2015 property and casualty insurance outlook financial ......achieving information ﬂuency...

2015 Property and Casualty Insurance OutlookFinancial Services Ireland

b

ContentsForeword 1

Looking forward 2

Achieving information fluency 5

Overcoming regulatory challenges 7

Operational effectiveness 9

Getting ahead of climate change 12

Next steps 14

Contacts 15

2015 Property and Casualty Insurance Outlook Focusing on the big picture 1

Dear colleagues:

In many ways, the Property and Casualty (P&C) insurance industry is better positioned to grow than it has been for quite some time. The Irish economy’s recovery is gaining momentum, sparking stronger and steadier gains in the labour market. P&C premium income should rise in 2015 as the industry benefits from an influx of additional insurable exposures in both personal and commercial lines.

Plenty of challenges remain to keep industry executives on their toes. Whether it’s the evolving threat of cybercrime, the effort to quantify and mitigate the impact of climate change, or how to efficiently meet the constant changes in the regulatory environment, P&C leaders will have their hands full. Agility and innovation are therefore likely to be increasingly important to upgrade capabilities and spark sustainable growth.

In this outlook, we strive to alert the industry to the threats and opportunities that may lie ahead, as well as offer practical suggestions for what insurers ought to do about them. However, while touching upon the general impact of the economy and the state of cyclical insurance markets, we focus the bulk of our attention on more systemic, bigger-picture agenda items that are likely to have a significant effect on consumer behaviour and insurer operations well beyond the year ahead.

Our views on industry trends and priorities for 2015 are based on the first-hand experience of many of Deloitte’s leading practitioners from Ireland and the US, and supplemented by P&C insurance research from the Deloitte Center for Financial Services led by Jim Eckenrode.

The bulk of the report will explore a number of key areas for P&C companies to address over the coming year, each including a specific look at the focus for 2015 and a “bottom line” that provides some actionable takeaways for industry leaders to consider.

We hope you find this report insightful and informative as you consider your company’s strategic decisions. Please share your feedback or questions with us. We would value the opportunity to discuss the report directly with you and your team.

Regards,

Foreword

Donal LehanePartner Financial Services Strategy & Operations

Glenn GillardPartner Insurance Practice

2

Looking forwardInsurers may struggle to adapt as fundamental shifts challenge traditional business models

Overcoming regulatory challenges

Achieving information fluency

Operational excellence

Getting ahead of climate change

Four priorities for property and casualty insurers

Despite recent turbulence in the global economy due to concerns about a double-dip recession in Europe, a precipitous drop in oil prices, and troubles in some emerging markets, prospects for organic growth in the P&C insurance industry should be bolstered if the Irish economic recovery continues as anticipated, gaining momentum in 2015 and thereby boosting the number of properties, people, and exposures requiring coverage.

Around 69% of CEO respondents in a recent survey undertaken by Deloitte and Enterprise Ireland believed that GDP will match or exceed recent predictions of 3%, while just under 25% believed it will be 4% or above. The majority (77%) are confident about Ireland’s capacity to exceed average EU GDP growth rates over the next 2-3 years.

Although business sentiment in Ireland is on the rise the increasing complexity and cost of regulatory compliance, operational overheads and climate change are limiting the Irish Insurance Industries ability to leverage the benefits of an improving economy. P&C carriers are focused on maintaining a positive combined ratio and preventing deterioration of returns on equity in a market that is continuously adapting to external changes.

Another key issue for Irish CEOs is people; staff mobility, availability of graduates, and sourcing suitable qualified and skilled local employees abroad. This concern is further compounded in the Irish Insurance market as highlighted in Deloitte’s Talent in Insurance survey. The popularity of Insurance in Ireland, amongst business students, is the fifth-lowest among the 17 EMEA markets surveyed. Across the globe, insurance is the 18th most popular industry


Overcoming regulatory challenges

Achieving information fluency

Operational excellence

Getting ahead of climate change

sector out of 30 for business students. They also suggest that the industry may not be attracting talent with the creative or innovative mind-set to safeguard its future success. To attract talent, insurers should do better at exploiting their strengths, which they currently underplay. Understanding the mind-set of business students and their attitudes to insurance is a first step. This is addressed in detail in our supporting Talent in Insurance survey.

In any case, P&C carriers should not be relying solely on the rising tide of an improving economy to lift all boats. Over the next few years, insurers will likely have to adapt to fundamental sea changes underway that threaten to upend their business models, standard operating procedures, and distribution systems.

4

Longer-term considerations

In this year’s outlook, we’re encouraging insurers to look beyond the short-term ups and downs of their own particular markets and the economy as a whole to consider the bigger picture. We focus on four pillars for long-term success that should rank high on insurer strategic agendas.

The agility with which carriers take on these challenges and convert them to opportunities for growth and performance enhancement will potentially determine which companies are most effectively positioned to lead the industry. They are:

• Achieving information fluency: Most insurers are not positioned to fully leverage the vast amount of data they already have, let alone the new sources of information and real-time analysis at their disposal through emerging outlets such as auto telematics and the Internet of Things. A new data management infrastructure and governance architecture would likely help many carriers break free of outdated, siloed systems, while turning proprietary information into both a strategic asset and a competitive advantage. The scope of these efforts should encompass client-targeting through service and supplemental sales.

• Overcoming regulatory challenges: Insurers can rely on regulatory uncertainty as an ongoing way of life rather than a passing conundrum, as multiple overseers — state and international — sort out new standards and rules. In addition, we see the potential for ongoing disputes and perhaps overlapping rules, as regulators from different jurisdictions compete for supremacy. Meanwhile, even if certain companies aren’t technically subject to new rules at first, they may be swept up into meeting these standards over time.

• Operational excellence: The changing insurance market will require insurers to be flexible, adaptable and to make significant changes in a very short

period of time. The core challenge will be ensuring that the right operational framework is in place, supported by internal principles and culture, that view change as an opportunity to excel. To overcome this challenge, P&C insurance companies will need to strike the right balance between customer need, right fit sales & contact channels, efficient use of data, correctly servicing regulatory requirements, and agility to maximise opportunities in emerging markets.

• Getting ahead of climate change: Insurers have long been on the front lines when it comes to compensating for the impact of climate change, as they help policyholders recover from the damages of increasingly frequent and severe weather-related events across the country, problems that are likely to worsen. Indeed, a recent report from the United Nations warned of “severe, pervasive, and irreversible” weather and climate extremes if the global community doesn’t start doing a better job containing greenhouse gasses.4

While some major European carriers have enthusiastically taken up that cause, Irish carriers should expect mounting pressure — from regulators, rating agencies, government, media, and the general public — to help fill the void in getting a better handle on exactly what the risks of climate change are, how to better predict their consequences, and what might be done to limit exposure and losses. Some may choose to launch their own initiatives, while others could contribute through industry-wide efforts already underway or yet to come.

Overall, the bottom line is that while macro- and microeconomic factors will continue to fluctuate and likely require ongoing adjustments, the four pillars explored in this outlook present tremendous opportunities to grow the business and make it more profitable and sustainable.


Insurers thrive on data. The more they have at their disposal, the greater the potential competitive edge. Carriers should therefore take steps to make sure they can capitalise on the increasing variety, volume, and velocity of data being collected and analysed.

New types of information are already transforming certain lines of business, such as the telematics flow of real-time driving performance data, fueling usage-based auto insurance. Yet this is only the tip of the data iceberg. A similar trend will likely impact a growing number of non-auto personal and commercial lines, as sensors driving the Internet of Things proliferate at home, work, and everywhere in between.

For example, smart homes may allow policyholders and their insurers to monitor and receive alerts about overheating wires, boilers, or outright fires; anyone entering their house; as well as potentially dangerous changes in temperature, wind speed, roof pressure, or carbon monoxide levels. On the commercial side, telematic data can help insurers and policyholders spot and control the risk of loss for vehicles, warehouses, factory floors, retail outlets, and office buildings.

Those carriers that most effectively leverage this deluge of additional input are likely to have a leg up on competitors. Yet many companies have not taken the

Achieving information fluencyInsurer intelligence should be enhanced by an increasingly interconnected world, but data barriers persist

Achieving data fluency

Raw data

Knowledge rich Information rich

Processed data

?

Best practices

ê Develop a blueprint

ê Assess process maturity

ê Identify data champions

ê Get executive buy-in

ê Identify pilot function — align with strategic priorities

ê Build and socialize data governance

ê Ensure compliance

necessary steps to fully realise the massive amount of data they already collect as an enterprise-wide strategic asset, let alone utilise new sources being developed.

The full value of data is still rarely optimised by insurers because it often remains isolated in siloed, legacy technology systems and operating structures. To date, few insurers are equipped to harvest and harness data to its fullest value. So, while carriers may be information rich, many to a large extent remain knowledge poor.

Further exacerbating this conundrum is that regulatory requirements now emphasise information management as a foundational element of compliance reporting and enterprise risk management. That means data systems should be adapted not just to facilitate enhancements of insurer operations, but also to meet evolving government oversight and rating agency demands.

Insurers could soon find themselves at a distinct disadvantage if they continue to pursue a slow, continuous improvement path instead of taking a more transformative approach to make information management a differentiator and a competitive strength.

6

Focus for 2015

As a growing number of insurers are looking to capitalise on both legacy and new sources of information to enhance business performance, but have yet to overcome the technological and operational obstacles of leveraging their data, the need to improve enterprise-wide information management is likely to become more prominent in 2015. More carriers should begin to strategically transform the way they amass, store, define, govern, analyse, and disseminate information. This could enable more effective marketing, underwriting, pricing, and claims decision-making, as well as the delivery of a more positive customer experience. Meanwhile, improved data fluency will potentially enrich an insurer’s insights into the needs and behaviors of both personal and commercial lines buyers, as well as those of the distribution partners with which they engage.

The flip side of the data management coin is the ever-present privacy and cybersecurity challenge, especially as the use of social media, mobile platforms, and other non-traditional information sources proliferates.

Ironically, while cyber liability might be one of the biggest P&C coverage growth areas over the next few years, it also represents perhaps the most dangerous exposure for insurers. The treasure trove of personally identifiable information insurers keep in their various servers, systems, and devices makes them highly attractive targets for hackers, and as insurers increasingly digitise their marketing, sales, and communication systems, the vulnerability level of their proprietary information also rises.

The bottom line

The Internet of Things, auto telematics, and other information technology initiatives are dramatically increasing the amount and variety of new data being processed by insurer systems. Yet many carriers are still struggling to organise and come to grips with the enormous amounts of data they’ve always had in house, adding greater urgency to transformation efforts.

Advancing information fluency throughout an insurance company should be treated as an ongoing journey rather than a final destination, since internal systems need to be regularly reassessed and revamped to process new types of information from additional sources, while better capitalising on data already on hand.

Efficiently staying on top of regulatory mandates, given insurers’ largely siloed operating environment, can be cumbersome and costly. Therefore, carriers that incorporate ongoing regulatory compliance into their overall strategic data management goals will likely gain advantages in their ability to more nimbly react to new and updated directives.

Strong executive buy-in, robust change management programs, and dedicated data champions should be the foundation of data management initiatives. Through an effectively communicated shared vision and commitment to collaboration and change, both at the top of the organisation and through its ranks, information can be shared and leveraged across multiple business units, functions.

For insurers anxious about initiating a strategy to improve information fluency, one option may be to delve into the project in multiple stages — dividing implementation of the overall data management strategy into short-, medium-, and long-term objectives with definitive milestones.

The potential payoff for such an investment is significant: improved market competitiveness, enhanced customer relations, more responsive and reliable compliance reporting, more insightful enterprise risk management and decision-making, as well as enhanced business growth and a better bottom line.


Introduction

The regulatory agenda facing (re)insurance companies and, indeed, the entire financial services sector over the coming years is daunting; in particular, the fundamental shift away from what has largely been a prescriptive regime into one that is more principles based.

While Solvency II and its related areas have been, and continue to be, the primary focus for (re)insurance companies, there are other regulatory requirements expected over the coming years which will also require significant management attention. For example, we expect to see further clarification on regulatory requirements targeting financial crime through the 4th Money Laundering Directive (4MLD), on consumer protection and harmonising point-of-sale disclosure requirements through the 2nd Insurance Mediation Directive (IMD2) and Packaged Retail Insurance based Investment Products (PRIIPs) Directive and on harmonising and increasing transparency on financial statements through IFRS4 Phase II.

For the remainder of this article, our focus is on Solvency II and its related areas. However, we will explore the other aforementioned areas further in our Life and Pensions paper which is due for publication during the second half of this year.

Regulatory Process and timelines

Despite Solvency II’s “go live” date of 1st January 2016, the EU regulatory process still has quite some way to run: 2015 will see the adoption of the Level 2 Delegated Acts into national law. These comprise the operational detail backing up the Level 1 framework and principles. The Implementing and Regulatory Technical Standards (ITS & RTS) and the Level 3 Guidelines are still both a work in progress. The purpose of the technical standards and guidelines are to harmonise as much as possible the legislative rules, texts and processes. Over 40 consultation papers were issued during 2014 with many more expected during 2015. At the time of writing, about 40% of those issued were final with the remainder still within their feedback phase. Consultations have covered a wide range of topics across the pillars, from market and counterparty risk within the standard formula to the system of governance and finally through to reporting - the QRTs and narrative reports. The same can be expected during 2015.

Pillar 1: Quantitative Capital Requirements

Our experience is that companies are largely comfortable with their ability to calculate regulatory capital requirements, whether by standard formula or internal model. We expect the main areas of focus now and for the remainder of 2015 will be on:

• validating the numbers produced, the models and assumptions underlying the numbers and streamlining their delivery into “business as usual”;

• obtaining granular level asset data on unit-linked funds from outsourced providers in accordance with requirements;

• formal applications for internal model approval (from 1 April 2015);

• early applications for approval to use ancillary own funds, undertaking specific parameters, matching and volatility adjustments (also from 1 April 2015).

Overcoming Regulatory Challenges Insurers should prepare for some major changes, as well as continuing uncertainty on key issues

Solvency II is the new harmonised regulatory risk-based regime for (re)insurance companies in the EU. It is comprised of 3 pillars, each with a different focus: pillar 1, quantitative capital requirements; pillar 2, governance and risk management; pillar 3, reporting and disclosure. The ultimate aim of the framework is the provision of better policyholder protection. It will go live on 1st January 2016.

8

Pillar 2: System of Governance and Risk Management

2014 marked a distinct change in pace as companies began to comply with the CBI’s preparatory guidelines including the demonstration of an effective system of governance, risk management system and the production and subsequent submission of a Forward Looking Assessment of Own Risks (FLAOR) report to the CBI at the end of 2014. Since the start of 2015, high and medium-high companies need to make an assessment of compliance with Solvency II technical provisions and capital requirements, whereas low and medium-low companies will work towards this over the course of 2015.

We expect all companies, irrespective of their PRISM rating, to focus on a number of aspects with respect to their FLAOR during 2015:

• refinement of scenarios and stress tests

• refinement of the report following CBI feedback before April 2015 and informal guidance and considerations expected to be issued through the Society of Actuaries in Ireland

• refinement of production processes

• work to embed the FLAOR into strategic decision making

During 2015, with respect to the system of governance, we expect work to continue on updating risk management policies in line with the Level 3 guidelines issued. We also expect discussions to occur with respect to the existing role of the appointed / signing actuary and how it will evolve in the context of Solvency II, in particular its interaction with risk management. Enhanced auditor assurance around specific areas within high risk companies is currently in progress and expected during 2015. Our expectation is that this type of assurance will also be requested of lower rated companies as we move into Solvency II “go live”.

Pillar 3: Reporting and Disclosure

Pillar 3 will ensure a common reporting standard for (re)

insurance companies. It comprises the submission of significant amounts of both qualitative and quantitative information on a regular basis – the higher your PRISM rating, the more frequent the reporting required. It is expected that this enhanced disclosure will facilitate analysts, investors and rating agencies to benchmark and compare (re)insurers.

Our EMEA Pillar 3 Market survey, conducted in January 2015, highlights that Pillar 3 is the main pillar of focus for 2015. For high and medium-high companies, the focus for 2015 will be on meeting the CBI’s preparatory guidelines. For low and medium-low companies, the focus will be on completing gap analyses and sourcing a reporting solution that is tailored to their particular business needs, risk appetite and budgetary requirements. In our view, the primary challenge for (re)insurers is that of industrialising the reporting process to meet required timelines after each quarter/annual close, which has been exacerbated by the need to develop tactical and strategic solutions in parallel.

Hidden Pillar: Data Governance and Quality

As we start into 2015, we can already see a turning point occurring in (re)insurers’ position on Data Governance and Quality Management. Firstly, the new Level 3 guidelines are very explicit in stating that data quality applies to all data and not just that related to technical provisions and undertaking specific parameters or to those with internal models. We also know, from our experience in the UK and Europe, that major projects are already underway with respect to data quality within these jurisdictions. One of the issues which has somewhat stalled progress in Ireland is that many (re)insurers here have struggled to understand the steps needed to translate data quality regulation into compliance. In our view, compliance with Solvency II’s data quality standards requires a focus on four key areas:

• Data Governance Framework: comprising policies, structures, roles, responsibilities, processes and procedures identifying those responsible in the data quality chain

• IT and Data Framework: to facilitate storage, integration, usage, access and delivery of data from (external) sources through internal data warehouses to calculation engines and onward to reporting


• Data Dictionary: which defines and documents data and provides the necessary business and IT context in order to improve sharing, retrieving and understanding of enterprise information

• Data Quality (complete, valid, consistent, timely, accurate): evidenced by the extent of suitable processes, maps and controls and performance monitored through key data quality indicators visualised on reporting and analytics dashboards

Three Stages of Compliance

Minimum Compliance

Whilst a viable end in itself for some companies, minimum compliance can only ever be a qualifier for the majority.

Embed & Operationalise

Much of the focus to date has been on addressing the applicable business and operational impacts in order to manage the transition from the existing regime through the preparatory phase and into Solvency II. However, as companies become more confident about their ability to fulfil their mandatory compliance obligations, their attention will turn to the need to industrialise operational and IT processes in order to achieve efficiencies and reduce costs but also to improve their effectiveness and improve upon the quality of the reported outputs.

Solvency II Insurance Value Chain

The asset data quality challenge highlights the impact of Solvency II on the wider insurance value chain. In 2015, we expect to see (re)insurers actively engage up-stream value chain players (e.g. external fund managers, asset servicing firms, custodians, data vendors) to agree on availability (both breadth and granularity e.g. look-though into underlying fund structures), data governance and quality standards as well as delivery mechanisms and timeframes.

Looking beyond 2015 - Strategic Alignment

We expect to see more mature companies, especially those subsidiaries of multi-national groups, take steps to embed Solvency II into the strategic fabric of their business. The winners and losers post Solvency II will emerge from their ability to match asset and liabilities to risk tolerances in the most capital effective manner. Opportunities to differentiate returns and offerings through asset diversification and product development strategies will follow.

Just how successful Solvency II will prove to be in levelling the regulatory playing field across Europe remains to be seen over the next few years. Transitional measures and an emerging divergence in the approach between national competent authorities suggest that this story may have more to run.

10

The Irish insurance industry will face significant challenges in 2015 as technology and market trends continue to disrupt traditional insurance practices and models. Insurers must seek not only to meet these challenges, but to proactively position themselves for success; developing and maintaining high standards of operational efficiency is the key to this. In core operational areas, organisations will need to be streamlined, efficient and entirely adaptable. We have highlighted some of the key focus areas for property and casualty insurers in 2015.

Consumer

Consumers continue to be extremely price conscious, valuing savings over brand loyalty. Our consumer research suggests that over 90% consider price to be an important factor when choosing an insurer; our 2014 Consumer Tracker report indicated that up to 25% of consumers (depending on product line) have switched insurance provider to avail of an introductory offer with a competitor.

This willingness to switch also means that consumers have high expectations in terms of quality of service. They want the power to tailor their insurance plan to their personal needs. They want to be able to contact their insurer how and when they need to, and they expect their experience to be a positive one. Crucially, when it isn’t, the knock-on effect goes further than just one customer. Consumers are increasingly looking online for peer-to-peer feedback on the quality of insurers; one bad customer experience can potentially influence thousands of others.

These factors, as well as the increasing difficulty of product differentiation, mean that a strong customer service function is essential for attracting and retaining customers. In our experience, property and casualty insurers who have prioritised this function (through establishing a strong culture of service, using practical metrics to measure this and rewarding staff who excel in this area) have reaped the benefits.

Sales & Contact Channels

As noted above, the methods through which customers access information, purchase insurance and interact

with their insurers in the post-sales space are changing as consumers become more technologically capable. While the majority of Irish consumers still prefer to purchase insurance over the phone, the research that they do prior to that call is primarily online, and international trends are towards a preference for online interaction for claims, renewals and policy adjustments, particularly for younger consumers.

While some Irish insurers have begun to expand into fully optimised mobile websites and specific apps for their customers, there is significant room for growth in this area. Internationally, apps are being used to submit photographs of damage for claims or of possessions to document a house’s contents; to track the progress of claims; or combined with GPS and telematics to allow motor insurers to monitor drivers and adjust premiums accordingly. Moreover, insurers are using online tools like gamification to further engage with their customers. Facilitated by the ‘Internet of Things’, consumers are willing to give insurers a huge amount of information about themselves in return for ease and quality of service, but expect that information exchange to be two-way.

Data

The consequence of this is that insurers have unprecedented access to data on their customers, and in turn an unprecedented opportunity to leverage this data into operational improvements. Used correctly, this data will allow insurers to fine-tune their risk, pricing and loss models, and gain insights into every aspect of their customers’ interaction with them. However, insurers need to react quickly – given increasing ease of entry to the insurance market and consumers’ willingness to move outside of traditional insurers, organisations need to position themselves to ensure that they are the recipients of this data, rather than other intermediaries.

Outside of consumer data, the potential to use demographic information, market information and even data on weather patterns (to improve loss predictions during periods of flooding) is enormous. Insurers will need to ensure both that their internal culture is ready and willing to adapt to these new data sources, and

Operational Excellence for Irish InsurersThe changing insurance market expects insurers to be flexible and adaptable


that they have the expertise to apply this data in their operations.

Regulatory

The other side of Big Data is the increased pressure on insurers to manage vast amounts of potentially sensitive customer data. The newly appointed Data Protection Commissioner has signalled her intent to improve Ireland’s data protection framework, including re-opening a Dublin office and doubling the number of staff in the department. Building internal expertise and implementing robust controls around data management practices will be essential.

Insurers have unprecedented access to data on their customers, and in turn an unprecedented opportunity to leverage this data into operational improvements.

The core regulatory challenge of 2015 will be continued preparation and implementation work around Solvency II. The necessary expansion of reporting units will be a significant challenge; however, it should also be seen as an opportunity to optimise reporting frameworks and ensure that necessary compliance work is also supporting and feeding into more general business practices, particularly around data collation and usage.

Emerging Markets

Increased flexibility of product types and ease of access to insurers offers Irish firms the opportunity to reach a consumer base who may not have previously/traditionally purchased insurance. Globally, the expansion into ‘emerging consumer’ markets will be a key trend, with the ‘global middle class’ expected by the World Bank to expand by 3bn people by 2025. Emerging markets in Asia and Africa, fuelled by global incomes that are growing on a per-capita basis, provide insurance firms with new and untapped consumer bases; investment in this sector will be a key feature of the international insurance market over the next decade. Traditional pricing and risk models and standard product offerings may not be suitable for these markets; insurers will need their operating models to be streamlined and flexible to deal with the challenges inherent in this expansion.

Conclusion

The changing insurance market will require insurers to be flexible, adaptable and to make significant changes in a very short period of time. The core challenge will be ensuring that the right operational framework is in place, supported by internal principles and culture, that view change as an opportunity to excel.

12

The causes, pace, and repercussions of climate change may remain controversial for some, scientifically and politically. However, since it is often insurers that have to pay for damages from weather-related catastrophes, Irish Insurers paying approximately €750 million in claim costs for nine major floods since 2000, the industry is by definition on the front lines when it comes to financing the rising cost of cleanup and recovery efforts. Climate exposures have the potential to impact a wide range of carriers, including insurers of homes, businesses, and vehicles.

However given Ireland’s temperate climate and geographical location it is fair that some would perceive climate change as a minimal concern for Irish Property &

Getting ahead of climate change Rising weather exposures offer opportunities for insurers to innovate with risk management, new products

Casualty insurers. With flood damage potentially the most problematic of Ireland’s climate change consequences at present, Insurance Ireland and the Office of Public Works established a Memorandum of Understanding in 2014 to enable the exchange of information between the OPW and Insurance Ireland on flood relief schemes completed and the standard of protection offered to those schemes. This will provide for greater focus on provisioning of insurance, and potentially ease the difficulty in providing insurance, to people living in areas most at risk to flooding and subsidence.

For the vast number of companies transacting internationally from Ireland the risks from climate change and natural disasters are much more significant.

Volcanic ash, the European floods and other recent disasters have resulted in significant insurance

losses for companies’ passporting into Europe from Ireland. This is introducing

pressure on the industry to deal more comprehensively with

climate change risks, especially as new demands are

introduced from regulators and rating

agencies.


Focus for 2015

Industry efforts to quantify and limit the impact of climate change will likely proliferate over the next few years. Carriers can expect heightened scrutiny and more data calls from overseers evaluating how the phenomenon is being accounted for in underwriting and pricing models, reserving decisions, investment policies, and business continuity planning. These considerations could fit neatly into broader enterprise risk management transformations.

Beyond any mandatory compliance responsibilities and costs, the possibility of increased frequency and severity of climate-related disaster losses should motivate insurers to voluntarily expand their research efforts into how climate change may be disrupting the communities they serve, as well as affecting their bottom lines. Carriers will likely need additional capabilities and skill sets to get a better handle on weather trends. One can imagine climatologists becoming valuable members of an insurance company’s modeling team and underwriting department as carriers look to become more adept in pricing climate-change-related exposures.

Another major opportunity may be greater privatisation of the flood insurance market. Given the growing number of exposed areas this underserved market potentially represents the largest single growth opportunity in the property-casualty industry today — but only if carriers are able (and permitted to) assess the exposure with a high degree of confidence and charge actuarially-sound rates.

The bottom line

Climate change is not a new topic of conversation, particularly in international insurance company circles. European insurers have been outspoken about how the industry might help mitigate this risk for quite some time.

Carriers should expect mounting pressure — from regulators, rating agencies, government, media, and the general public — to help fill the void in getting a better handle on exactly what the risks of climate change are, how to better predict their consequences, and what might be done to limit exposure and losses. Some may choose to launch their own initiatives, while others could contribute through industry-wide efforts already underway or yet to come.

Beyond risk management, however, insurers should be able to seize an opportunity around product innovation, perhaps even building a brand that resonates with sustainability-conscious consumers and businesses.

14

There’s much that’s beyond the control of P&C insurers that nevertheless has a major impact on their top and bottom lines, such as the growth rate of the economy, or the direction of stock and bond markets. Carriers should always be prepared to make midcourse corrections in their operating and investment strategies to compensate.

The emphasis in this outlook, however, is for insurers to focus on bigger picture elements that are very much in the control of their leadership team and which will likely affect their ability to remain competitive over the long haul, regardless of market conditions. Addressing these issues will likely put them in a much stronger position to adapt to ongoing changes in the economy, their individual markets, and consumer preferences.

Take data management. Insurers already have a veritable treasure trove of information at their disposal and rich deposits of raw material to mine from emerging as well as untapped sources. Yet unless they initiate a comprehensive effort to widen access to data across their organisation and put the analytical tools and talent in place to make sense of it, much of the information may be like crude oil, its inherent value unrealised because it cannot be refined effectively.

Even in areas that might appear to be outside an insurer’s control — such as the regulations that govern them, or the ultimate wild card, that being the weather — proactive carriers can better position themselves to adapt more quickly and be more innovative to turn threats into opportunities.

Indeed, insurers should be adopting more of a strategic risk management approach to deal with potentially disruptive trends and marketplace shifts. Unlike traditional risks, which are avoided at best or contained at worst, strategic risks could actually have big upside potential. If anticipated early enough, a nimble insurer can flip such risks into strategic opportunities, giving early adapters at least a temporary competitive edge.

Those that can respond quickly and proactively to strategic risks are less likely to be disrupted, let alone displaced. They should be better able to alter business models, adjust internal processes, upgrade technology infrastructure, and reconstitute distribution systems to benefit from evolutionary and even revolutionary changes reshaping the business.

Next stepsWhere do insurers go from here?


Industry leadership

Donal Lehane Partner Consulting +353 1 417 2807 [email protected]

Glenn Gillard Partner Audit +353 1 417 2802 [email protected]

Co-authors

Ciara Regan

Sinead Kiernan

Yvonne Gibson

John Kilbride

Cormac Hennessey

Anthony Nugent

Industry leadership

Gary Shaw Vice Chairman US Insurance Leader Deloitte LLP +1 973 602 6659 [email protected]

Deloitte Center for Financial Services

Jim Eckenrode Executive Director Deloitte Center for Financial Services Deloitte Services LP +1 617 585 4877 [email protected]

Contacts

Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/ie/about for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms.

With nearly 2,000 people in Ireland, Deloitte provide audit, tax, consulting, and corporate finance to public and private clients spanning multiple industries. With a globally connected network of member firms in more than 150 countries, Deloitte brings world-class capabilities and high-quality service to clients, delivering the insights they need to address their most complex business challenges. With over 210,000 professionals globally, Deloitte is committed to becoming the standard of excellence.

This publication contains general information only, and none of Deloitte Touche Tohmatsu Limited, Deloitte Global Services Limited, Deloitte Global Services Holdings Limited, the Deloitte Touche Tohmatsu Verein, any of their member firms, or any of the foregoing’s affiliates (collectively the “Deloitte Network”) are, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your finances or your business. Before making any decision or taking any action that may affect your finances or your business, you should consult a qualified professional adviser. No entity in the Deloitte Network shall be responsible for any loss whatsoever sustained by any person who relies on this publication.

© 2015 Deloitte & Touche. All rights reserved

2015 property and casualty insurance outlook financial ......achieving information ﬂuency...

Documents