The catastrophic events of the past few years, in Christchurch and Japan in particular, have shone light on risk management and insurance like never before.
As global consultancy KPMG said in its 2012 New Zealand Insurance Industry Update, this was another “difficult” year for everyone in the insurance industry. And this next 12 months look “just as challenging”, according to the report.
Last year saw insurers re-examine their risk exposures and respond by revising geographic exposures, increasing premiums to match risk, and/or adapting their products with, for example, the emergence of fixed-sum cover for new homes rather than traditional open-ended replacement.
But what KPMG says about the future of the insurance industry on the broader global front makes even more compelling reading. It predicts, for example, that insurers who embrace challenges posed by “four megaforces” the consultancy has identified, will both survive and thrive. “They will be innovative in adapting their business models and strategies” to capitalise on new environment.
The global megaforces will impact on the insurance industry in the next decade and beyond, according to Jamie Sinclair, KPMG New Zealand’s director advisory: risk consulting – sustainability. His consultancy’s analysis suggests the four sustainability-based global megaforces are about surviving and thriving over the long term. “And these forces are changing the face of risk and the future of the insurance industry,” he says.
The forces will impact the key building blocks of the insurance business model. They will affect products and markets; distribution and operations; regulation and capital management, and governance and people.
Products and markets
Tomorrow’s insurance industry will be quite different from today’s, says Sinclair. Industry leaders will need to understand how markets change and what products will be relevant. It will, for example, be demographically and culturally different marketplace. The typical household is becoming smaller, older, better educated and more urbanised. By 2050, 70 percent of the world’s population will live in cities.
Increased urbanisation will be accompanied by increased wealth, though this won’t be evenly distributed and the gap between rich and poor will grow. And as the world gets older, the declining birth rate will increase pressure on workers to support themselves in their retirement.
What retirement means will also change as the cost of living increases and government support struggles to keep up, Sinclair explains. The implications of the product development megaforce include:
• Adapting to the changing face of retirement. This will include providing product to support the ‘new retirement’ that has multiple phases with sabbatical breaks, rather than traditional retirement.
• Importance of asset protection. As wealth grows, so too will the assets that need protection.
• New ways to transfer wealth. Innovative wealth transfer products will be required, to enable the baby boomers to pass their wealth onto the next generation.
Distribution and operations
Technology changes are impacting how customers interact with insurers and the service they get. Customers’ primary interaction with insurers is often at the time of need after an event; the process, therefore, needs to reflect customers’ priorities and focus on accessibility. Technology can speed up the claims process which, in turn, can enhance customer satisfaction and lift operational efficiency.
But technology changes are also impacting information security and privacy and that is growing concern. As Sinclair points out: “Technology changes create increased fraud and cyber crime risks. This, in turn, creates challenges for operational effectiveness but also opportunities to develop new products to address risks associated with cyber crime and intangible wealth.”
Insurers will also need to lift their game and their understanding of the implications of the growth of social media, which could, the report suggests, be important to their competitive positioning.
Regulation and capital management
Insurance companies’ ability to preserve and enhance their capital base is also challenged by the world’s prevailing complexity and uncertainty. Shareholder returns must be protected and investors need to make informed decisions. It is increasingly important, therefore, for insurance companies to apply investment models that take the impact of KPMG’s four megaforces into account, according to Sinclair.
To be seen as sound, long-term investment insurance companies must articulate how earnings are impacted. Generally speaking, there is low understanding of insurance earnings. Investors generally don’t understand actuarial models. “Improving this communication will be critical to obtaining further capital for the industry and ensuring its sustainability,” he adds.
According to the report, environmental megaforce challenges have the potential to significantly impact insurance industry capital. Climate change, for example, might not only alter the structure of insurance risk but also impact shareholder returns. Being able to explain these risks and communicate the industry’s response will be an important risk mitigation strategy.
Governance and people
“Stakeholder engagement is also key sustainability principle,” says Sinclair. And because trust in financial services companies is generally low, there is significant risk that more people will be turned off insurance, despite it being an essential component of social and economic infrastructure, he adds.
Good governance is therefore critical to improving levels of trust and the value of the industry business. “One element of strong governance is the identification and transparent reporting of all elements associated with business value. This involves integrating environmental, social and governance impacts into corporate reporting,” he says. “Ethics and value have key role to play.”
The insurance industry is, according to the KPMG survey: “A core component of healthy economic system, providing both social and economic benefits. Sustainable insurers will be those that adapt their key business processes to respond well to the megaforces set to impact the industry over the next decade and beyond.” M
Reg Birchfield is writer on leadership, governance & management. [email protected]
