department of economic and social Affairs, Population division, new York.
Pwc (2015), “top insurance industry issues in 2015,” vol. 7, pp. 1–46.
the economist intelligence Unit (2015), “digital Adoption in the insurance sector: from Ambition to reality?” pp. 1–10.
IESE Business School28
Industry Trends
5Th INSuraNCE INduSTry MEETINg
Agenda
December 10, 2014
introduction
Prof. Jorge soley, academic director of the industry meeting, iese business schoolProf. Juan José toribio, president, iese-cif (center for international finance)José luis Perelli, country managing partner, ernst & Young spain
the economic and financial context
Prof. Juan José toribio, iese business school
current status and Prospects of insurance regulation
maría flavia rodríguez-Ponga, director general, directorate General for insurance and Pension funds, ministry of economy and competitivenessmoderator: Prof. Jorge soley, iese business school
the insurance business in europe
Pilar González de frutos, president, UnesPA moderator: manuel martínez Pedraza, partner responsible for the insurance industry, eY
innovation and the insurance business
ignacio eyries, managing director, caser Óscar Herencia, general manager, metlife iberia Juan Hormaechea, managing director of insurance area, mutua madrileña, and executive president, segurcaixa AdeslasJaime Kirkpatrick, ceo, Aegon españamoderator: Prof. Jorge soley, iese business school
Executive Education — Industry Meetings 29
Insurance
the Assistance industry and service Quality
José félix cañas, marketing and sales director, AXA AssistanceJuan carlos Guzmán, ceo, europ Assistance spainrafael senén, chairman and ceo, mapfre Asistenciamoderator: Prof. Javier santomá, iese business school
Health and dependency
enrique de Porres, ceo, Asisa• iñaki ereño, spain and latin America managing director, bupa/sanitas group• Javier murillo, director general and member of the board, segurcaixa Adeslasmoderator: manuel martínez Pedraza, partner responsible for the insurance industry, eY
the insurance industry and Globalization
• Juan luis cavero, sales managing director, Generali• ignacio izquierdo, ceo, Avivamoderator: Alberto Placencia, managing partner, financial services, eY
closing session
Prof. Jorge soley, iese business school
IESE Business School30
Industry Trends
Academic Director
aCadEMIC dIrECTION
Óscar herenciaGeneral manager,metlife iberia
iñaki ereñospain and latin America managing director,bupa/sanitas group
José Félix Cañasmarketing and sales director,AXA Assistance
Pilar gonzález de Frutos President,UnesPA
Speakers
Juan Carlos guzmánceo,europ Assistance spain
ignacio eyriesmanaging director, caser
enrique de Porresceo,Asisa
Juan luis Caverosales managing director,Generali
Profesor Jorge SoleySenior Lecturer on Financial Management,IESE Business School
Executive Education — Industry Meetings 31
Insurance
Juan hormaecheamanaging director of insurance area, mutua madrileña, and executive president, segurcaixa Adeslas
Jaime Kirkpatrickceo,Aegon españa
Speakers
manuel martínez PedrazaPartner responsible for the insurance industry,eY
ignacio izquierdoceo,Aviva
Javier murillodirector general and member of the board,segurcaixa Adeslas
m.ª Flavia rodríguez-Ponga director general,directorate General for insurance and Pension funds, ministry of economy and competitiveness,spanish Government
rafael Senénchairman and ceo,mapfre Asistencia
Javier SantomáProfessor,iese business school
José luis Perellicountry managing partner,ernst & Young spain
alberto Placenciamanaging partner, financial services,eY
Professor Juan José toribioPresident, IESE-CIF (Center for International Finance)
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