Article Synopsis :
The “2018 Insurance Industry Outlook,” from Deloitte, offers advice on how to anticipate, prepare, and adapt to shifting circumstances, both strategically and operationally, in increasingly competitive markets.
Insurers hit speed bumps—both natural and man-made—on the road to profitability in 2017:
US property-casualty (P&C):
- Underwriting losses more than doubled, to $5.1 billion, for the first half of 2017 compared with the year before. Soaring loss costs, led by higher catastrophe and auto claims, drove net income down 29% in the first half (before huge third-quarter disaster claims from Hurricanes Harvey, Irma, and Maria).
- Soft markets beyond auto and property-catastrophe lines prevail, with global insurance renewal rates falling for the seventeenth consecutive period. This appears mainly due to an overabundance of capital, particularly in the US market, with industry surplus as of June 30 at an all-time high of $704 billion.
- Emerging markets— particularly China—appear to be a better bet for rapid growth, at least on a percentage basis, especially for P&C insurers.
- In addition to expected hikes in property-catastrophe premiums, particularly for reinsurance, look for a large share of US P&C premium gains to be generated by higher auto insurance rates (which were already rising in 2017 due to worsening loss frequency and severity). Even with price increases, however, profitability could remain elusive, given the multitude of emerging risk factors confronting auto carriers, such as the rise in distracted driving and the proliferation of more expensive sensor-laden vehicles.
US life and annuities (L&A):
- Economic headwinds keep the Federal Reserve from taking more aggressive action, thus leaving interest rates at historically low levels, undermining industry profitability. Stubbornly low fixed-investment yields are prompting L&A writers to cut the crediting rates offered to policyholders.
- The MIB Life Index, which tends to give a strong indication of individually underwritten life insurance activity, fell 3.2% the first half of 2017, while activity in the critical 45-59 target age segment was down 5.5%. According to the Insured Retirement Institute, revenue from annuity sales was down 18% in the first quarter of 2017.
- Life insurance and annuities could be a harder sell in the United States in 2018, given the potential impact of new fiduciary standards set by the US Department of Labor on the sale of retirement-related products. While the final form of the fiduciary rule is still being debated, many insurers have already made substantial business-model changes to accommodate the regulation.
- Interest rates raised on a more regular basis would help, and there are already some positive signs. The gap is widening between what consumers can earn on fixed annuity contracts and bank certificates of deposit, with annuity holders having the added benefit of tax-deferred status on gains. And while the life policy count fell by 4% in Q2 2017 and 3% in H1, new annualized premiums were actually up 4% in H1.
- Five million more US households had life insurance in 2016 than in 2010, but gains were fueled by population growth rather than higher market penetration, which remains at its record low of just 30%. L&A insurers must simplify products and streamline the application process to make policies easier to understand, underwrite, and purchase.
- It’s an enigma: nearly half of the US population is uninsured or underinsured, and a similar percentage of US families having no retirement account savings, yet sales of L&A products remain relatively sluggish.
Key challenges heading into 2018:
- Over-capitalization, resulting in a soft market outside of auto and property-catastrophe
- Rising auto loss costs due to expensive new tech and distracted driving
- Soaring natural catastrophe claims (due in part to climate change)
Life and annuities:
- Persistently low interest rates and uncertainty over timing and size of future increases
- Adaptation to new regulations such as the Department of Labor fiduciary rule for retirement products (disrupting product lines, compensation structures, and distribution systems)
- Outdated application and underwriting processes undermining sales
Growth options? Insurers can and should capitalize on the following strategies:
Connectivity and digitization:
- Unless the industry commits to integrating transformative technologies more rapidly into operations, L&A carriers in particular could risk not only continued stagnation, but potential leakage to InsurTechs.
- Insurers are experimenting with connectivity and advanced analytics to narrow the life application-to-closing process from weeks to minutes, lowering onboarding costs, and minimizing the consumer dropout rate.
- Accelerated underwriting metrics, based on digitally available medical data, drug prescription information, and potentially even facial analytics technology are being used to estimate an applicant’s life expectancy and eliminate traditional medical tests.
- Underwriting digitalization removes barriers to purchase with all ages discouraged by the long and complicated life insurance application process.
- Insurers are incorporating health data from wearables, incorporating the data into underwriting and pricing of life policies.
- Digital distribution is a game-changer: Abaris, an InsurTech startup, launched a direct-to-consumer online platform for deferred income annuities. Ladder, another InsurTech, is now offering direct-to-consumer life policies within minutes, particularly targeting younger consumers who may often avoid purchasing such coverage, given the time it traditionally takes to do so. No agents, no commissions.
- Insurers should embed digital technology across their organizations—as part of an offensive strategy to expand market share and defensive measure to fend off potential competition from InsurTechs.
- Insurers should harness and harvest big data sources—perhaps with the help of third-party managed services specialists—to streamline often cumbersome and expensive operating models while improving customer experience and lowering costs.
- Insurers should consider teaming up with, investing in, and/or purchasing InsurTechs not just to expand digital capabilities, but to inject a more innovative element into their culture, and to accelerate the disruption of more time-consuming and expensive standard business processes.
Internet of Things (IoT):
80m smart-home devices were delivered globally in 2016, with 60% growth rates projected, to 600m devices by 2021. In-home devices create an opportunity to transform the insurer/customer dynamic, delivering prevention (v. protection) toward lower claim costs. Sensors bolster underwriting and client engagement.
Yes, carriers are looking to crack the cyber coverage market (perhaps the largest single organic growth opportunity), but they’re more concerned about cyber losses and cyber hacks. Regulations went into effect on Aug. 28, 2017, from the New York State Department of Financial Services, mandating NY insurers to appoint a Chief Information Security officer (CISO), have a written data security policy approved by its board or a senior officer, and begin reporting cyber-related events. A model law very similar to New York’s has been approved by the National Association of Insurance Commissioners, setting the stage for a likely nationwide rollout. The New General Data Protection Regulation (GDPR) takes effect across the EU in May 2018.
Organic growth remains elusive and a robust US stock market suggests share buybacks may not be the most productive use of the industry’s excess capital, leaving crystal-ball gazers predicting a more positive outlook for insurance industry M&A in 2018.
The US insurance market remains the largest globally in terms of premium volume, and on a pure premium-dollar basis still offers the most growth potential and economic stability. However, breaking into the US market can be difficult, given high valuations, which are often hard for many foreign acquirers to justify. Sales of US insurers to buyers in Canada, Europe, and Latin America will likely be few in the near-term.
Chinese regulatory clampdown on speculation by insurers and new limits on outbound capital flows will limit China participation in M&A. However, the Japanese continue to pursue foreign deals to seek growth outside their own stagnant insurance market.
With insurers seeking to enhance distribution, customer experience, data collection, advanced analytics, and operational efficiency, they’re homing in on InsurTech investment and acquisitions. Although outright purchases of InsurTechs are still relatively few to date, such acquisitions through the first nine months of 2017 are already nearly twice that of the high point in 2014, with a full quarter remaining. Nearly half of global insurers recently surveyed expect to make deals over the next three years to acquire new technologies, and 14% expect to make more than one acquisition.
Slowing of loss-reserve releases across the industry will likely drive divestiture of non-core assets, as well as a run-off of some long-tail legacy liabilities on insurers’ books. This could encourage redeployment of capital into higher return options.
Robotics and AI:
Insurers have hit a wall on productivity gains with existing people and systems. Robotic process automation (RPA) and cognitive intelligence (CI) technologies—fueled by rapid increases in computing power and decreases in data storage costs—give insurers new options to reduce expenses and also reinvent how they conduct business.
RPA gives carriers the ability to automate mundane, box-checking-type tasks in underwriting, policy administration, and claims, potentially freeing up thousands of people hours. Insurer spending on cognitive/artificial intelligence technologies is expected to rise 48% globally CAGR over five years, reaching $1.4 billion by 2021.
Per a study by the Deloitte Center for Financial Services, with respect to cognitive AI, in one type of occupation alone—claims adjusters, appraisers, examiners, and investigators—the US insurance industry could potentially free up between 54 million and 285 million hours of workforce time annually, amounting to potential cost savings between $1.7 billion and $8.9 billion, within five to seven years, depending upon level of investment.
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Digital Insurer's CommentsThere’s a lot to look forward to in 2018. AI is coming of age, open platforms are enabling partnerships and rapid development, data analytics allow faster scale at lower cost, blockchain (DLT) threatens the core of multiple administration platforms, and, last not least, fully autonomous (i.e., no driver, no steering wheel, no pedals) vehicles hit the streets—in California anyway. Who says insurance is boring?
Amara’s Law (coined by Roy Amara, co-founder of the Institute of the Future): “We tend to overstate the effect of a technology in the short run and underestimate the effect in the long run.” Big promises up front, followed by disappointment, then slow gains, and finally wins and uses exceeding expectations. In 2018 we predict slow gains en route to wins and uses exceeding expectations, 2019 and beyond.
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